COMSOVEREIGN HOLDING CORP. Unless the context requires otherwise, references in this Quarterly Report to "Company, "we", "us" and "our" refer to theCOMSovereign Holding Corp. and
its
subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Item 2. Management's Discussion
and Analysis ("MD&A") of Financial Condition and Results of Operations,"
contains "forward-looking statements" that represent our beliefs, projections
and predictions about future events. From time to time in the future, we may
make additional forward-looking statements in presentations, at conferences, in
press releases, in other reports and filings and otherwise. Forward-looking
statements are all statements other than statements of historical fact,
including statements that refer to plans, intentions, objectives, goals,
targets, strategies, hopes, beliefs, projections, prospects, expectations or
other characterizations of future events or performance, and assumptions
underlying the foregoing. The words "may," "could," "should," "would," "will,"
"project," "intend," "continue," "believe," "anticipate," "estimate,"
"forecast," "expect," "plan," "potential," "opportunity," "scheduled," "goal,"
"target," and "future," variations of such words, and other comparable
terminology and similar expressions and references to future periods are often,
but not always, used to identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future
performance or results and will not necessarily be accurate indications of
whether, or the times by which, our performance or results may be achieved.
Forward-looking statements are based on information available at the time those
statements are made and management's belief as of that time with respect to
future events and are subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in or suggested
by the forward-looking statements. Readers should carefully review the risk
factors included under "Item 1A. Risk Factors" that are included in Part II of
this Quarterly Report as well as our fiscal 2021 Annual Report on Form 10-K
filed with the U. S. Securities and Exchange Commission (the "SEC") on August
16, 2022 .
Overview of Business; Operating Environment and Key Factors Impacting Our Operating Results
The following MD&A is intended to help readers understand the results of our
operations and financial condition and is provided as a supplement to, and
should be read in conjunction with our unaudited condensed consolidated
financial statements and the related notes ("Notes") in Part 1 of this Quarterly
Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to the three and
nine months ended
Business Overview We are a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the fewU.S. based providers of telecommunications equipment and services.
We provide the following categories of product offerings and solutions to our customers:
? Telecom and Network Products and Solutions. We design, develop, market and sell
products for telecom network operators, mobile device carriers and other
enterprises, including the following:
? Wireless Transport Solutions. We offer a line of high-capacity packet microwave
solutions that drive next-generation intellectual property ("IP") networks. Our
carrier-grade point-to-point packet microwave systems transmit broadband voice,
video and data. Our solutions enable service providers, government agencies,
enterprises and other organizations to meet their increasing bandwidth
requirements rapidly and affordably. The principal application of our product
portfolio is wireless network transport, including a range of products ideally
suited to support the emergence of underlying small cell networks. Additional
solutions include leased-line replacement, last mile fiber extension and
enterprise networks.
? In-Band Full-Duplex Technologies. We have developed proprietary wireless
transmission technologies that alleviate the performance limitations of the
principal transmission technologies used by most networks today. Time Division
Duplex ("TDD") transmission technology used by many communications systems
utilizes a single channel for transmission of data alternating between downlink
or uplink, which limits capacity/throughput. Frequency Division Duplex ("FDD")
technologies in the marketplace today use two independent channels for downlink
and uplink but require twice the spectrum. Neither TDD nor FDD can
simultaneously transmit and receive on a single channel - a limitation that
network advancements and 5G will require for optimal performance.
26
? Edge Compute Capable Small Cell 4G LTE and 5G Access Radios. We offer both
4G/LTE and 5G New Radio ("NR") based small cell radios that are designed to
connect to other access radios or to connect directly to mobile devices such as
mobile phones and other Internet-of-things devices. Recently, we developed we
believe the world's first fully-virtualized 5G core network on a microcomputer
the size of a credit card, enabling, for the first time, the ability to have
the 5G network collocated on the network edge with the small cell communicating
with the devices themselves. The small cells support edge-based application
hosting and enable third-party service integration.
? Tethered Drones and Aerostats. We design, manufacture, sell and provide
logistical services for specialized tethered aerial monitoring and
communications platforms serving national defense and security customers for
use in applications such as intelligence, surveillance, and reconnaissance
("ISR") and tactical communications. We focus primarily on a suite of tethered
aerostats known as the Winch Aerostat Small Platform, which are principally
designed for military and security applications and provide secure and reliable
aerial monitoring for extended durations while being tethered to the ground via
a high-strength armored tether. Our recently-acquired HoverMast line of
quadrotor-tethered drones feature uninterruptible ground-based power, fiber
optic communications for cyber immunity, and the ability to operate in
GPS-denied environments while delivering dramatically-improved situational
awareness and communications capabilities to users.
We are also developing processes that we believe will significantly advance the
state-of-the-art in silicon photonic ("SiP") devices for use in advanced data
interconnects, communication networks and computing systems. We believe our
novel approach will allow us to overcome the limitations of current SiP optical
modulators, dramatically increase computing bandwidth, and reduce drive power
while offering lower operating costs.
Our engineering and management teams have extensive experience in optical
systems and networking, digital signal processing, large-scale
application-specific integrated circuit design and verification, SiP design and
integration, system software development, hardware design, high-speed
electronics design and network planning, installation, maintenance, and
servicing. We believe this broad expertise in a wide range of advanced
technologies, methodologies, and processes enhances our innovation, design and
development capabilities, and has enabled us, and we believe will continue to
enable us, to develop and introduce future-generation communications and
computing technologies. In the course of our product development cycles, we
engage with our customers as they design their current and next-generation
network equipment in order to gauge current and future market needs.
Our Business
Through a series of acquisitions, we have expanded our service offerings and
geographic reach over the past three years. On November 27, 2019 , we completed
the acquisition of ComSovereign Corp. ("ComSovereign") in a stock-for-stock
transaction with a total purchase price of approximately $80 million (the
"ComSovereign Acquisition"). ComSovereign had been formed in January 2019 and,
prior to its acquisition by our company, had completed five acquisitions of
companies with unique products in development for, or then being marketed to,
the telecommunications market. As a result of our acquisitions, our company is
comprised of the following principal businesses, each of which was acquired to
address a different opportunity or sector of the telecom infrastructure and
service market. These acquired entities are designated as CORE and Noncore
businesses. Our CORE business is comprised of our network hardware and software
products and services solutions, and our Noncore business is comprised the Drone
and related products. Our Power division employees have been idled.
Our CORE business is comprised of the following acquisitions:
?
Corp. and
point-to-point telecom backhaul radio units. DragonWave and its predecessor
have been selling telecom backhaul radios since 2012 and its microwave radios
have been installed in over 330,000 locations in more than 100 countries
worldwide. According to a report of the
as of
point-to-point microwave backhaul radios in
acquired by
On
subsidiary, and transferred the related employees and assigned the Canadian
lease of DragonWave's Canadian subsidiary, to a third party.
?
wireless telecommunications technology developer and equipment manufacturer of
both 4G LTE Advanced and 5G NR capable radio equipment. VNC designs, develops,
manufactures, markets, and supports a line of network products for wireless
network operators, mobile virtual network operators, cable TV system operators,
and government and business enterprises that enable new sources of revenue, and
reduce capital and operating expenses. We acquired VNC in
? Fastback.
name Fastback Networks ("Fastback"), is a manufacturer of intelligent backhaul
radio ("IBR") systems that deliver high-performance wireless connectivity to
virtually any location, including those challenged by Non-Line of Sight
limitations. Fastback's advanced IBR products allow operators to economically
add capacity and density to their existing cellular networks and expand service
coverage density with small cells. These solutions also allow operators to both
provide temporary cellular and data service utilizing mobile/portable radio
systems and provide wireless Ethernet connectivity. We acquired Fastback in
January 2021 .
?
is a
generation network systems and components, including large-scale network
protocol development, software-defined radio systems and wireless network
designs.
ComSovereign Acquisition.
?
full-duplex wireless technologies and components, including
multi-reconfigurable radio frequency ("RF") antennae and software programs.
This technology enables the doubling of a given spectrum band by allowing
simultaneous transmission and receipt of radio signals on the same frequencies.
Acquisition.
27
?
for use in copper-to-fiber-to-copper switching, high-speed computing,
high-speed ethernet, autonomous vehicle applications, mobile devices and 5G
wireless equipment.
ComSovereign Acquisition. In order to conserve cash, VEO idled the employees in
June 2022 .
?
("RF Engineering") is a
antennas and accessories. By providing one of the industry's lowest cost of
ownership, RF Engineering has continued to innovate and expand, and it recently
announced the industry's first Universal Licensed Microwave Antenna. Supporting
frequencies from (6-42 GHz), customers can now reduce sparing costs and safely
future-proof their networks by leveraging this new Universal plug and play
architecture. We acquired RF Engineering in
Company idled the employees of
?
is the software developer behind the award-winning SAGUNA Edge Cloud, which
transforms communication networks into powerful cloud-computing infrastructures
for applications and services, including augmented and virtual reality,
Internet of Things ("IoT"), edge analytics, high-definition video, connected
cars, autonomous drones and more. SAGUNA allows these next-generation
applications to run closer to the user in a wireless network, dramatically
cutting down on latency, which is a fundamental and critical requirement of 5G
networks. SAGUNA's
but can be optimized to support the latest artificial intelligence and machine
learning features through dedicated accelerators. We acquired SAGUNA in October
2021. In order to conserve cash, SAGUNA idled the employees in
Our NONCORE business is comprised of the following:
?
name
develops and manufactures cost-effective, compact and enhanced tethered
unmanned aerial vehicles, including Lighter-Than-Air aerostats and drones that
support surveillance sensors and communications networks. We acquired Drone
Aviation inJune 2014 .
?
drones with a patented tethered hovering technology that provides
long-duration, mobile and all-weather ISR capabilities to customers worldwide
for both land and marine-based applications. Its innovative technologies
include fiber optic tethers that enable secure, high-capacity communications,
including support for commercial 4G and 5G wireless networks. SKS's flagship
HoverMast line of quadrotor-tethered drones feature uninterruptible
ground-based power, fiber optic communications for cyber immunity, and the
ability to operate in GPS-denied environments while delivering dramatically
improved situational awareness and communications capabilities to users. We
acquired SKS in
in
conditions and there are no assurances that the transaction will close.
?
technologically advanced video and communications products and physical
security solutions designed for government and private sector commercial
industries. It has been serving governments and the military for nearly two
decades with sophisticated, environmentally rugged optical and infrared
cameras, hardened processors, custom tactical video hardware, software
solutions, and related communications technologies. It also has developed
nano-defractive optics with integrated, artificial intelligence-driven
electro-optical sensors and communication network connectivity products for
smart city/smart campus applications. We acquired
December 29, 2022 , we soldRvision in order to settle two lawsuits. As part of the Company's restructuring, commencingJanuary 1, 2023 , the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer intends to manage the Company and make decisions based on the Company's consolidated operating results. Discontinued Operations
On
The historical operating results of Sovereign Plastics are reported as loss from discontinued operations.
Nasdaq Compliance Developments
As previously disclosed in our Form 10-K filed onAugust 16, 2022 , and in subsequent Form 8-K filings, we are not in compliance with Nasdaq Listing Rule 5550(a)(2), the$1.00 minimum closing bid price requirement ("minimum bid price") due to the price of our common stock. Additionally, because we were late with filing our Quarterly Reports on Form10-Q for the quarters endedMarch 31, 2022 ,June 30, 2022 , andSeptember 30, 2022 (collectively the "Delinquent Reports"), we are not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports ("filing requirements") with theSecurities and Exchange Commission ("SEC"). OnNovember 17, 2022 , a hearing was held before theNasdaq Hearings Panel (the "Panel") regarding our request for continued listing onThe Nasdaq Capital Market of our common stock and additional time to regain compliance with Nasdaq Listing Rules. OnNovember 29, 2022 , the Panel issued its determination, granting our request for the continued listing of our common stock, subject to evidencing compliance with Nasdaq's minimum bid price requirement byFebruary 2, 2023 , and evidencing compliance with Nasdaq's filing requirement by getting our remaining Delinquent Reports filed with theSEC byFebruary 24, 2023 , and certain other conditions. Upon the filing on or beforeFebruary 24, 2023 , of this Quarterly Report on Form10-Q for the quarter endedSeptember 30, 2022 , the Company will be compliant with the filing requirements.The Nasdaq Panel granted the Company's request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal onFebruary 8, 2023 , and to demonstrate compliance with minimum bid price requirement byFebruary 24, 2023 . 28
The Company is working to demonstrate compliance with the minimum bid price requirement byFebruary 24, 2023 for continued listing on Nasdaq. The Company put forth a reverse split proposal to our stockholders, which was approved at the Company's Annual Stockholders meeting onFebruary 8, 2023 . OnFebruary 8, 2023 , the Board of Directors of the Company set the reverse stock split ratio at one-for-one hundred, and approved and adopted a Certificate of Amendment to our Amended and Restated Articles of Incorporation which became effective at11:59 p.m. Eastern Time onFebruary 9, 2023 , to effect the reverse stock split. The Company's common stock commenced trading on the post-split basis onFebruary 10, 2023 , on the Nasdaq Capital Market under the same symbol "COMS" with a new CUSIP number, 205650401. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.
Significant Components of Our Results of Operations
Revenues Our revenues are generated primarily from the sale of our products, which consist primarily of telcom hardware, repairs, support and maintenance, drones, tooling, consulting, warranties and others. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met. During the three and nine months endedSeptember 30, 2022 , approximately 0% and 8%, respectively, of our revenues were derived from sales outside ofNorth America . During the three and nine months endedSeptember 30, 2021 , approximately 14% and 28%, respectively, of our revenues were derived from sales outside ofNorth America . While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outsidethe United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to theU.S. government and its agencies, even if such systems are for integration into foreign locations.
Cost of Goods Sold and Gross Profit
Our cost of goods sold is comprised primarily of the costs of manufacturing products, procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, shipping and handling costs and warranty costs. We presently outsource the manufacturing of our Fastback and DragonWave products to SMC for Fastback products and Benchmark for DragonWave products. Cost of goods sold also includes costs associated with supply operations, including personnel-related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to the services we provide. Additionally, cost of goods sold does not include any depreciation and amortization expenses as we separate depreciation and amortization expense into its own category within operating expenses. Gross profit has been and will continue to be affected by various factors, including changes in our supply chain and evolving product mix. The margin profile of our current products and future products will vary depending on operating performance, features, materials, manufacturer, and supply chain. Gross margin will vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing, our production costs, costs of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors. Operating Expenses We classify our operating expense as research and development, sales, and marketing, and general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions, benefits, and bonuses. Additionally, we separate depreciation and amortization expense into its own category. Research and Development In addition to personnel-related costs, research and development expense consists of costs associated with the design, development, and certification of our products. We generally recognize research and development expense as incurred. Development costs incurred prior to establishment of technological feasibility are expensed as incurred. We expect our research and development costs to continue to increase as we develop new products and modify existing products to meet the changes within the telecom landscape. Sales and Marketing In addition to personnel costs for sales, marketing, service and product management personnel, sales and marketing expense consists of the expenses associated with our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approvals of our products, travel, entertainment and recruiting. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales, marketing, service, and product management organization in support of our investment in our growth opportunities, whether through the development and rollout of new or modified products or through acquisitions. General and Administrative
In addition to personnel costs, general and administrative expense consists of
professional fees, such as legal, audit, accounting, information technology and
consulting fees; share-based compensation; and facilities and other supporting
overhead costs.
29
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation related to fixed assets such as test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, as well as amortization related to definite-lived intangibles.
Interest Expense
Interest expense is comprised of interest expense associated with our secured
notes payable, notes payable and senior convertible debentures. The amortization
of debt discounts is also recorded as part of interest expense.
Share-Based Compensation
Share-based compensation consists of expense related to the issuance of equity
instruments, which can be in many forms, such as incentive or nonqualified stock
options, stock appreciation rights, stock bonuses, restricted stock, stock units
and other forms of awards including performance-based awards under our long-term
incentive plans or outside of such plans. The expense related to any share-based
compensation grant is allocated to specific groupings in the condensed
consolidated statement of operations in the same manner as the grantee's normal
compensation expense and will vary depending upon the number of underlying
shares of common stock, the fair value of the common stock on the date of grant
and the vesting period.
Results of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(Amounts in thousands, except share and
per share data) 2022 2021 2022 2021
Revenue $ 3,796 $ 3,268 $ 7,937 $ 6,770
Cost of goods sold 1,795 1,252 6,259 3,125
Gross profit 2,001 2,016 1,678 3,645
Operating expenses
Research and development (1) 74 2,058 1,782 3,805
Sales and marketing (1) 27 292 105 449
General and administrative (1) 2,672 6,075 13,848 19,486
Depreciation and amortization 702 3,593 1,705 10,548
Impairment (2) (1,090 ) - 14,685 281
Loss on sales (ID, DWXC) (3) - - 2,564 - Loss on lease abandonment 305 - 11,634 - Gain on the sale of assets - - (8,441 ) (83 ) Total operating expenses, net 2,690 12,018 37,882 34,486 Loss from operations (689 ) (10,002 ) (36,204 ) (30,841 ) Other expense Interest expense (755 ) (723 ) (2,982 ) (1,705 ) Other expense - (116 ) - (116 ) Gain (loss) on extinguishment of debt (512 ) 300 (1,130 ) (4,479 ) Foreign currency transaction loss - 94 - 32 Total other expense (1,267 ) (445 ) (4,112 ) (6,268 ) Loss from continuing operations (1,956 ) (10,447 ) (40,316 ) (37,109 ) Income (loss) from discontinued operations, net of tax - (242 ) 747 (363 ) Net loss$ (1,956 ) $ (10,689 ) $ (39,569 ) $ (37,472 )
(1) These are exclusive of depreciation and amortization
(2) See Note 12 -
financial statements for out-of-period adjustment.
(3) InnovationDigital ("ID"), DragonWave-X Canada ("DWXC")
30
Three and Nine Months Ended
Total Revenues For the three months endedSeptember 30, 2022 , total revenues were$3.8 million compared to$3.3 million for the three months endedSeptember 30, 2021 . The increase of$0.5 million , or 15%, primarily consisted of increased sales of our aerostat products and accessories offset by decreases in our mobile network backhaul products.
For the nine months ended
Cost of Goods Sold and Gross Profit
For the three months endedSeptember 30, 2022 , cost of goods sold was$1.8 million compared to$1.3 million for the three months endedSeptember 30, 2021 . The increase of$0.5 million , or 38%, primarily the sale of our aerostat products and accessories and payment to our contract manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities. For the nine months endedSeptember 30, 2022 , cost of goods sold were$6.2 million compared to$3.1 million for the nine months endedSeptember 30, 2021 . The increase of$3.1 million , or 100%, primarily consisted of the one-time sale of inventory, the sale of our aerostat products and accessories and the payment to our contract manufacturer, including increases in purchase price variances for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities. Gross profit for the three months endedSeptember 30, 2022 was$1.8 million compared to$2.0 million for the three months endedSeptember 30, 2021 . The decrease in gross profit margin of$0.2 million , or 10%, was driven primarily by products that were lower margin during the current quarter as compared to the corresponding period in fiscal year 2021 and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers, resulting from current macro supply chain constraints. Gross profit for the nine months endedSeptember 30, 2022 was$1.5 million compared to$3.6 million for the nine months endedSeptember 30, 2021 . The decrease in gross profit margin of$2.1 million , or 58%, was driven primarily by the one-time sale of DragonWave inventory of approximately$1.8 million at a loss of$1.6 million due to the challenges related to the Company's liquidity. In addition, it was impacted by products that were lower margin during the nine months as compared to the corresponding period in fiscal year 2021, and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers resulting from current macro supply chain constraints.
Research and Development Expense
For the three months endedSeptember 30, 2022 , research and development expense was$0.1 million compared to$2.1 million for the three months endedSeptember 30, 2021 . The decrease of$2.0 million consisted primarily of contract labor and payroll related costs due to the suspension of research and development activity as a result of liquidity challenges. For the nine months endedSeptember 30, 2022 , research and development expense was$1.8 million compared to$3.8 million for the nine months endedSeptember 30, 2021 . The decrease of$2.0 million consisted primarily of contract labor and payroll related costs due to the suspension of research and development activity as a result of liquidity challenges.
While costs have recently been reduced due to the Company's liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Sales and Marketing Expense For the three months endedSeptember 30, 2022 , sales and marketing expense was$0.0 million compared to$0.3 million for the three months endedSeptember 30, 2021 . The decrease of$0.3 million primarily consisted of decreases in sales costs and cutbacks due to the Company's liquidity challenges. For the nine months endedSeptember 30, 2022 , sales and marketing expense was$0.1 million compared to$0.4 million for the nine months endedSeptember 30, 2021 . The decrease of$0.3 million primarily consisted of decreases in sales costs and cutbacks due to the Company's liquidity challenges.
While costs have recently been reduced due to the Company's liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
31
General and Administrative Expenses
For the three months endedSeptember 30, 2022 , general and administrative expense was$2.7 million compared to$6.1 million for the three months endedSeptember 30, 2021 . The decrease of$3.4 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges. For the nine months endedSeptember 30, 2022 , general and administrative expense was$13.8 million compared to$19.5 million for the nine months endedSeptember 30, 2021 . The decrease of$5.7 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges.
While costs have recently been reduced due to the Company's liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Depreciation and Amortization For the three months endedSeptember 30, 2022 , depreciation and amortization was$0.7 million compared to$3.6 million for the three months endedSeptember 30, 2021 . The decrease of$2.9 million was primarily due to the sale of ourTucson Building (see below) and equipment, partially offset by$0.4 million of additional amortization that was recorded in order to correct an understatement of intangible asset amortization during the three months endedJune 30, 2022 . For the nine months endedSeptember 30, 2022 , depreciation and amortization was$1.7 million compared to$10.5 million for the nine months endedSeptember 30, 2021 . The decrease of$8.8 million was primarily due to the sale of ourTucson Building and equipment. Impairment For the three months endedSeptember 30, 2022 , impairment was a credit of$1.1 million compared to$0.0 million for the three months endedSeptember 30, 2021 . The credit of$1.1 million was due to the correction of the second quarter 2022 overstatement of intangible asset impairment.
For the nine months ended
?
later periods; and
?
capitalization.
Loss on Sales of Innovation Digital and DragonWave-X Canada Assets
For the three months ended
For the nine months endedSeptember 30, 2022 , the loss on the sales of Innovation Digital and DragonWave-X Canada assets was$2.6 million compared to$0.0 million for the nine months endedSeptember 30, 2021 . The increase is primarily due to the transfer of$2.0 million of finished goods inventory to the purchaser of DragonWave-X Canada and the$0.6 million of intellectual property returned to the original owners of Innovation Digital. Loss on Lease Abandonment For the three months endedSeptember 30, 2022 , the loss on lease abandonment was$0.3 million compared to$0.0 million for the three months endedSeptember 30, 2021 , which was due to the 2022 abandonment of ourVirginia location. For the nine months endedSeptember 30, 2022 , the loss on lease abandonment was$11.6 million compared to$0.0 million for the nine months endedSeptember 30, 2021 . The increase of$11.6 million primarily consisted of$10.0 million related to the abandonment of theTucson Building lease and related leasehold improvements and inventory,$1.0 million related to the abandonment of theDallas Texas office space and related leasehold improvements,$0.3 million related to the abandonment of theChantilly Virginia lease and related leasehold improvements and inventory,$0.2 million related to the abandonment of theSan Diego California lease, and$0.2 million related to the return of various pieces of operating lease equipment and abandonment of small offices or airport hangers used for drone storage. Gain on the Sale of Assets For the three months endedSeptember 30, 2022 , the gain on the sale of assets was$0.0 million compared to$0.0 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the gain on the sale of assets was$8.4 million compared to$0.1 million for the nine months endedSeptember 30, 2021 . The increase of$8.3 million is primarily due to theJanuary 31, 2022 sale of ourTucson Building for$15.8 million of cash.The Tucson Building had a carrying value of$6.7 million . The Company recognized an$8.5 million gain on sale of assets, which is net of$0.7 million of related transaction costs.
32
Other Expenses
For the three months ended September 30, 2022 , other expense was $1.3 million
compared to other expense of $0.4 million for the three months ended September
30, 2021 . The increase of $0.9 million primarily consisted of increases in the
gain (loss) on extinguishment of debt of $0.8 million , and foreign currency
transaction gain (loss) of $0.1 million , partially offset by a decrease in
interest expense of $0.3 million .
For the nine months ended September 30, 2022 , other expense was $4.1 million
compared to other expense of $6.3 million for the nine months ended September
30, 2021 . The decrease of $2.2 million primarily consisted of a decrease in the
gain (loss) on extinguishment of debt of $3.3 million , partially offset by
increases in interest expense of $1.3 million .
Loss from Continuing Operations
For the three and nine months endedSeptember 30, 2022 , we had a net loss from continuing operations of$2.0 million and$40.3 million , respectively, compared to a net loss from continuing operations of$10.4 million and$37.1 million for the three and nine months endedSeptember 30, 2021 , related to the items described above.
Loss from Discontinued Operations
For the three and nine months endedSeptember 30, 2022 , we had net income from discontinued operations of$0.0 million and$0.7 million , respectively, compared to a net loss from discontinued operations of$0.2 million and$0.4 million for the three and nine months endedSeptember 30, 2021 . The income in the nine months endedSeptember 30, 2022 included a$1.1 million gain on the sale of Sovereign Plastics.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its cash requirements. As ofSeptember 30, 2022 , we had$0.6 million in cash compared to$1.9 million onDecember 31, 2021 , a decrease of$1.3 million resulting primarily from$10.7 million of cash used in operating activities and$7.6 million of debt repayments, partially offset by$15.1 million of cash proceeds from the sale of theTucson Building on or aboutJanuary 31, 2022 . See Note 11 - Property and Equipment, Net in the notes to the condensed consolidated financial statements for more information related to the sale of theTucson Building .
As of
As of
?
?
?
Subsequent to
? of the
converted into common stock; and
? additional promissory notes with a face value of
Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, and the costs of our operations. We cannot be sure that any additional funding, if needed, will be available. Any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders' ownership and could also result in a decrease in the market price of our common stock. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. Going Concern
The accompanying unaudited condensed consolidated financial statements and notes have been prepared assuming that we will continue as a going concern. For the nine months endedSeptember 30, 2022 , we used cash flows in operating activities of$10.7 million , and atSeptember 30, 2022 we had an accumulated deficit of$257.4 million and we had working capital deficit of$10.5 million . Our fiscal operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about our ability to continue as a going concern. Based on our current cash on hand and subsequent activity as described herein, we presently only have enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of our limited cash availability, our operations have been scaled back to the extent possible. We continue to explore opportunities with third parties and related parties to provide additional capital; however, we have not entered into any agreement to provide the necessary capital. In the near term, there will be limited opportunities to raise capital of significance until our Nasdaq compliance issues are resolved, as discussed in Nasdaq Compliance Developments herein. 33 We will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet our future liquidity requirements. However, there can be no assurance that we will be successful in any capital-raising efforts that we may undertake. If we are not able to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we could be forced to discontinue operations, liquidate assets and/or seek reorganization under theU.S. bankruptcy code. Lines of Credit and Debt
Summary information with respect to our debt or other credit facilities is set forth in Note 14 - Debt of the notes to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report.
Sources and Uses of Cash
For the Nine Months Ended
September 30,
(Amounts in thousands) 2022 2021
Cash flows used in operating activities $ (10,706 ) $ (33,121 )
Cash flows provided by (used in) investing activities 14,935 (8,699 )
Cash flows used in (provided by) financing activities (7,163 ) 46,747
Cash flows provided by discontinued operations 1,632 (2,857 )
Net (decrease) increase in cash and cash equivalents $ (1,302 ) $ 2,070
Operating Activities
For the nine months ended September 30, 2022 , net cash used in operating
activities was $10.7 million . Net cash used in operating activities primarily
consisted of the net loss from continuing operations of $40.3 million , which was
partially offset by adjustments for non-cash expenses of $27.3 million and net
cash generated by changes in the levels of operating assets and liabilitiesof$2.3 million . For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$33.1 million . Net cash used in operating activities primarily consisted of the net operating loss from continuing operations of$37.1 million , which was partially offset by adjustments for non-cash expenses of$19.1 million , and net cash used to fund changes in the levels of operating assets and liabilities of$15.1 million . Investing Activities For the nine months endedSeptember 30, 2022 , net cash provided by investing activities was$14.9 million . Investing activities primarily consisted of proceeds from the building sale of$15.1 million , which was partially offset by the acquisition of property and equipment of$0.2 million . For the nine months endedSeptember 30, 2021 , net cash used in investing activities was$8.7 million . Investing activities primarily consisted of net cash used to fund business acquisitions of$4.5 million , acquire property and equipment of$3.1 million , and acquire intangible assets of$1.2 million , which was partially offset by proceeds from disposal of property and equipment of
$0.1 million . Financing Activities
For the nine months ended
For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$46.7 million . Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of$45.0 million and net proceeds of borrowings of$14.2 million , which was offset by the repayment of debt of$6.4 million , offering costs of$5.3 million , and the repayment of related party notes of$0.9 million .
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
There have been no material changes to the Company's significant accounting
policies as set forth in the Company's audited consolidated financial statements
included in the Annual Report on Form 10-K for the year ended
34
However, it should be noted that business developments commencing in the second
quarter of 2022 (see Note 3 - Discontinued Operations and Note 20 - Other
Business Developments) in the footnotes to the unaudited consolidated financial
statements herein, included discussions of selling or exiting of certain
businesses and/or assets and of idling of employees. The Company recognized
$11.6 million of impairment expense during the three months ended June 30, 2022 .
During the current quarter, the Company determined that it was not more likely
than not that any reporting unit's fair value was below that reporting unit's
carrying amount. Accordingly, it was not necessary to perform interim impairment
testing as of September 30, 2022 , but the Company may need to recognize
additional impairment expense in the near future.
Consequently, for the purpose of emphasis, we are again disclosing below our accounting policy related to long-lived assets and goodwill.
Long-Lived Assets and
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles -Goodwill and Other.Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. As ofJune 30, 2022 , due to a sustained decline in the Company's market capitalization, the Company recognized$11.6 million of impairment expense. As ofSeptember 30, 2022 , because there were no new significant Company developments, the Company determined that it was not necessary to perform interim impairment testing because it was not more likely than not that any intangible assets' or reporting unit's fair value was below its carrying amount. As ofDecember 31, 2022 , the Company will perform its annual impairment testing and the Company may need to recognize additional impairment expense at that time, if there are unfavorable events or changes in circumstances (e.g. deterioration in general economic conditions, limitation on accessing capital, deterioration in the environment in which an entity operates, etc.) which lead to quantitative impairment testing and possibly a conclusion that the carrying value of certain intangibles or reporting units exceeds their fair value.
© Edgar Online, source
