UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~Quarterly Period Ended September 30, 2017~~quarterly period ended March 31, 2023

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~Transition Period~~transition period from ~~_________~~______________ to ~~_________~~______________

Commission ~~file number: 333-150332~~File No. 001-39379

~~DRONE AVIATION~~COMSOVEREIGN HOLDING CORP.

(Exact name of registrant as specified in its charter)

Nevada		46-5538504
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~11651 Central Parkway #118, Jacksonville, FL 32224~~

~~(Address of principal executive offices) (zip code)~~

6890 E Sunrise Drive, Suite 120-506, Tucson, AZ		85750
(Address of principal executive office)		(Zip Code)

~~(904) 834-4400~~(206) 796-0173

(Registrant’s ~~telephone number, including area code)~~Telephone Number, Including Area Code)

~~Not applicable~~.Securities registered pursuant to Section 12(b) of the Act:

~~(Former name, former address and former fiscal year, if changed since last report)~~

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	COMS	The Nasdaq Stock Market LLC
Warrants to purchase Common Stock	COMSW	The Nasdaq Stock Market LLC
9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share	COMSP	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Note: The registrant is a voluntary filer, but has filed all reports it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months if it was subject to the filing requirements thereof.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☐ No ☒ No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	~~☐ (Do not check if a smaller reporting company)~~☒	Smaller reporting company	☒
		Emerging growth company	☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section ~~7(a)(2)(B) of the Securities Act and Section~~ 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of ~~November 13, 2017,~~January 8, 2024, there were ~~9,182,470~~2,695,238 shares of registrant’s common stock outstanding.

~~DRONE AVIATION HOLDING CORP.~~TABLE OF CONTENTS

~~INDEX~~
PART I
~~PART I.~~ FINANCIAL INFORMATION

Item 1	~~ITEM 1~~	Financial Statements ~~(Unaudited)~~(unaudited)	~~F-1~~1

	Condensed Consolidated Balance Sheets as of ~~September 30, 2017 (Unaudited)~~March 31, 2023 and December 31, ~~2016~~2022	~~F-1~~1

	Condensed Consolidated Statements of Operations for the ~~nine months ended September 30, 2017~~Three Months Ended March 31, 2023 and ~~2016 (Unaudited)~~2022.	~~F-2~~2

	Condensed Consolidated Statements of Changes in Stockholders’ (Deficiency) Equity for the Three Months Ended March 31, 2023 and 2022.	3

	Condensed Consolidated Statements of Cash Flows for the ~~nine months ended September 30, 2017~~Three Months Ended March 31, 2023 and ~~2016 (Unaudited)~~2022.	~~F-3~~4 - 5
		~~Notes to Interim Unaudited Consolidated Financial Statements~~	~~F-4~~
	~~ITEM~~Notes to the Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
	~~ITEM 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	8
	~~ITEM 4.~~	~~Controls and Procedures~~	821

~~PART II. OTHER INFORMATION~~Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION
	~~ITEM~~
Item 1.	Legal Proceedings	930
	~~ITEM~~
Item 1A.	Risk Factors	930
	~~ITEM~~
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	930
	~~ITEM~~
Item 3.	~~Defaults~~Default Upon Senior Securities	1031
	~~ITEM~~
Item 4.	Mine Safety Disclosures	1032
	~~ITEM~~
Item 5.	Other Information	1032
	~~ITEM 6.~~	~~Exhibits~~	10
Item 6.	Exhibits	32

	~~SIGNATURES~~Signatures	1133

~~DRONE AVIATION~~

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

9/30/2017 12/31/2016
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,764,389 $ 2,015,214
Accounts receivable - trade 100,749 394,000
Inventory, net 735,161 459,885
Prepaid expenses and deposits 71,274 120,614

Total current assets 2,671,573 2,989,713

PROPERTY AND EQUIPMENT,at cost: 180,302 179,627
Less - accumulated depreciation (87,134 ) (60,784 )

Net property and equipment 93,168 118,843

OTHER ASSETS:
Goodwill 99,799 99,799
Intangible assets, net 1,070,667 1,289,667

Total other assets 1,170,466 1,389,466

TOTAL ASSETS $ 3,935,207 $ 4,498,022

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade and accrued liabilities $ 149,922 $ 293,922
Accounts payable due to related party 188,217 46,849
Bank Line of Credit 1,000,000 -
Related party convertible note payable, net of discount of $0 and $2,092,156, respectively 1,000,000 907,844
Derivative liability - 1,832,013

Total current liabilities 2,338,139 3,080,628

LONG TERM LIABILITIES:
Related party convertible notes payable 3,000,000 -

TOTAL LIABILITIES $ 5,338,139 $ 3,080,628

COMMITMENTS AND CONTINGENCIES - -

STOCKHOLDERS’ EQUITY (DEFICIT):
Convertible Preferred stock, Series A, $.0001 par value; authorized 595,000 shares; 0 and 100,100 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively $ - $ 10
Convertible Preferred stock, Series B, $.0001 par value; authorized 324,671 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series B-1, $.0001 par value; authorized 156,231 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series C, $.0001 par value; authorized 355,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series D, $.0001 par value; authorized 36,050,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series E, $.0001 par value; authorized 5,400,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series F, $.0001 par value; authorized 3,300,999 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series G, $.0001 par value; authorized 8,000,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Common stock, $.0001 par value; authorized 300,000,000 shares; 9,182,470 and 8,682,220 shares issued and outstanding, at September 30, 2017 and December 31, 2016 918 868
Additional paid-in capital 25,918,859 21,089,301
Retained Deficit (27,322,709 ) (19,672,785 )

Total stockholders’ equity (deficit) (1,402,932 ) 1,417,394

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 3,935,207 $ 4,498,022

	March 31,			December 31,
(Amounts in thousands, except share and per share data)	2023			2022
	(unaudited)

Assets
Current assets:
Cash	$	3,063		$	1,868
Accounts receivable, net		482			1,126
Inventory, net		4,336			3,966
Prepaid expenses		3,531			3,571
Note and obligation receivable - current		650			650
Other current assets		112			150
Assets held for sale - current		-			651
Total current assets		12,174			11,982
Property and equipment, net		341			377
Operating lease right-of-use assets		87			97
Intangible assets, net		1,197			1,428
Goodwill		6,612			7,310
Note and obligation receivable - long-term		1,950			1,350
Assets held for sale - long-term		-			2,374
Total assets	$	22,361		$	24,918

Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable	$	4,229		$	3,656
Accrued interest		626			477
Accrued liabilities		3,524			3,006
Accrued payroll		2,010			1,758
Contract liabilities - current		4,285			3,232
Accrued warranty liability - current		488			488
Operating lease liabilities - current		1,453			1,321
Note payable - related party		100			100
Debt - current, net of unamortized discounts and debt issuance costs		11,709			11,536
Liabilities held for sale - current		-			2,342
Total current liabilities		28,424			27,916
Debt – long-term		550			1,895
Contract liabilities – long-term		152			152
Operating lease liabilities - long-term		9,672			9,816
Liabilities held for sale - long-term		-			140
Total liabilities		38,798			39,919

Commitments and contingencies (Note 17)
Stockholders’ Deficiency
Preferred stock, $0.0001 par value, 100,000,000 shares authorized; Series A Cumulative Redeemable Perpetual Preferred Stock, 690,000 shares designated, 320,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		-			-
Common stock, $0.0001 par value, 300,000,000 shares authorized; 2,683,571 and 2,381,136 shares issued and 2,683,238 and 2,380,803 shares outstanding as of March 31, 2023 and December 31, 2022, respectively		-			-
Additional paid-in capital		286,076			282,582
Treasury stock, at cost, 333 shares as of March 31, 2023 and December 31, 2022		(50	)		(50	)
Accumulated deficit		(302,486	)		(297,556	)
Accumulated other comprehensive income		23			23
Total Stockholders’ Deficiency		(16,437	)		(15,001	)
Total Liabilities and Stockholders’ Deficiency	$	22,361		$	24,918

The accompanying notes are an integral part of ~~these unaudited~~the condensed consolidated financial statements.

~~F-1~~

~~DRONE AVIATION~~COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~(Unaudited)~~

(unaudited)

For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016

Revenues $ 93,105 $ 146,208 $ 474,634 $ 1,073,672

Cost of goods sold 33,594 64,651 283,590 374,112

Gross profit 59,511 81,557 191,044 699,560

General and administrative expense 4,544,499 3,887,052 7,432,226 7,896,130

Loss from operations (4,484,988 ) (3,805,495 ) (7,241,182 ) (7,196,570 )

Other income (expense)
Derivative Gain 779,787 24 1,831,635 24
Interest expense (376,636 ) (2,869 ) (1,558,389 ) (3,149 )
Gain on settlement of make whole provision - - - 11,000
Loss on debt extinguishment (681,988 ) - (681,988 ) -
Debt Forgiveness - 75,000 - 75,000

Total other income (expense) (278,837 ) 72,155 (408,742 ) 82,875

NET LOSS (4,763,825 ) (3,733,340 ) (7,649,924 ) (7,113,695 )

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (4,763,825 ) (3,733,340 ) (7,649,924 ) (7,113,695 )

Weighted average number of common shares outstanding - basic and diluted 9,087,361 6,977,777 8,880,168 6,285,681

Basic and diluted net loss per share $ (0.52 ) $ (0.54 ) $ (0.86 ) $ (1.13 )

	For the Three Months Ended
	March 31,
(Amounts in thousands, except share and per share data)	2023			2022

Revenue	$	483		$	2,053
Cost of goods sold		301			1,483
Gross profit		182			570
Operating expenses (income)
Research and development ⁽¹⁾		57			1,172
Sales and marketing ⁽¹⁾		-			66
General and administrative ⁽¹⁾		2,179			5,780
Depreciation and amortization		69			741
Impairment		896			-
Gain on sale (SKS) ⁽²⁾		(454	)		-
Gain on the sale of assets		-			(8,441	)
Total operating expenses (income), net		2,747			(682	)
(Loss) income from operations		(2,565	)		1,252
Other expense
Interest expense		(419	)		(879	)
Loss on extinguishment of debt		-			(173	)
Loss on inducement of debt conversions		(1,946	)		-
Total other expense		(2,365	)		(1,052	)
(Loss) income from continuing operations		(4,930	)		200
Loss from discontinued operations, net of tax		-			(64	)
Net (loss) income		(4,930	)		136
Dividend on preferred stock		(185	)		(123	)
Net (loss) income attributable to common stockholders	$	(5,115	)	$	13
Net (loss) income per share
- Basic and diluted from continuing operations	$	(1.97	)	$	0.09
- Basic and diluted from discontinued operations	$	-		$	(0.08	)
Weighted average number of common shares outstanding

- Basic and diluted		2,593,028			835,527

⁽¹⁾	These are exclusive of depreciation and amortization
⁽²⁾	Sky Sapience (“SKS”)

The accompanying notes are an integral part of ~~these unaudited~~the condensed consolidated financial statements.

~~F-2~~

~~DRONE AVIATION~~COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS (Unaudited)~~STOCKHOLDERS’ (DEFICIENCY) EQUITY

(unaudited)

For the Nine Months Ended
9/30/2017 9/30/2016
OPERATING ACTIVITIES:
Net loss $ (7,649,924 ) $ (7,113,695 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense of debt discount 1,409,790 2,822
Gain on derivative liability (1,831,635 ) (24 )
Depreciation expense 26,350 25,132
Amortization expense of intangible assets 219,000 97,333
Gain on settlement of make whole provision - (11,000 )
Loss on debt extinguishment 681,988 -
Gain on settlement of debt - (75,000 )
Stock based compensation 4,829,598 4,866,324
Recovery of inventory allowance - (15,383 )
Changes in current assets and liabilities:
Accounts receivable 293,251 81,078
Inventory (275,276 ) (220,186 )
Prepaid expenses and other current assets 49,340 (35,660 )
Accounts payable and accrued expense (144,000 ) 420,990
Due from related party 141,368 (7,896 )
Deferred revenue - (6,000 )

Net cash used in operating activities (2,250,150 ) (1,991,165 )

INVESTING ACTIVITIES:
Cash paid on furniture and equipment (675 ) (14,099 )

Net cash used in investing activities (675 ) (14,099 )

FINANCING ACTIVITIES:
Proceeds from related party convertible note payable 1,000,000 -
Proceeds from bank line of credit 1,000,000 -
Cash repayment on OTCC loan - (35,000 )
Proceeds from convertible Note Payable Series 2016 - 3,000,000

Net cash provided by financing activities 2,000,000 2,965,000

NET INCREASE (DECREASE) IN CASH (250,825 ) 959,736

CASH, beginning of period 2,015,214 2,659,734

CASH, end of period $ 1,764,389 $ 3,619,470

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months ended September 30:
Interest $ 5,875 $ 3,149

Noncash investing and financing activities for the nine months ended September 30:
Common Stock issued for Adaptive Flight asset purchase make whole provision $ - $ 150,500
Conversion of Series A preferred stock to common stock $ 25 $ -
Conversion of Series C preferred stock to common stock $ - $ 18
Conversion of Series D preferred stock to common stock $ - $ 5
Conversion of Series F preferred stock to common stock $ - $ 5
Conversion of Series G preferred stock to common stock $ - $ 5
Derivative liability on reset provision of Convertible Notes Payable Series 2016 $ - $ 2,394,974
Stock Issued for November 2015 PIPE Investors as consent shares $ - $ 50

	FOR THE THREE MONTHS ENDED MARCH 31, 2023
												Accumulated
									Additional			Other										Total
	Preferred Stock				Common Stock				Paid-In			Comprehensive		Treasury Stock					Accumulated			Stockholders’
(Amounts in thousands, except share data)	Shares		Amount		Shares		Amount		Capital			Income		Shares		Amount			Deficit			Deficiency
Balance - January 1, 2023		320,000	$	-		2,381,136	$	-	$	282,582		$	23		333	$	(50	)	$	(297,556	)	$	(15,001	)
Issuance of common stock for conversion of debt		-		-		280,625		-		3,547			-		-		-			-			3,547
Round ups pursuant to the reverse split		-		-		21,810		-		-			-		-		-			-			-
Preferred dividend		-		-		-		-		(185	)		-		-		-			-			(185	)
Share-based compensation		-		-		-		-		132			-		-		-			-			132
Net loss		-		-		-		-		-			-		-		-			(4,930	)		(4,930	)
Balance - March 31, 2023		320,000	$	-		2,683,571	$	-	$	286,076		$	23		333	$	(50	)	$	(302,486	)	$	(16,437	)

	FOR THE THREE MONTHS ENDED MARCH 31, 2022
												Accumulated
									Additional			Other										Total
	Preferred Stock				Common Stock				Paid-In			Comprehensive		Treasury Stock					Accumulated			Stockholders’
(Amounts in thousands, except share data)	Shares		Amount		Shares		Amount		Capital			Income		Shares		Amount			Deficit			Equity
Balance - January 1, 2022		320,000	$	-		819,851	$	-	$	266,021		$	23		333	$	(50	)	$	(217,843	)	$	48,151
Issuance of common stock for conversion of debt		-		-		15,761		-		1,150			-		-		-			-			1,150
Issuance of common stock for exercise of options		-		-		2,098		-		31			-		-		-			-			31
Preferred dividend		-		-		-		-		(123	)		-		-		-			-			(123	)
Share-based compensation		-		-		-		-		535			-		-		-			-			535
Net income		-		-		-		-		-			-		-		-			136			136
Balance - March 31, 2022		320,000	$	-		837,710	$	-	$	267,614		$	23		333	$	(50	)	$	(217,707	)	$	49,880

The accompanying notes are an integral part of ~~these unaudited~~the condensed consolidated financial statements.

~~F-3~~

~~DRONE AVIATION~~COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Three Months Ended
	March 31,
(Amounts in thousands, except share data)	2023			2022

Cash Flows From Operating Activities:
Net (loss) income	$	(4,930	)	$	136
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss from discontinued operations, net of tax		-			64
Depreciation		36			357
Amortization		33			384
Impairment		896			-
Non-cash rent expense		463			271
Bad debt expense		-			49
Gain on sale (SKS) ⁽¹⁾		(454	)		-
Gain on the sale of assets		-			(8,441	)
Share-based compensation		132			535
Amortization of debt discounts and debt issuance costs		3			574
Loss on extinguishment of debt		-			173
Loss on inducement of debt conversions		1,946			-
Changes in operating assets and liabilities:
Accounts receivable, net		644			(983	)
Inventory, net		(370	)		217
Prepaid expenses		40			(495	)
Other assets		154			(1,045	)
Accounts payable		499			(1,000	)
Accrued interest		324			(41	)
Accrued liabilities		333			(56	)
Contract liabilities		1,053			1,055
Operating lease liabilities		(465	)		(868	)
Related party notes		-			(86	)
Other current liabilities		252			738
Total Adjustments		5,519			(8,598	)
Net Cash Provided By (Used In) Operating Activities		589			(8,462	)
Cash Flows From Investing Activities:
Proceeds from sale of SKS ⁽¹⁾		436			-
Proceeds from building sale, net of transaction costs		-			15,102
Purchases of property and equipment		-			(193	)
Net Cash Provided By Investing Activities		436			14,909
Cash Flows From Financing Activities:
Principal payment on finance lease		-			(7	)
Proceeds from issuance of related party note		-			100
Proceeds from issuance of debt		170			-
Proceeds from exercise of options		-			31
Preferred stock dividend		-			(123	)
Repayment of debt		-			(7,588	)
Net Cash Provided By (Used In) Financing Activities		170			(7,587	)
Net Cash Used in Discontinued Operations		-			(335	)
Net Increase (Decrease) In Cash		1,195			(1,475	)
Cash - Beginning of Period		1,868			1,873
Cash - End of Period	$	3,063		$	398

⁽¹⁾	Proceeds from the gain on sale of Sky Sapience (“SKS”) are net of $35,000 cash sold.

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(unaudited)

	For the Three Months Ended
	March 31,
(Amounts in thousands, except share data)	2023		2022

Supplemental Disclosures of Cash Flow Information:

Cash paid during the period for:
Interest	$	76	$	105
Non-cash investing and financing activities:
Accrual of preferred dividends not paid yet	$	185	$	-
Reclassification of assets and liabilities held for sale	$	543	$	-
Issuance of common stock for conversions of debt and interest	$	3,547	$	1,150
Recognition of operating lease right-of-use asset and liability	$	-	$	10,052

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMSOVEREIGN HOLDING CORP.

NOTES TO ~~INTERIM UNAUDITED~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

NOTE 1 DESCRIPTION OF BUSINESS

~~For~~COMSovereign Holding Corp. (“COMSovereign”) and subsidiaries (collectively the ~~Period Ended September 30, 2017~~“Company”) 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.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.	~~BASIS OF PRESENTATION~~

There have been no material changes in the Company’s significant accounting policies as of and for the three months ended March 31, 2023, as compared to the significant accounting policies described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022.

Basis of Presentation

The ~~following unaudited interim consolidated~~accompanying financial statements ~~have been prepared pursuant to the rules and regulations~~ of the ~~Securities and Exchange Commission. Accordingly, such interim financial statements do not include all the information and footnotes required by~~Company were prepared in accordance with generally accepted accounting principles ~~generally accepted~~ in the United States ~~for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in~~(“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary ~~in order to make~~for a fair presentation have been included. The results of operations and financial position for the ~~financial statements~~three months ended March 31, 2023 and cash flows for the three months ended March 31, 2023 are not ~~misleading. The balance sheet as~~necessarily indicative of the operating results for the full year ending December 31, ~~2016 has been derived from~~2023 or any other period. The amounts reported in the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes required for complete annual financial statements. Theunaudited condensed consolidated financial statements, ~~included~~and the tables in ~~this~~the notes hereto, of the Quarterly Report on Form 10-Q as of March 31, 2023 and for the three months ended March 31, 2023 and 2022, are presented in United States dollars and are rounded in thousands with the exception of share and per share data. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2022 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on December 7, 2023.

Effective February 10, 2023, the Company enacted a 1-for-100 reverse stock split (the “2023 Split”) of the Company’s common stock. These consolidated financial statements and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported results of operations or loss per share.

Correction of an Error

See Note 20 - Correction of an Error.

Principles of Consolidation

The unaudited condensed consolidated financial statements as of March 31, 2023 and December 31, 2022, and for the three months ended March 31, 2023 and 2022, include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates consist of the valuation of stock-based compensation; the valuation of the assets and liabilities acquired; the valuation of the Company’s equity securities issued in transactions; the valuation of inventory; the allowance for credit losses; the valuation of equity securities; the valuation allowance for deferred tax assets; and impairment of long-lived assets and goodwill.

Long-Lived Assets and Goodwill

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.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

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 of March 31, 2023, the Company determined that it was not more likely than not that the reporting unit’s fair value was below its carrying amount due to a decline in the Company’s market capitalization. Accordingly, it was not necessary to perform impairment testing as of March 31, 2023. However, please see Note 20 – Correction of an Error for details related to the recognition of additional 2022 impairment expense.

In determining whether a quantitative assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the quantitative impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more than likely that the fair value is less than the carrying amount, the quantitative impairment test is not required. The Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition projections, and its expectations.

The Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches and compares it to the carrying values. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. For the market approach, the Company uses internal analyses based primarily on market comparables. The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and its expectations. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.

Discontinued Operations

On June 21, 2022, the Company completed the sale of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest of 5% and a maturity date of May 31, 2025. The results of Sovereign Plastics are reflected in the accompanying statements of operations for the three months ended March 31, 2022 as loss from discontinued operations, net of tax (see Note 3 – Discontinued Operations and Assets and Liabilities Held for Sale for additional information).

Assets and Liabilities Held for Sale

On March 20, 2023, the Company completed the sale of its Sky Sapience business unit to Titan Innovations Ltd. for total consideration of $1.8 million. Accordingly, assets and liabilities of Sky Sapience are reflected in the accompanying condensed consolidated balance sheet as “Assets held for sale” and “Liabilities held for sale”, respectively, as of December 31, 2022 (see Note 3 – Discontinued Operations and Assets and Liabilities Held for Sale for additional information).

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:

Level 1 – Observable inputs that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.

Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs may be used with standard pricing models or other valuation or internally-developed methodologies that result in management’s best estimate of fair value.

The Company utilizes fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

As allowed by applicable FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently eligible financial assets or liabilities. The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes ~~thereto~~payable. The Company has determined that the book value of its outstanding financial instruments as of March 31, 2023 and December 31, 2022 approximated their fair value due to their short-term nature.

Reportable Segments and Reporting Units

A reporting unit (“RU”) is a component of an operating segment that is a business activity for which discrete financial information is available and segment management regularly reviews the operating results of that component. The Company’s legal operating subsidiaries are not organized to qualify as individual segments, however, each operating entity had separate financial information and an operating manager, who oversees the business and financial activities, reporting to the Chief Operating Decision Maker (“CODM”). Therefore, during 2022, the Company operated as one reportable segment and each legal entity was deemed to be a separate reporting unit.

As of January 1, 2023, the Company began operating as a single reporting unit. As part of the Company’s restructuring, the Company integrated its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer is managing the Company and making decisions based on the Company’s consolidated operating results.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the current expected credit losses (“CECL”) standards. The ASU is now effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU on January 1, 2023 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

Sovereign Plastics LLC

Sovereign Plastics is a manufacturer of plastic and metal components to third-party manufacturers based out of Colorado Springs, Colorado. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sovereign Plastics in the future as compared to the opportunities available to Sovereign Plastics in the future, and the availability of strategic alternatives. On June 13, 2022, after careful consideration, the Board of Directors unanimously approved the sale of Sovereign Plastics.

On June 21, 2022, the Company completed the sale of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest of 5% and a maturity date of May 31, 2025. As a result of the sale, in the second quarter of 2022, the Company recognized a $1.1 million gain on the sale of Sovereign Plastics which was included in “Loss from discontinued operations, net of tax” in the accompanying consolidated statements of operations and comprehensive loss for the period ended March 31, 2022. See Note 12 – Note and Obligation Receivable for additional information.

Sky Sapience Ltd.

Sky Sapience was acquired on February 25, 2021 and is a manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications based out of Israel. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sky Sapience in the future as compared to the opportunities available to Sky Sapience in the future, and the availability of strategic alternatives. On December 21, 2022, after careful consideration, the Board of Directors unanimously approved the sale of Sky Sapience.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

On March 20, 2023, the Company completed the sale of its Sky Sapience business unit to Titan Innovations Ltd. for total consideration of $1.8 million. The sale of Sky Sapience didn’t qualify for discontinued operations presentation because the sale didn’t represent a strategic shift that had a major effect on the Company’s operations (the Company will continue to be in the drone business). Sky Sapience’s assets and liabilities met the criteria to be classified as held for sale as of December 31, 2022 as follows:

	Sky Sapience
	December 31,
(Amounts in thousands, except share and per share data)	2022
Assets
Cash	$	35
Inventory, net		535
Prepaid and deferred expenses		56
Other current assets		25
Assets held for sale - current		651
Property and equipment, net		640
Operating lease right-of-use assets		269
Intangible assets, net		246
Goodwill		1,219
Assets held for sale - long-term		2,374
Total assets held for sale	$	3,025

Liabilities
Accounts payable	$	233
Accrued liabilities		321
Accrued payroll		321
Contract liabilities - current		1,347
Operating lease liabilities - current		120
Liabilities held for sale - current		2,342
Operating lease liabilities - long-term		140
Liabilities held for sale - long-term		140
Total liabilities held for sale	$	2,482

Upon the completion of the sale of SKS during the first quarter of 2023, the Company recorded a gain on sale of $0.5 million which consisted of total liabilities assumed of $2.5 million, an obligation receivable of $0.6 million, and cash proceeds of $0.5 million, partially offset by total assets acquired of $3.0 million and closing costs in connection with the sale to a consultant of $0.1 million. See Note 12 – Note and Obligation Receivable.

NOTE 4 GOING CONCERN

U.S. GAAP requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.

The accompanying condensed consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the three months ended March 31, 2023, the Company generated cash flows from operations of $0.6 million and had an accumulated deficit of $302.5 million and a working capital deficit of $16.3 million. These factors raise substantial doubt about our ability to continue as a going concern.

Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund growth initiatives. Based on current cash on hand and subsequent activity as described herein (see Note 21 – Subsequent Events – Debt and Equity Developments), the Company presently only has enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of the Company’s limited cash availability, its operations have been scaled back to the extent possible (see Note 19 – Other Business Developments – Business Developments). Management continues to explore opportunities with third parties and related parties; however, it has not entered into any agreement to provide the necessary additional capital, except as disclosed herein.

The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising or profit-enhancing efforts that it may undertake, and these planned actions do not alleviate the substantial doubt. If the Company is not able to obtain additional financing on a timely basis, it may have to further delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on its business, financial condition and results of operations, and ultimately, it could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code. Determining the extent to which conditions or events raise substantial doubt about the Company’s ability to continue as a going concern and the extent to which mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and estimation by the Company. The Company makes assumptions that management’s plans will be effectively implemented but may not alleviate substantial doubt and its ability to continue as a going concern.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

NOTE 5 REVENUE

Revenue by type consisted of the following for the three months ended March 31, 2023 and 2022:

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2023		2022
Drones	$	243	$	353
Telecom hardware		207		1,289
Support & maintenance		31		40
Software		2		-
Optic repairs		-		314
Consulting		-		57
Total revenue	$	483	$	2,053

The following table is a summary of the Company’s timing of revenue recognition for the three months ended March 31, 2023 and 2022:

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2023		2022
Timing of revenue recognition:
Services and products transferred at a point in time	$	451	$	1,955
Services and products transferred over time		32		98
Total revenue	$	483	$	2,053

The Company disaggregates revenue by source and geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue by source consisted of the following for the three months ended March 31, 2023 and 2022:

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2023		2022
Revenue by products and services:
Products	$	451	$	1,955
Services		32		98
Total revenue	$	483	$	2,053

Revenue by geographic destination consisted of the following for the three months ended March 31, 2023 and 2022:

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2023		2022
Revenue by geography:
North America	$	482	$	1,549
International		1		504
Total revenue	$	483	$	2,053

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

Contract Balances

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of March 31, 2023 and December 31, 2022, the Company did not have a material contract assets balance.

The following table is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.

(Amounts in thousands)	Total
Balance at December 31, 2022	$	3,384
New invoices not yet earned		1,066
Revenue earned		(13	)
Balance at March 31, 2023	$	4,437

Of the $3.4 million contract balance as of December 31, 2022, $13 thousand was recognized as revenue during the three months ended March 31, 2023 and $1.9 million is expected to be recognized during the remainder of 2023 resulting in the remaining contract balance of $1.5 million, which will be recognized as revenue when the Company meets the performance obligation, the timing of which is uncertain at this time.

NOTE 6 EARNINGS (LOSS) PER SHARE

The Company accounts for earnings or loss per share pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which requires disclosure on the financial statements of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period.

Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss attributable to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss attributable to common shareholders.

The following weighted-average potential common shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of March 31, 2023 and 2022, respectively:

	March 31,
	2023		2022
Options		24,954		66,808
Warrants		115,899		128,149
Convertible notes⁽¹⁾		189,601		52,080
		330,454		247,037

⁽¹⁾	The potentially dilutive shares associated with convertible notes were calculated based on the conditions as of the calculation date.

NOTE 7 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

Cash is represented by operating accounts or money market accounts maintained with insured financial institutions, including cash equivalents, defined as all short-term, highly-liquid investments with maturities of three months or less when purchased. The Company had no cash equivalents as of March 31, 2023 and December 31, 2022, respectively. During the year ended December 31, 2022, $195,000 of restricted cash was released upon the sale of a building (see Note 11 – Property and Equipment, Net for additional information related to the sale of the building). The remaining $47,000 was released upon the abandonment of overseas equipment leases and $35,000 was transferred in the sale of Sky Sapience.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

NOTE 8 ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following as of March 31, 2023 and December 31, 2022:

	March 31,			December 31,
(Amounts in thousands)	2023			2022
Accounts receivable	$	1,723		$	2,372
Less: allowance for doubtful accounts		(1,241	)		(1,246	)
Total accounts receivable, net	$	482		$	1,126

The Company had $0 and $49 thousand of bad debt expense for the three months ended March 31, 2023 and 2022, respectively.

NOTE 9 INVENTORY, NET

Inventory consisted of the following as of March 31, 2023 and December 31, 2022:

	March 31,			December 31,
(Amounts in thousands)	2023			2022
Raw materials	$	3,563		$	3,685
Work in progress		794			560
Finished goods		738			480
Total inventory		5,095			4,725
Reserve		(759	)		(759	)
Total inventory, net	$	4,336		$	3,966

NOTE 10 PREPAID EXPENSES

Prepaid expenses consisted of the following as of March 31, 2023 and December 31, 2022:

	March 31,		December 31,
(Amounts in thousands)	2023		2022
Prepaid products and services	$	3,517	$	3,557
Prepaid rent and security deposit		14		14
Total prepaid expenses	$	3,531	$	3,571

Prepaids and deferred expenses include cash paid in advance for rent and security deposits, inventory and other. As of March 31, 2023 and December 31, 2022, prepaid products and services were comprised of deposits for radio inventory of $2.9 million.

NOTE 11 PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of March 31, 2023 and December 31, 2022:

	March 31,			December 31,
(Amounts in thousands)	2023			2022
Shop machinery and equipment	$	672		$	672
Computers and electronics		766			766
Office furniture and fixtures		68			68
Leasehold improvements		41			41
Total property and equipment		1,547			1,547
Less: accumulated depreciation		(1,206	)		(1,170	)
Total property and equipment, net	$	341		$	377

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

For the three months ended March 31, 2023 and 2022, the Company had $0.0 million and $0.2 million, respectively, in investments in capital expenditures.

On January 31, 2022, the Company sold its Tucson, Arizona office building (the “Tucson Building”) for $15.8 million in cash. The Tucson Building had a carrying value of $6.7 million, including the $4.8 million cost basis of the building, the $1.3 million cost basis of the land, and the $0.8 million related to building improvements, partially offset by $0.2 million of accumulated depreciation. The Company recognized an $8.4 million gain on sale of assets, which is net of $0.7 million of related transaction costs. See Note 13 – Leases for additional information about the subsequent leaseback of the office building.

During the year ended December 31, 2022, the Company derecognized the property and equipment associated with the following transactions (see Note 13 – Leases and Note 19 – Other Business Developments for additional information):

Abandonment of Tucson Building lease – gross assets of $0.6 million with a net book value of $0.1 million on February 1, 2022;

Sale of DragonWave-X Canada, Inc. assets – gross assets of $8.5 million with a net book value of $0.0 million on May 23, 2022; and

Transfer of Innovation Digital, LLC assets – gross assets of $0.1 million with a net book value of $0.1 million on June 23, 2022.

The Company recognized $0.0 million and $0.5 million of depreciation expense for the three months ended March 31, 2023 and 2022, respectively.

NOTE 12 NOTE AND OBLIGATION RECEIVABLE

On June 21, 2022, the Company completed the sale of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest of 5% and a maturity date of May 31, 2025. The payment schedule of the note is as follows: $0.65 million is due on May 31, 2023, $0.65 million is due on May 31, 2024, and $0.70 million is due on May 31, 2025. While management remains confident of collection, the payment due on May 31, 2023 hasn’t been collected to date. As of March 31, 2023, the note receivable of $2.0 million and accrued interest in aggregate of $0.1 million is included on the condensed consolidated balance sheet.

On March 20, 2023, the Company completed the sale of its Sky Sapience business unit to Titan Innovations Ltd. The consideration included a $0.6 million obligation receivable, which is due March 20, 2025. See Note 3 – Discontinued Operations and Assets and Liabilities Held for Sale for more information on the sale of Sky Sapience.

NOTE 13 LEASES

Operating Leases

The Company has operating leases for office, manufacturing and warehouse space, along with office equipment. Balances as of March 31, 2023 and December 31, 2022 for operating leases were as follows:

	March 31,		December 31,
(Amounts in thousands)	2023		2022
Operating lease ROU assets	$	87	$	97
Operating lease liability	$	11,125	$	11,137

Other information related to the Company’s operating leases are as follows:

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2023		2022
Operating lease cost	$	488	$	611
Short-term lease cost	$	-	$	9

Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	-	$	10,052

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	463	$	549

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of March 31, 2023 and December 31, 2022:

	March 31,			December 31,
	2023			2022
Weighted average remaining lease term (years)		7.79			7.90
Weighted average discount rate		5.51	%		5.52	%

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2023:

	Operating
(Amounts in thousands)	Leases
2023	$	1,358
2024		1,720
2025		1,625
2026		1,386
2027		1,424
Thereafter		6,862
Total minimum lease payments		14,375
Less: effect of discounting		(3,250	)
Present value of future minimum lease payments		11,125
Less: current obligations under leases		(1,453	)
Long-term lease obligations	$	9,672

NOTE 14 DEBT

Debt consisted of the following as of March 31, 2023 and December 31, 2022:

			March 31, 2023						December 31, 2022
(Amounts in thousands)	Note Reference	Maturity Date	Amount Outstanding			Interest Rate			Amount Outstanding			Interest Rate
Secured Notes Payable
Secured senior convertible note payable	A	5/27/23	$	51			6.0	%	$	51			6.0	%
Secured senior convertible note payable	B	8/25/23		59			6.0	%		59			6.0	%
Secured note payable	C	10/25/23		368			6.0	%		368			6.0	%
Secured note payable	D	11/8/23		263			6.0	%		263			6.0	%
Secured note payable	E	11/26/21		775			15.0	%		775			15.0	%
Secured note payable	F	7/29/24		550			8.0	%		550			8.0	%
Secured note payable	G	6/30/23		50			-			50			-
SBA loan	H	5/15/50		150			3.8	%		150			3.8	%
Total secured notes payable				2,266						2,266

Unsecured Notes Payable
Note payable - related party	I	12/31/23		100			5.5	%		100			3.0	%
Note payable	J	7/29/23		26			15.0	%		26			15.0	%
Note payable	K	7/30/23		90			8.0	%		-			-
Note payable	L	8/1/23		80			8.0	%		-			-
Total notes payable				296						126

Unsecured Convertible Notes Payable
Convertible note payable	M	1/29/26		9,805			15.0	%		11,150			3.3	%
Total convertible notes payable				9,805						11,150

Total debt				12,367						13,542
Less: unamortized discounts and debt issuance costs				(8	)					(11	)
Total long-term debt, less discounts and debt issuance costs				12,359						13,531
Less: current portion of debt				(11,809	)					(11,636	)
Long-term portion of debt			$	550					$	1,895

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

Debt activity during the three months ended March 31, 2023 included the following:

For Note F, on March 14, 2023, the Company amended Note F to extend the maturity date to July 29, 2024 with an interest rate of 8% and the ability to convert principal and interest into shares of the Company’s common stock at a 10% discount to the closing price on which the conversion is elected effective September 15, 2023. In addition, the note became secured with a second priority security interest on the assets of its Lighter Than Air Systems Corp. (d/b/a Drone Aviation Corp) business and agreed to extend the term of the advisory agreement pursuant to the original note for an additional two years and issue an additional 12,000 shares of the Company’s common stock per year while the note is outstanding. On April 13, 2023, the Company issued 12,000 shares of the Company’s common stock to the advisor pursuant to the terms of the advisory agreement as consideration for their services.

For Note K, on January 17, 2023, the Company sold an unsecured promissory note in the principal amount of $90,000, which was due on or before July 30, 2023. Of the $90,000 of proceeds from the first note, usage of $88,000 is restricted to make interest payments due to certain holders of Note M. The note becomes immediately due and payable if the Company raises at least $2.5 million in an equity or debt offering and will accrue 8% interest per annum, which increases to 15% per annum if the note isn’t repaid by the maturity date. The issuance of a second note (Note L) made the principal and accrued interest of both notes convertible if they aren’t repaid by the maturity date and the conversion price will equal 81% of the closing market price of the common stock on the day that the holder elects to convert the note(s), subject to a floor price of $5.00 per share. The Company did not repay the note on maturity and therefore the note became convertible as of the maturity date and is in default.

For Note L, on February 1, 2023, the Company sold an unsecured promissory note in the principal amount of $80,000, which was due on or before August 1, 2023. The note becomes immediately due and payable if the Company raises at least $2.5 million in an equity or debt offering and accrues 8% interest per annum, which increases to 15% per annum if the note isn’t repaid by the maturity date. The issuance of this note made the principal and accrued interest of Note K convertible if they aren’t repaid by the maturity date and the conversion price will equal 81% of the closing market price of the common stock on the day that the holder elects to convert the note(s), subject to a floor price of $5.00 per share. The Company did not repay the note on maturity and therefore the note became convertible as of the maturity date and is in default.

For Note M, on May 24, 2022, the Company received notice from counsel for holders of $11.2 million of convertible promissory notes issued in connection with the acquisition of FastBack that the Company had failed to file its Annual Report on Form 10-K in a timely manner, as required by the terms of the convertible promissory notes. While the note holders have the right to accelerate the maturity of the principal, the notice simply indicated that the holders were reserving their rights. On January 20, 2023, the Company paid cash for interest in the amount of $75,985. In addition, during January 2023, pursuant to a limited time offer, certain note holders agreed to amend their note and convert an aggregate of $1.3 million principal of their notes and $0.3 million of accrued interest into 280,625 shares of the Company’s common stock pursuant to a limited time offer for conversions at a discounted rate of 81% of the closing market price of the Company’s common stock on the day special conversion notices were received. As a result of the conversions, which were recorded using inducement accounting, the Company recognized a $1.9 million of loss on inducement of debt conversions, which is included in income from continuing operations in the income statement, which represents the fair value of the 280,625 shares of common stock issued pursuant to the limited time offer, less the fair value of the 3,068 shares of common stock that would have been issuable pursuant to the original terms of the convertible notes. Interest is being accrued at the 15.0% default rate during 2023.

Certain agreements governing the secured notes payable, unsecured notes payable, and unsecured convertible notes payable contain customary covenants, such as limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness.

All debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and is continuing, the lenders may accelerate the applicable amounts due. The Company is in default on several debt agreements and has accrued the proper penalties or disclosed any additional contingencies that resulted from the default.

Future maturities contractually required by the Company under long-term debt obligations are as follows as of March 31, 2023:

(Amounts in thousands)	Total
2023	$	11,817
2024		550
2025		-
2026		-
2027		-
Thereafter		-
Total	$	12,367

NOTE 15 STOCKHOLDERS’ EQUITY

Reverse Stock Split

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

Dividends

During the three months ended March 31, 2023 and 2022, the Company recorded $184,992 and $123,328, respectively, of dividends paid or payable to the holders of the 9.25% Series A Preferred Stock.

On or about May 25, 2022, the Company announced that it had suspended the payment of dividends on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $1,171,616.

Common Stock

During the three months ended March 31, 2023, the Company issued an aggregate of 280,625 shares of common stock for conversions of debt and interest (see Note 14 – Debt for additional information) and issued 21,810 shares of common stock upon the round-up of common shares pursuant to the 1-for-100 reverse stock split effective February 10, 2023.

During the three months ended March 31, 2022, the Company issued an aggregate of 15,761 shares of common stock with a fair value of $1.2 million for conversions of debt and interest and issued 2,098 shares of common stock for gross proceeds of $31,000 upon the exercise of options.

NOTE 16 SHARE-BASED COMPENSATION

Restricted Stock Awards

A summary of the restricted stock unit (“RSA”) activity during the three months ended March 31, 2023 is presented below:

				Weighted-
				Average
	Number of			Grant Date Value
	RSA’s			Per Share
RSA’s non-vested - January 1, 2023		333		$	450
Granted		-			-
Forfeited		-			-
Vested		(333	)		450
RSA’s non-vested - March 31, 2023		-		$	-

During the three months ended March 31, 2023, the Company recognized $12,502 of share-based compensation expense associated with restricted stock awards. During the three months ended March 31, 2022, the Company recognized $78,496 of share-based compensation expense associated with restricted stock awards. Compensation expense related to restricted stock awards is recorded in general and administrative expense in the condensed consolidated statement of operations. As of March 31, 2023, there was no unrecognized stock-based compensation expense related to restricted stock awards.

Stock Options

There were no stock options issued during the three months ended March 31, 2023 and 2022.

The following table presents stock option activity for the three months ended March 31, 2023:

				Weighted		Weighted
				Average Exercise		Average Contractual		Aggregate
	Number of			Price		Life in		Intrinsic
	Options			Per Share		Years		Value
Outstanding - December 31, 2022		26,554		$	223
Exercised		-			-
Cancelled or Expired		(1,600	)		291
Outstanding - March 31, 2023		24,954		$	219		2.78	$	-
Exercisable - March 31, 2023		17,496		$	195		2.34	$	-

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

The following table presents information related to stock options as of March 31, 2023:

Options Outstanding				Options Exercisable
				Weighted
Exercise		Outstanding		Average		Exercisable
Price		Number of		Remaining Life		Number of
Per Share		Options		In Years		Options
	$ 0.01 - $ 50.00		-		-		-
	$ 50.01 - $100.00		5,688		2.27		5,688
	$ 100.01 - $ 150.00		-		-		-
	$ 150.01 - $ 200.00		2,900		0.75		2,900
	$ 200.01 - $ 250.00		-		-		-
	$ 250.01 - $ 300.00		16,033		2.92		8,575
	$ 300.01 - $ 350.00		333		2.27		333
			24,954		2.34		17,496

The Company recognized $119,991 of share-based compensation expense related to options for the three months ended March 31, 2023, compared to $456,604 of share-based compensation expense related to options for the three months ended March 31, 2022. Compensation expense related to stock options is recorded in general and administrative expense in the condensed consolidated statement of operations. At March 31, 2023, the Company had $221,545 of unrecognized compensation expense related to options, which will be recognized over the weighted average remaining vesting period of 0.6 years.

NOTE 17 COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Management does not believe that after the final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations or cash flows, except as follows.

On January 27, 2022, a former employee filed suit against the Company in the Tulsa County Oklahoma District Court, Case No. CJ-2022-00221. The plaintiff has alleged that she was entitled to six months of severance pay after her employment contract was not renewed, and that her option agreements did not expire thirty days after cessation of her employment, and claims she is owed approximately $75,000 in severance and $250,000 in damages for her options. The Company filed an answer on or about March 18, 2022. The Company disputes the plaintiff’s allegations, has not accrued for any contingent losses, and intends to vigorously defend the lawsuit.

On June 16, 2022, the Company received notice from certain former shareholders of SAGUNA claiming breaches of the SAGUNA stock purchase agreement and claiming that all of the former shareholders of SAGUNA have suffered damages totaling approximately $13.9 million, which they calculated as the value related to the consideration issued to those former shareholders for the acquisition of SAGUNA. The Company denies those claims and has not accrued any contingent loss. However, the Company may face legal claims or proceedings regarding those claims.

By notice dated July 14, 2022, the Company received notice from a distributor that has a distribution agreement with InduraPower claiming that InduraPower, and the Company as guarantor, has breached the distribution agreement, and are claiming approximately $2.0 million in damages, which includes a claim for $0.5 million of foregone profit. The Company had received $1.3 million in cash as a deposit against future product deliveries which is included in contract liabilities – current. In addition, the Company fully accrued the remaining claim of $0.7 million in accrued liabilities in the condensed consolidated balance sheet as of December 31, 2022.

On or about July 17, 2022, the former employees of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $400,000 of claims of the former employees, which were fully accrued as of September 30, 2022. The claims of the former employees were resolved pursuant to the SKS Sale Agreement and the action was dismissed on or about January 9, 2023.

On or about August 22, 2022, two former FastBack employees filed suit against the Company, DragonWave and FastBack in the Alameda County Superior Court, California, Case No. 22CV016666. The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times, failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff claimed damages of no less than $66,500. The Company has accrued for the wage claims for services provided but has not accrued for penalties. On April 4, 2023, the Company resolved this lawsuit.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

On or about September 20, 2022, the Company was served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806. The plaintiff alleges that for $125,000 he purchased an 8% promissory note in 2018 from Transform-X which has not been paid. Plaintiff alleges that the Company is also liable under the Transform-X promissory note. This lawsuit was removed to the United States District of South Carolina, Civil Action No.:3:22-cv-03645-MGL. The Company filed an Answer on October 27, 2022 and the proceedings are currently in the discovery phase. The Company strongly disputes the plaintiff’s allegations, has not accrued for any contingent losses, and intends to vigorously defend the lawsuit.

On or about November 14, 2022, an intellectual property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego. The plaintiff alleges that they performed work for the Company and its subsidiaries subsequent to September 30, 2022 and are owed approximately $75,000, which was fully accrued as of March 31, 2023.

On January 9, 2023, a former employee of a subsidiary of InduraPower, filed suit against the Company and the former CEO, Daniel Hodges, in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. The Company strongly disputes plaintiff’s allegations and intends to vigorously defend the lawsuit.

On or about January 10, 2023, a recruiting and staffing company obtained a default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for $145,917 and post-judgment interest at 7%. As of March 31, 2023, the Company accrued for the full amount of the judgment. The judgment holder obtained a garnishment order against the Company’s banking accounts and has received approximately $17,600 in cash through the date of this filing.

See Note 21 – Subsequent Events – Litigation, Claims and Contingencies Developments for post-March 31, 2023 developments.

NOTE 18 CONCENTRATIONS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable. At March 31, 2023, accounts receivable, net, from three customers comprised an aggregate of approximately 83% of the Company’s total trade accounts receivable, and none of these balances were characterized as uncollectible.

In addition, for the three months ended March 31, 2023, revenue from four customers individually exceeded 10% of revenue and comprised approximately 88% of the Company’s total revenue. For the three months ended March 31, 2022, three customers individually exceeded 10% of the Company’s total revenue and, in total, comprised approximately 37% of the Company’s total revenue. At March 31, 2023 and 2022, no account payables from vendors accounted for 10% or more of the Company’s total expenses.

NOTE 19 OTHER BUSINESS DEVELOPMENTS

Nasdaq Compliance Developments

Throughout most of 2022, our common stock was not in compliance with the $1.00 minimum closing bid price requirement. We were given grace periods and regained compliance on or about February 27, 2023, by having the closing bid price of our common stock exceed $1.00 for a minimum of ten (10) consecutive trading days during the grace period by implementing a 1-for-100 reverse stock split of our outstanding common stock on February 10, 2023.

On February 27, 2023, the Company regained compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) price of the Company’s common stock following the successful filing of its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 pursuant to Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”).

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

On March 31, 2023, the Company filed a notice of late filing on Form 12b-25 with the SEC to report that its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) would not be timely filed. On April 18, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company has not yet filed the Form 10-K, the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the SEC. On May 17, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed the Form 10-K or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Form 10-Q”), the Company is not in compliance with Nasdaq Listing Rules. On August 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. On October 16, 2023, the Company received notice from the Listing Qualifications Staff (the “Staff”) indicating that the Staff had determined to delist the Company’s securities unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Staff’s determination was based upon the Company’s continued non-compliance with the filing requirement set forth in Nasdaq Listing Rule 5250(c)(1) because the Company had not filed its Form 10-K for the year ended December 31, 2022, and has not filed the Forms 10-Q for the periods ended March 31, 2023 and June 30, 2023. On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules.

The Company requested and obtained a hearing before the Panel as well as a further stay of any additional action by Nasdaq pending the issuance of a decision by the Panel. There can be no assurance that a favorable decision will be obtained.

If the Company fails to timely regain compliance with the Nasdaq Listing Rule within any grace period granted by the Nasdaq Hearings Panel, the Company’s common stock, warrants and 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock will be subject to delisting from Nasdaq. There is no assurance that the Company will regain compliance during any grace periods or be able to maintain compliance with Nasdaq’s listing requirements in the future. If we are not able to regain compliance during a grace period, Nasdaq will notify us that our common stock, warrants, and 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock will be delisted from The Nasdaq Capital Market.

Business Developments

In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC.

NOTE 20 CORRECTION OF AN ERROR

During the review of the Company’s condensed consolidated financial statements for the three months ended March 31, 2023, the Company identified errors in the reporting of historical goodwill impairment (included in impairment expense) and intangible asset impairment (included in impairment expense). The errors resulted in an understatement of impairment expense for the year ended December 31, 2022. Based on management’s evaluation of the SEC Staff’s Accounting Bulletins Nos. 99 (“SAB 99”) and 108 (“SAB 108”) and interpretations therewith, the Company concluded that the aforementioned errors were not material to the Company’s previously filed 2022 consolidated financial statements. This is further supported by the fact that all errors are of a non-cash nature, do not impact Adjusted EBITDA (earnings before income tax, depreciation and amortization, impairment expense, and stock-based compensation), and would not likely have materially impacted a reasonable investor’s opinion of the Company’s financial condition and results of operations.

Because the correction of these errors was not deemed to be material to the results for the year ended December 31, 2022, and the errors are not expected to be material to the year ended December 31, 2023, to correct these errors, the Company recorded the corrections as out-of-period adjustments in the three-month period ended March 31, 2023. See the table below for the details of the corrections:

	For the Three Months Ended
Condensed Consolidated Statements of Operations:	March 31, 2023
(Amounts in thousands)	Before Adjustment			Adjustment			As Reported
Impairment	$	-		$	896		$	896
Net loss from continuing operations	$	(4,034	)	$	(896	)	$	(4,930	)
Net loss from continuing operations – basic and diluted per share	$	(1.63	)	$	(0.34	)	$	(1.97	)

NOTE 21 SUBSEQUENT EVENTS

Debt and Equity Developments

On April 13, 2023, pursuant to certain contractual arrangements for services in exchange for a fixed number of shares of common stock of the Company, the Company issued 12,000 shares of the Company’s common stock to an advisor in consideration for services with an aggregate fair value of $28,080 (Note F – see Note 14 – Debt for additional information).

On May 26, 2023, pursuant to the note agreement, $100,000 of penalties and interest were capitalized into principal (Note E – see Note 14 – Debt).

On September 1, 2023, Dustin H. McIntire, our CTO, loaned $260,000 to the Company which was used to secure a software license for the Company. Upon being notified of the proposed loan, the Audit Committee reviewed the transaction under the related party transaction policy and approved the transaction. The Company gave Mr. McIntire a secured convertible promissory note for the $260,000 loan, due December 31, 2024, with eight per cent (8%) interest, secured by the software license. The holder may convert all or a portion of the note at any time into shares of the Company’s common stock at the closing price on which the conversion is elected or into bridge financing with identical terms as such bridge financing or offering.

Litigation, Claims and Contingencies Developments

On or about May 22, 2023, a landlord filed suit against the Company in the Circuit Court, Fairfax County, Virgina, Case No. 202307755, for breach of a commercial lease. The plaintiff obtained a default judgment in the amount of approximately $130,000 which remains unpaid as of the date of this filing. As of March 31, 2023, the Company accrued for the full amount of the judgment in accrued liabilities on the condensed consolidated balance sheet.

Nasdaq Compliance Developments

On June 21, 2023, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the Company’s minimum Market Value of Publicly Held Shares, as defined by Nasdaq (“MVPHS”), of the Company’s 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock (“Preferred Stock”) has been below the minimum $1 million requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5555(a)(4) (the “Minimum Market Value of Publicly Held Shares Requirement”). Under Nasdaq rules, the Company will have the opportunity to appeal the delisting decision to a Nasdaq Hearings Panel. There can be no assurance that, if the Company decides to appeal the delisting determination, such appeal would be successful.

In accordance with Nasdaq Listing Rule 5810(c)(3)(D), the Company has been provided a compliance period of 180 calendar days from receipt of the letter, or until December 18, 2023, to regain compliance with the Minimum Market Value of Publicly Held Shares Requirement. To regain compliance with the Minimum Market Value of Publicly Held Shares Requirement, the Company’s Preferred Stock MVPHS must be $1 million or more for a minimum of 10 consecutive business days during the compliance period ending on December 18, 2023. There can be no assurance that the Company will be able to regain compliance with either listing requirement.

On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. As a result, the Company is required to present its views of the deficiency to the Panel in writing no later than December 22, 2023.

~~Uses~~2022, which is the minimum requirement set forth in Nasdaq Listing Rule 5550(b)(1), and ~~Sources~~did not otherwise satisfy the alternative minimum requirements for market value of ~~Liquidity~~

~~At September 30, 2017, the Company had cash of $1,764,389, working capital of $333,434, and an accumulated deficit of $27,322,709. Furthermore, the Company has a history of negative cash flow~~listed securities or net income from operations, primarily due to heavy investment in research and development and costs associated with maintaining a public entity. In October 2016, the company issued $3,000,000 in Convertible Notes Payable with a maturity date of October 2017. As further discussed in Note 6 – Related Party Convertible Notes Payable and Derivative Liability, the Company does not currently have the liquid resources to repay the notes. On August 3, 2017, the maturity date of the notes were extended to April 1, 2019 and reclassified as long-term liability as of the balance sheet date. On August 2, 2017, the Company closed on a bank line of credit in the principal amount of $2,000,000 that was guaranteed by the Company’s Chairman and CEO and a private line of credit with a related party investor who is a significant shareholder in the amount of $2,000,000. The Company expects this financial backing has strengthened the balance sheet to support the level of sales necessary to maintain positive working capital and sufficient liquidity forcontinuing operations.

The Company ~~expects that it will need~~previously requested and was granted a hearing before the Nasdaq Hearings Panel (the “Panel”), as well as a further stay of any suspension action by Nasdaq pending the issuance of a decision by the Panel and the expiration of any extension the Panel may grant to ~~raise substantial additional capital to accomplish its business plan over the next several years. In addition,~~ the Company ~~may wish to selectively pursue possible acquisitions of businesses, technologies, or products complementary to those of~~following the hearing. At the hearing, the Company inintends to present its plan to regain compliance with all applicable continued listing criteria and request an extension to do so. If the ~~future in order~~Panel denies the Company’s request for continued listing or if the Company is unable to ~~expand its presence in~~evidence compliance within any extension of time that may be granted by the ~~marketplace~~Panel, Nasdaq will provide written notification that the Company’s securities will be delisted and, ~~achieve operating efficiencies. The Company expects to seek to obtain additional funding through a bank credit facility or private equity. There~~as such, there can be no assurance ~~as to the availability or terms upon which such financing and capital might be available.~~

2.	~~RELATED PARTY TRANSACTIONS~~

~~The Company accounts for related party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to be related to~~that the Company ifwill be able to maintain the ~~party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners~~listing of ~~the Company,~~ its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.securities on Nasdaq.

~~As of September 30, 2017 and December 31, 2016, there was $188,217 and $46,849 accrued interest payable, respectively, to related parties on convertible notes payable.~~

~~F-4~~

3.	~~INVENTORY~~

Inventories are stated at the lower of cost or market, using the first-in first-out method. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our supplies, and the estimated utility of our inventory. If the review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of goods sold. Allowance for slow moving items increased $6,366 due to a type of aerostat material which was custom ordered. Inventory consists of the following at September 30, 2017 and December 31, 2016:

September 30,
2017 December 31,
2016
Raw Materials $ 110,765 $ 48,014
Work in Progress 287,175 254,258
Finished Goods 346,793 160,819
Less valuation allowance (9,572 ) (3,206 )
Total $ 735,161 $ 459,885

4.	~~PROPERTY AND EQUIPMENT~~

Property and equipment is recorded at cost when acquired. Depreciation is provided principally on the straight-line method over the estimated useful lives of the related assets, which is 3-7 years for equipment, furniture and fixtures, hardware and software and leasehold improvements. During the nine months ended September 30, 2017, the Company invested $675 in shop machinery and equipment. Depreciation expense was $26,350 and $25,132 for the nine months ended September 30, 2017 and 2016, respectively. Property and equipment consists of the following at September 30, 2017 and December 31, 2016:

September 30,
2017 December 31,
2016
Shop machinery and equipment $ 87,704 $ 87,029
Computers and electronics 35,270 35,270
Office furniture and fixtures 37,814 37,814
Leasehold improvements 19,514 19,514
180,302 179,627
Less - accumulated depreciation (87,134 ) (60,784 )
$ 93,168 $ 118,843

5.	~~INTANGIBLE ASSETS~~

On July 20, 2015, the Company, through its wholly-owned subsidiary Drone AFS Corp., purchased substantially all the assets of Adaptive Flight, Inc. (“AFI”), a Georgia corporation. The Company purchased assets, including, but not limited to, intellectual property, licenses and permits, including commercial software licenses for the “GUST” (Georgia Tech UAV Simulation Tool) autopilot system and other transferable licenses which include flight simulation and fault tolerant flight control algorithms. The Company paid $100,000 in immediately available funds and $100,000 to be held in escrow. In addition, the Company issued 150,000 shares of unregistered common stock valued at $8.40 per share, on a post-October 29, 2015 reverse stock split basis, on the date of agreement, to be held in escrow.

~~F-5~~

The Company had a milestone of twelve months to complete a technology integration plan, the non-completion of which could result in the return of the purchased assets and termination of the Company’s obligations to release the escrow cash and shares. Additional milestones included exclusive, no-cost and perpetual licenses to all contributing intellectual property included or related to the purchased assets. As such time as all milestones were met, one-half of the escrow shares were to be released to AFI. Upon termination of the escrow agreement, anticipated to be twelve months from the closing of the asset purchase, if all milestones had been met, the remaining escrow shares would be released to AFI; but if all milestones have not been met, the escrow cash and escrow shares would be released to the Company and the purchased assets would be returned to AFI. According to the terms of the Escrow Agreement, if the escrow share value was less than $1,400,000, the Company must issue an additional number of unregistered shares, not to exceed 50,000 shares. At December 31, 2015, the value of the 150,000 shares was $3.23 per share, or $484,500. The Company recorded $161,500 as an additional liability and expense at December 31, 2015 for the cost of 50,000 shares at $3.23 per share. On June 3, 2016, the Integration Plan was deemed to be completed. At June 3, 2016, the value of the 150,000 shares was $3.01 per share, or $451,150. The additional liability was reduced to $150,500 for the cost of 50,000 shares at $3.01 per share. The Company recorded the $11,000 reduction in the additional liability through the statement of operations at June 3, 2016. The Company began amortizing the $1,460,000 of purchased assets over a sixty-month period on June 3, 2016 in the amount of $24,333 per month. Total amortization expense for the nine months ended September 30, 2017 was $219,000. The remaining unamortized balance of $1,070,667 is estimated be amortized in the estimated amounts of $292,000 per year for 2017 through 2020 and $121,667 in 2021.

~~The asset acquisition did not qualify as a business combination under ASC 805-10 and has been accounted for as a regular asset purchase.~~

6.	~~RELATED PARTY CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY~~

On September 29, 2016, the Company issued Convertible Promissory Notes Series 2016 due October 1, 2017 in the aggregate principal amount of $3,000,000 in a private placement to the Chairman of the Board and the Chairman of the Strategic Advisory Board of the Company, both of whom are greater than 10% shareholders of the Company. The notes bear interest at a rate of six percent (6%) per annum. The Company may prepay the notes at any time without penalty. If the Company does not prepay a note in full or the holder does not convert the note before the maturity date, the Company may pay the outstanding principal amount and any accrued and unpaid interest on the maturity date with cash or with common stock or through a combination of cash and stock at the Company’s discretion. The conversion price of the notes is the lesser of $3.00 per share or eight-five percent (85%) of the lowest per share purchase price of common stock in the next sale of common stock in which the Company receives gross proceeds of an amount greater than or equal to $3,000,000.

On August 3, 2017 (the “Effective Date”), the Company entered into amendments (the “Convertible Note Amendments”) with the owners and holders of the following convertible promissory notes issued by the Company (the “Series 2016 Convertible Notes”):

●

Convertible Promissory Note in the original principal amount of $1,500,000 issued by the Company on September 29, 2016 to Frost Gamma Investments Trust (“Frost Gamma”). Frost Gamma is a trust that is controlled by Dr. Phillip Frost, a substantial shareholder of the Company; and

●

Convertible Promissory Note in the original principal amount of $1,500,000 issued by the Company on September 29, 2016 to Jay H. Nussbaum, the Company’s Chief Executive Officer and Chairman of the Board of Directors.

The Convertible Note Amendments extend the maturity date for each of the Series 2016 Convertible Notes to April 1, 2019 (the “Maturity Date”) and revise the conversion price to mean $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. Accordingly, the notes have been reclassified as long-term debt. Consistent with the original terms of the Series 2016 Convertible Notes, interest accrues at the rate of 6% interest per annum and is payable on the Maturity Date. The accrued interest is payable at the holders’ option in cash or shares of our common stock valued at the $1.00 per share conversion price. The Convertible Note Amendments provide that an event of default in the City National Bank Loan will be treated as an event of default under the Series 2016 Convertible Notes.

~~F-6~~

The Company evaluated the modification under ASC 470-50 and determined that is qualified as an extinguishment of debt. The aggregate loss on extinguishment of debt in 2017 is $681,988, including ($378) on derivative liabilities, and $682,366 on unamortized debt discount. The embedded conversion feature of the notes pre-modification required liability classification.

The Company analyzed the conversion option in the notes for derivative accounting treatment under ASC Topic 815, “Derivatives and Hedging,” and determined that the instrument does not qualify for derivative accounting.

The Company therefore performed an analysis to determine if the conversion option was subject to a beneficial conversion feature and determined that the instrument does not have a beneficial conversion feature.

~~The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value as of September 30, 2017 and December 31, 2016:~~

Level 1 Level 2 Level 3 Total
LIABILITIES:
Derivative liabilities as of September 30, 2017 $ 0 $ 0 $ 0 $ 0
Derivative liabilities as of December 31, 2016 $ 0 $ 0 $ 1,832,013 $ 1,832,013

~~The following table represents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2017 and the year ended December 31, 2016:~~

Fair value of derivative liabilities as of December 31, 2015 $ 0
Fair value of derivative liability at September 30, 2016 recorded as debt discount 2,394,974
Change in fair value of derivative liabilities (562,961 )
Fair value of derivative liabilities as of December 31, 2016 $ 1,832,013
Change in fair value of derivative liabilities (1,831,635 )
Gain on extinguishment of debt (378 )
Fair value of derivative liabilities as of September 30, 2017 $ 0

7.	~~REVOLVING LINE OF CREDIT~~

On August 2, 2017, the Company issued a promissory note to City National Bank of Florida (“CNB”) in the principal amount of $2,000,000, the CNB Note. The note evidences a revolving line of credit with advances that may be requested by the Company until the maturity date of August 2, 2018 so long as no event of default exists under the note, the Company or Mr. Nussbaum does not cease doing business, Mr. Nussbaum does not seek to revoke or modify his guarantee of the Note, the Company does not misapply the proceeds of this loan or CNB in good faith does not believe itself insecure. The CNB Note bears interest at a variable rate equal to 0.250 percentage points over the Wall Street Journal Prime Rate payable monthly. The Company will pay to CNB a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may prepay the note at any time without penalty. In the event of a default, the interest rate will increase to the highest lawful rate. The Company is obligated to maintain depository accounts with CNB with a minimum average annual balance of $600,000. In the event the Company does not maintain this account balance, CNB may charge the Company a fee equal to 2% of the deficiency as additional interest under the note. The CNB Note is personally guaranteed by Mr. Nussbaum, the Company’s Chief Executive Officer pursuant to written guarantee in favor of CNB (the “CNB Guarantee”). Mr. Nussbaum and the Company are obligated to maintain an unencumbered liquidity of no less than $6,000,000 in the form of cash, repurchase agreements, certificates of deposit or marketable securities acceptable to CNB. In addition, to secure our obligations under the note, we entered into a security agreement in favor of CNB (the “Security Agreement”) encumbering all of our accounts, inventory and equipment along with an assignment of a bank account we maintain at CNB with an approximate balance of $90,000. As of September 30, 2017, $1,000,000 has been drawn against the line of credit. Accrued interest of $5,231 has been recognized as of September 30, 2017.

~~Indemnification Agreement~~

On August 3, 2017, the Company entered into an Indemnification Agreement with Mr. Nussbaum in order to indemnify and defend him to the fullest extent permitted by law for any claim, expense or obligation which might arise as a result of his guarantee of the CNB Note.

~~F-7~~

8.	~~SERIES 2017 SECURED CONVERTIBLE NOTE~~

On August 3, 2017, the Company issued a Secured Convertible Promissory Note Series 2017 due August 2, 2018 in the aggregate principal amount of $2,000,000 (the “Series 2017 Convertible Note”) in a private placement to Frost Nevada Investments Trust (“Frost Nevada”). Frost Nevada is a trust that is controlled by Dr. Frost, a substantial shareholder of the Company. The note evidences a revolving line of credit with advances that may be requested by the Company until the maturity date of August 2, 2018 so long as no event of default exists under the loan. The Company may request advances of principal under this note equal to and at the same time as it requests advances, if any, pursuant to the CNB Note. The note bears interest at a variable rate equal to 0.250 percentage points over the Wall Street Journal Prime Rate. The Company may prepay the notes at any time without penalty. If the Company does not prepay the note in full or the holder does not convert the note before the maturity date, the Company may pay the outstanding principal amount and any accrued and unpaid interest on the maturity date with cash or with common stock or through a combination of cash and stock at Frost Nevada’s discretion. The conversion price under the note is $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. The Series 2017 Convertible Note is secured by a security interest in all the Company’s assets. This security interest is subordinate to the security interest of CNB discussed in Footnote #7 above. As of September 30, 2017, $1,000,000 has been drawn against the line of credit. Accrued interest of $7,231 has been recognized as of September 30, 2017.

9.	~~SHAREHOLDERS’ EQUITY~~

On August 3, 2017, the Company entered into an amendment to the August 24, 2014 Independent Contractor Agreements it entered into with Dr. Philip Frost and Steven Rubin who serve as members of the Company’s Strategic Advisory Board (the “SAB Amendments”). The SAB Amendments extend the term of the agreements from May 1, 2017 until April 30, 2018 and provide for the following equity based compensation: (a) for Dr. Frost, a warrant to purchase 2,000,000 shares of the Company’s Common Stock (the “Frost Warrant”) and an award of 150,000 shares of the Company’s unregistered restricted Common Stock and (b) for Mr. Rubin, an award of 100,000 shares of the Company’s unregistered restricted Common Stock. The restricted stock vests upon the occurrence of a change of control (as defined in the SAB Amendments). The Warrant has a term of five years and exercise price of $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. The Company recognized $104,167 expense for the pro rata portion of shares earned by the two members during the nine months ended September 30, 2017, amortizing the expense over the 12 months of the service agreement regardless of the vesting condition.

In September 2016 , the Company issued 1,349,000 shares of restricted common stock outside of the 2015 Equity Plan to Jay Nussbaum, Felicia Hess, Daniyel Erdberg, Kendall Carpenter, Mike Silverman and Reginald Brown pursuant to Stock Award Agreements. The shares will vest upon consummation of a significant equity and/or debt financing of at least $5,000,000 provided that the holder remains engaged by the Company through the vesting date. The Company recognized $970,067 stock based compensation during the six months ended June 30, 2017 and $28,808 in stock based compensation during the nine months ended September 30, 2016. As of August 3, 2017, the Company does not believe the vesting conditions are probable of being achieved, and as such, no stock-based compensation expense is expected to be recognized in connection with the September 2016 shares. Consequently, previously recorded stock based compensation of $1,488,596 was reversed during the nine months ended September 30, 2017.

On August 3, 2017, these awards were modified so that the restrictions set forth in the RSA lapse upon the earlier of (i) consummation of a significant equity and/or debt financing from which the Company receives gross proceeds of at least $7,000,000 or (ii) a change in control (as defined in the RSA Amendment), provided that, in either case, the holder remains engaged by the Company through the date of such event. The Company does not believe the modified vesting conditions are probably of being achieved, and as such, no stock-based compensation expense has been recorded. The Company will reassess whether achievement of the vesting conditions is probable at each reporting date. If it is probable, stock-based compensation will be recognized.

~~F-8~~

In May 2016, the Company issued 150,000 shares of common stock with monthly vesting provisions to Strategic Advisory Board members, Dr. Philip Frost and Steven Rubin, for 12 months of services. The advisors can earn a pro rata portion of the shares, calculated based on the twelve-month vesting period, in the event the service agreements are terminated prior to the expiration date as described in the agreements. These shares vested during May 2017. The Company recognized a total of $29,500 and $211,890 expense for the pro rata portion of shares earned by the two members during the nine months ended September 30, 2017 and 2016, respectively.

In April 2016, the Company issued an aggregate of 1,150,000 shares of common stock outside of the 2015 Equity Plan to Jay Nussbaum, Felicia Hess, Daniyel Erdberg, Kendall Carpenter, and Kevin Hess pursuant to Stock Award Agreements. Stock based compensation of $3,346,615 was recognized during the nine months ended September 30, 2016 on the awards which fully vested on September 29, 2016. That same month, the Company issued 100,000 shares of stock to a director who subsequently resigned and forfeited the shares. The Company recognized a total of $60,495 stock compensation during the nine months ended September 30, 2016.

On September 4, 2015, the Company issued 450,000 shares of restricted common stock to four management employees and one director pursuant to stock award agreements. Stock based compensation of $604,440 was recognized during the nine months ended September 30, 2016.

On June 1, 2015, the Company issued 50,000 shares of restricted common stock with monthly vesting provisions to the Chairman of the Board for twenty-four months services pursuant to a Director Agreement. The Chairman can earn a pro rata portion of the shares, calculated on a twenty-four-month vesting period, in the event the Chairman relinquishes his position and Board seat prior to the expiration date of the Director Agreement. These shares vested on June 1, 2017. The Company recognized a total of $112,500 and $202,500 expense for the portion of such shares earned by the Chairman during the nine months ended September 30, 2017 and 2016, respectively.

On April 24, 2017, the holder of Series A preferred stock converted a total of 100,100 shares of Series A for an aggregate of 250,250 shares of restricted common stock in accordance with their conversion rights which includes a blocker with respect to individual ownership percentages.

~~10.~~

~~PREFERRED STOCK~~

All the preferred stock of the Company is convertible into common shares. The Series A stock conversion ratio is 1 to 2.5 common shares. All preferred stock has voting rights equal to the number of shares it would have on an ‘as if converted’ basis subject to any ownership limitations governing such preferred shares. All preferred stock is entitled to dividends rights equal to the number of shares it would have on an ‘as if converted’ basis. None of the preferred stock is redeemable, participating nor callable.

The Company analyzed the embedded conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion option should be classified as equity.

~~F-9~~

~~11.~~

~~EMPLOYEE STOCK OPTIONS~~

On August 3, 2017, upon approval of the Company’s board of directors, the Company issued outside its 2015 Equity Plan, 5,210,000 options to purchase the Company’s common stock to officers, directors and employees for services provided. Jay Nussbaum was issued 2,000,000 options, Felicia Hess was issued 1,200,000 options, Dan Erdberg was issued 1,140,000 options, Kendall Carpenter was issued 275,000 options, Directors David Aguilar, Mike Haas and General Wayne Jackson were issued 100,000 , 10,000 and 10,000 options, respectively. The remaining 475,000 options were issued to employees and consultants. These stock options immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021. During the nine months ended September 30, 2017, $3,489,058 compensation expense was recognized on these 5,210,000 options.

One June 1, 2015, the Company issued an option award to an employee for 37,500 shares vesting over three years with an exercise price of $10.80 and expiration date of May 4, 2019. During the nine months ended September 30, 2017 and 2016, $46,353 and $101,141 compensation expense was recognized on these 37,500 options, respectively.

On January 9, 2017, the Company issued an option to purchase 100,000 shares of common stock with an exercise price of $2.90 per share to a director. The option vests 50,000 after one year from grant date and another 50,000 two years from grant date with an expiration date of four years from grant date provided that the Director is still providing service to the Company. During the nine months ended September 30, 2017, $96,794 compensation expense was recognized on these 100,000 options.

~~The Company used the Black-Scholes option pricing model to estimate the fair value on the date of grant of the 5,310,000 options granted during the nine months ended September 30, 2017.~~

~~The following table summarizes the assumptions used to estimate the fair value of the 5,310,000 stock options granted during the nine months ended September 30, 2017 on the date of grant.~~

	~~2017~~

~~Expected dividend yield~~		0	%
~~Expected volatility~~		~~95-100~~	%
~~Risk-free interest rate~~		~~1.50-1.52~~	%
~~Expected life of options~~		~~2.50-4.00 years~~

Under the Black-Scholes option pricing model, the fair value of the 5,310,000 options granted during the nine months ended September 30, 2017 is estimated at $3,663,231 on the date of grant. During the nine months ended September 30, 2017, $3,585,852 compensation expense was recognized on these 5,310,000 options.

During 2016, the Company granted 65,000 common stock options to employees for service provided. Of these, 50,000 options were granted to two employees and were immediately vested with an exercise price of $2.91 and the expiration date is April 27, 2019. One of these employees terminated and did not exercise her 10,000 options resulting in the expiration of the option. Another 5,000 options were immediately vested and were granted with an exercise price of $3.77 and the expiration date is July 29, 2019. Another employee received 10,000 options with two-year vesting and an exercise price of $3.00 and an expiration date of December 6, 2019. The employee who received 5,000 options in July 2016 was terminated and did not exercise his options resulting in the expiration of a total of 5,000 options. The Company recognized $107,941 in compensation for the first nine months ended September 30, 2016 on these options.

The Company used the Black-Scholes option pricing model to estimate the fair value on the date of grant of the 10,000 stock-based awards that continue to vest during the nine months ended September 30, 2017.

~~F-10~~

~~The following table summarizes the assumptions used to estimate the fair value of the 10,000 outstanding stock options granted during 2016 on the date of grant:~~

	~~2016~~

~~Expected dividend yield~~		0	%
~~Expected volatility~~		~~102~~	%
~~Risk-free interest rate~~		~~1.24-1.38~~	%
~~Expected life of options~~		~~2.00-2.50 years~~

Under the Black-Scholes option price model, fair value of the options granted during 2016 is estimated at $16,889 on the date of grant. During the nine months ended September 30, 2017, $9,353 compensation expense was recognized on these 10,000 options.

~~The following table represents stock option activity as of and for the nine months ended September 30, 2017:~~

Number of Options Weighted
Average
Exercise Price per Share Weighted Average Contractual Life in Years Aggregate Intrinsic Value
Outstanding – December 31, 2016 442,500 $ 5.81 $ 1.72
Exercisable – December 31, 2016 407,500 $ 5.57 $ 1.65 $ 0
Granted 5,310,000 $ 1.04
Cancelled or Expired (7,500 ) $ 4.18
Outstanding – September 30, 2017 5,745,000 $ 1.40 3.57 $ 0
Exercisable – September 30, 2017 5,622,500 $ 1.35 3.63 $ 0

~~12.~~

~~WARRANTS~~

On August 3, 2017, upon approval of the Company’s board of directors, the Company issued outside its 2015 Equity Plan, 30,000 warrants to purchase the Company’s common stock to consultants for services provided. These warrants are immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021. The Company recognized $18,617 in compensation cost during the nine months ended September 30, 2017.

On August 3, 2017, the Company issued a warrant to purchase 2,000,000 shares of the Company’s common stock to Dr. Philip Frost for services to be provided under the terms of his service to the Strategic Advisory Board through April 2018. These warrants immediately vested, are exercisable at an exercise price of $1.00 per shares and expire on August 3, 2022. The Company recognized $1,445,252 in compensation cost during the nine months ended September 30, 2017.

~~The following table summarizes the assumptions used to estimate the fair value of the 2,030,000 warrants granted during 2017 as of re-measurement dates:~~

	~~2017~~

~~Expected dividend yield~~		0	%
~~Expected volatility~~		~~190-212~~	%
~~Risk-free interest rate~~		~~1.52~~	%
~~Expected life of warrants~~		~~4-5 years~~

For the year 2016, 60,000 common stock purchase warrants were granted to four consultants for services provided. Each warrant was granted with the exercise price of $2.91, which immediately vested, and the expiration date is April 27, 2019. The Company recognized $114,779 in compensation cost during the nine months ended September 30, 2016.

~~During 2016, 10,472 warrants expired that were issued in 2011 with exercise prices ranging between $141.00 and $404.50 on a post-reverse split basis.~~

~~The Company used the Black-Scholes warrant pricing model to estimate the fair value on the re-measurement dates of the 12,500 warrants that vested on June 10, 2017.~~

~~F-11~~

~~The following table summarizes the assumptions used to estimate the fair value of the 12,500 warrants granted during 2015 as of re-measurement dates:~~

	~~2017~~

~~Expected dividend yield~~		0	%
~~Expected volatility~~		~~107~~	%
~~Risk-free interest rate~~		~~1.53~~	%
~~Expected life of warrants~~		~~1 year~~

Under the Black-Scholes warrant pricing model, fair value of the 12,500 warrants granted during 2015 is estimated at $0 as of re-measurement dates. During the nine months ended September 30, 2017, $(3,467) compensation expense was recognized on these 12,500 warrants.

~~The following table represents warrant activity as of and for the period ended September 30, 2017:~~

Number of Warrants Weighted
Average
Exercise Price per Share Weighted Average Contractual Life in Years Aggregate Intrinsic Value
Outstanding – December 31, 2016 183,737 $ 7.35 2.70
Exercisable – December 31, 2016 171,237 $ 7.15 2.79 $ 0
Granted 2,030,000 $ 1.00
Forfeited or Expired 0 $ 0
Outstanding – September 30, 2017 2,213,737 $ 1.53 4.59 $ 0
Exercisable – September 30, 2017 2,213,737 $ 1.53 4.59 $ 0

~~13.~~

~~COMMITMENTS AND CONTINGENCIES~~

On May 16, 2016, Banco Popular North America (“Banco”) filed a lawsuit in Duval County, Florida in the Circuit Court of the Fourth Judicial Circuit against Aerial Products Corporation d/b/a Southern Balloon Works (“Aerial Products”), Kevin M. Hess, LTAS, and the Company to collect on a delinquent Small Business Administration loan that Banco made in 2007 to Aerial Products with Mr. Hess as the personal guarantor. LTAS and the Company filed an Answer on June 30, 2016 and Responses to Interrogatories on December 16, 2016. The lawsuit is active and discovery is ongoing. It is our position that neither LTAS nor the Company are continuations of Aerial Products, and LTAS and the Company have denied all allegations made by Banco and will vigorously defend that position. The Company has evaluated the probability of loss as possible but the range of loss is unable to be estimated.

~~Other than the Banco matter, there are no material claims, actions, suits, proceedings inquiries, labor disputes or investigations pending.~~

~~14.~~

~~SUBSEQUENT EVENTS~~

~~Amendment to Related Party Convertible Promissory Notes~~

On November 9, 2017, the Company entered into amendments (the “November 2017 Convertible Note Amendments”) with the owners and holders of the Series 2016 Convertible Notes to permit the payment of, at the holders’ election, accrued and unpaid interest either in monthly or quarterly payments at any time after the Effective Date. Accrued interest may be paid with: (i) cash; (ii) the issuance and delivery to the holder of shares of common stock of the Company at the conversion price provided for in the Series 2016 Convertible Note; or (iii) any combination of cash and shares of Common Stock, as determined by the holder in its sole discretion.

~~Related Party Consulting Agreement~~

On November 10, 2017, the Company and Global Security Innovative Strategies, LLC (“GSIS”), a related party, entered in an agreement whereby GSIS will provide business development support and general consulting services for sales opportunities with U.S. government agencies and other identified prospects and consulting support services for the Company’s role and activities as part of the Security Center of Excellence in Orlando, Florida. The agreement is for a period of six months beginning on November 1, 2017. The Company agreed to pay GSIS a fee of $10,000 per month and will evaluate the fee after 90 days. The Company agreed to pay the expenses of GSIS incurred in connection with the performance of its duties under the agreement. Either party may terminate or renew the agreement at any time, for any reason or no reason, upon at least 30 days’ notice to the other party. David Aguilar, a member of the Company’s board of directors, is a principal at GSIS.

~~Options and Warrants issued~~

On November 9, 2017, upon approval of the Company’s board of directors, the Company issued outside its 2015 Equity Plan, 2,000,000 options and 70,000 warrants to purchase the Company’s common stock to officers, directors, employees and consultants for services provided. Jay Nussbaum was issued 900,000 options, Felicia Hess was issued 300,000 options, Dan Erdberg was issued 200,000 options, Kendall Carpenter was issued 170,000 options, Directors David Aguilar, Mike Haas and General Wayne Jackson were issued 10,000, 10,000 and 10,000 options, respectively. Reginald Brown, Jr. was issued 400,000 options. The remaining 70,000 warrants were issued to three consultants. These stock options and warrants immediately vested, are exercisable at an exercise price of $1.35 per share and expire on November 9, 2021.

~~F-12~~

~~ITEM~~Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Certain statements~~Unless the context requires otherwise, references in this Quarterly Report to “Company, “we”, “us” and “our” refer to the COMSovereign 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 ~~information,~~fact, including ~~estimates,~~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 ~~relating to our business plans, objectives and expected operating~~should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the ~~assumptions upon~~times by which, ~~those statements are based, are “forward-looking statements”. Forward-looking statements generally can~~our performance or results may be identified by the use of forward-looking terminology, such as “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” “believe,” and similar expressions.achieved. Forward-looking statements are based on ~~current expectations~~information available at the time those statements are made and ~~assumptions~~management’s belief as of that time with respect to future events and are subject to risks and uncertainties ~~which may~~that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the advanced aerostats and tethered drone industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors ~~and related notes~~ included under ~~Item 1A of~~“Item 1A. Risk Factors” that are included in our fiscal 2022 Annual Report on Form 10-K ~~for the year ended December 31, 2016~~ filed with the U. S. Securities and Exchange Commission (the “SEC”) on ~~March 17, 2017.~~December 7, 2023.

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 Consolidated Financial Statements~~unaudited condensed consolidated financial statements and the ~~accompanying Notes to Unaudited Consolidated Financial Statements under~~related notes (“Notes”) in Part ~~I, Item~~ 1 of this Quarterly Report on Form 10-Q.

Growth and percentage comparisons made herein generally refer to the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023, compared ~~with~~to the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2022, unless otherwise ~~noted. Unless otherwise indicated or unless~~indicated.

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 ~~context otherwise requires, all references in this document~~upgrading of latent 3G networks to ~~“we,” “us,” “our,”~~4G and 4G-LTE networks and will facilitate the ~~“Company,”~~rapid roll out of the 5G and ~~similar expressions refer to Drone Aviation Holding Corp. and, depending on~~6G networks of the ~~context, its subsidiaries.~~

~~Business Overview~~

~~We design, develop, market and sell lighter-than-air (“LTA”) tactical aerostats, tethered drones, and land-based intelligence, surveillance and reconnaissance (“ISR”) solutions.~~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 ~~tethered aerostat known~~unique position to rapidly increase our near-term domestic sales as we are among the ~~Winch Aerostat Small Platform (“WASP”), as well as tethered drone products, including~~few U.S. based providers of telecommunications equipment and services.

We provide the ~~WATT~~following categories of product offerings and BOLT electric tethered drones launched on March 2, 2015 and July 13, 2016, respectively. The WATT and BOLT products are designed for commercial and military applications and provide secure and reliable aerial monitoring for extended durations while being tetheredsolutions to the ground via a high strength armored tether. We also developed FUSE, a cost-effective tether system for DJI Inspire and Matrice 200 drones. The FUSE winch system enables flights up to 200 feet and offers continuous power distribution monitoring and virtually unlimited flight time.

~~While sales in the past quarter decreased compared to the same period in 2016, this decrease was primarily a result of a longer sales cycle stemming in part from the recent change in administration and congressional budgeting delays. We expect increased sales in future periods based on a product pipeline that is developing following~~ our ~~increased marketing efforts and our announcement of the following:~~customers:

	●	~~On October 17, 2017, we announced an order for the upgraded, multi-mission capable tactical WASP from an existing U.S. Department~~*Wireless Transport Solutions*.We offer a line of ~~Defense customer, valued in excess of $800,000~~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 ~~expected~~data. Our solutions enable service providers, government agencies, enterprises and other organizations to ~~be delivered during the fourth quarter of 2017.~~

	●	~~On August 28, 2017, we announced the launch~~meet their increasing bandwidth requirements rapidly and affordably. The principal application of our ~~FUSE Tether System~~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.

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Edge Compute Capable 4G LTE and 5G Network in a Box.We offer both 4G/LTE and 5G New Radio (“NR”) based Network in a Box capable of connecting to other access radios or directly to mobile devices such as mobile phones and other Internet-of-things devices. The all-in-one mobile networks support edge-based application hosting and enable third-party service integration.

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Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for ~~DJI Commercial Drones through~~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 ~~commercial sales program with Drone Nerds, Inc.~~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.

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~~On May 9, 2017, we announced the new heavy lift WATT 300 Multirotor Tethered Drone and recently upgraded WASP Military Aerostat platforms at SOFIC 2017.~~

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On May 25, 2017, we announced our new product called FUSE which is an automated smart winch tethering system designed to meet the unique specifications for DJI Inspire drones, the world’s most popular commercial drone.

Our marketing efforts include submission of bids on a several government procurement projects that we expect will be awarded in the fourth quarter of 2017 and 2018. We also showcased our products and technologies at numerous conferences and live demonstrations, including the 2017 Special Operations Forces Industry Conference, Warrior Expo East, State of Florida HURREX exercise, CyberQuest 2017, and presentations to a variety of federal and state government agencies. In anticipation of increased sales resulting from our developing product pipeline, we completed financing transactions that provide us with up to $4,000,000 in cash and extended the maturity date on $3,000,000 of convertible debt until April 2019 providing us with significant increased liquidity and a strengthened balance sheet. While there is no assurance that the opportunities included in our developing pipeline will result in orders for our products, we have positioned ourselves to be able to deliver the goods and services we have bid on.

In addition to our plans to organically grow our lighter than air systems through increased marketing and sales, we intend to continue to consider potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses, products or technologies that expand, complement or otherwise relate to our current or future business.

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. In addition, we are seeking to leverage our AI capabilities in our Non-Line of Sight (NLOS) unlicensed radio enhancing and extending these capabilities to further support our customers’ environments while expanding and extending our footprint of AI capabilities through new partnerships.

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.

~~Results~~Our Business

Our CORE business is comprised of ~~Operations~~the following products:

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Licensed Microwave (formerly operated as DragonWave-X LLC). DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”)), are a manufacturer of high-capacity microwave and millimeter wave 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 U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America. DragonWave was acquired by ComSovereign in April 2019 prior to the ComSovereign Acquisition. On May 23, 2022, the Company sold the assets of DragonWave’s Canadian subsidiary, and transferred the related employees and assigned the Canadian lease of DragonWave’s Canadian subsidiary, to a third party.

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4G and 5G Edge Compute (formerly Virtual NetCom, LLC). Virtual NetCom, LLC (“VNC”)) is an edge compute focused 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 the product (formerly VNC) in July 2020.

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Unlicensed Microwave (formerly FastBack). Skyline Partners Technology LLC, which conducted business under the 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.

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Engineering Services (formerly Silver Bullet Technology, Inc.) enables us to provide engineering services including the design and develop of next generation network systems and components, including large-scale network protocol development, software-defined radio systems and wireless network designs. ComSovereign acquired Silver Bullet in March 2019 prior to the ComSovereign Acquisition.

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Mobile Edge Compute (formerly SAGUNA Networks Ltd.) based in Yokneam, Israel, 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 Edge Cloud operates on general purpose computing hardware 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 June 2022.

Our NONCORE business is comprised of the following products:

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Drones (formerly Lighter Than Air Systems Corp., which did business under the name Drone Aviation) based in Jacksonville, Florida 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 in June 2014.

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Silicon Photonics (formerly VEO Photonics, Inc.) based in San Diego, California, is a research and development group innovating SiP technologies 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 acquired VEO in January 2019 prior to the ComSovereign Acquisition. In order to conserve cash, VEO idled the employees in June 2022.

As part of the Company’s restructuring, commencing January 1, 2023, the Company integrated its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer manages the Company and makes decisions based on the Company’s consolidated operating results.

~~Three Months Ended~~

Nasdaq Compliance Developments

As previously disclosed in our Form 10-K filed on December 7, 2023, we are not in compliance with Nasdaq Continued Listing Rules. Throughout most of 2022, our common stock was not in compliance with the $1.00 minimum closing bid price requirement. We were given grace periods and regained compliance on or about February 27, 2023, by having the closing bid price of our common stock exceed $1.00 for a minimum of ten (10) consecutive trading days during the grace period by implementing a 1-for-100 reverse stock split of our outstanding common stock on February 10, 2023.

On February 27, 2023, the Company regained compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) price of the Company’s common stock, and Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”) following the successful filing of its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, ~~2017 compared~~2022.

On March 31, 2023, the Company filed a notice of late filing on Form 12b-25 with the SEC to ~~Three Months Ended September~~report that its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) would not be timely filed. On April 18, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company has not yet filed the Form 10-K, the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the SEC. On May 17, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed the Form 10-K or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, the Company is not in compliance with Nasdaq Listing Rules. On August 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2016~~

~~Revenues: Revenues of $93,105~~2023, the Company is not in compliance with Nasdaq Listing Rules. On October 16, 2023, the Company received notice from the Listing Qualifications Staff (the “Staff”) indicating that the Staff had determined to delist the Company’s securities unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Staff’s determination was based upon the Company’s continued non-compliance with the filing requirement set forth in Nasdaq Listing Rule 5250(c)(1) because the Company had not filed its Form 10-K for the year ended December 31, 2022, and has not filed the Forms 10-Q for the periods ended March 31, 2023 and June 30, 2023. On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017 decreased $53,103 or 36%~~2023, the Company is not in compliance with Nasdaq Listing Rules.

On June 21, 2023, the Company received a letter from ~~$146,208~~the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the ~~same~~last 30 consecutive business days, the Company’s minimum Market Value of Publicly Held Shares, as defined by Nasdaq (“MVPHS”), of the Company’s 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock (“Preferred Stock”) has been below the minimum $1 million requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5555(a)(4) (the “Minimum Market Value of Publicly Held Shares Requirement”). Under Nasdaq rules, the Company will have the opportunity to appeal the delisting decision to a Nasdaq Hearings Panel. There can be no assurance that, if the Company decides to appeal the delisting determination, such appeal would be successful.

On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in ~~2016. Sources~~compliance with Nasdaq Listing Rules. As a result, the Company is required to present its views of the deficiency to the Panel in writing no later than December 22, 2023.

On December 12, 2023, the Company received notice from Nasdaq indicating that the Staff had determined that an additional basis exists to delist the Company’s securities because the Company reported stockholders’ equity of less than $2,500,000 in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is the minimum requirement set forth in Nasdaq Listing Rule 5550(b)(1), and did not otherwise satisfy the alternative minimum requirements for market value of listed securities or net income from continuing operations.

The Company previously requested and was granted a hearing before the Nasdaq Hearings Panel (the “Panel”), as well as a further stay of any suspension action by Nasdaq pending the issuance of a decision by the Panel and the expiration of any extension the Panel may grant to the Company following the hearing. At the hearing, the Company intends to present its plan to regain compliance with all applicable continued listing criteria and request an extension to do so. If the Panel denies the Company’s request for continued listing or if the Company is unable to evidence compliance within any extension of time that may be granted by the Panel, Nasdaq will provide written notification that the Company’s securities will be delisted and, as such, there can be no assurance that the Company will be able to maintain the listing of its securities on Nasdaq.

Significant Components of Our Results of Operations

Revenues

Our revenues are generated primarily from the sale of our products, which consist primarily of telecom hardware, repairs, support & maintenance, drones, consulting, warranties and other. 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 months ended March 31, 2023 and 2022, approximately 0% and 16%, respectively, of our revenues were derived ~~primarily~~ from ~~aerostat~~sales outside of the United States. 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 ~~and accessories. The decrease~~ in ~~sales volume was primarily a result of a longer sales cycle stemming in part from the recent change in presidential administration and congressional budgeting delays.~~foreign jurisdictions. We expect ~~increased~~that over the short term our percentage of sales ~~in future periods based on a product pipeline developed following~~outside the United States may increase as we build up our ~~increased marketing efforts discussed in~~domestic sales and service teams. Notwithstanding such percentage increase, we expect the ~~Business Overview section above.~~sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.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 two outsourced manufacturers, SMC for FastBack products and Benchmark for DragonWave products. Cost of goods sold ~~of $33,594 for the quarter ended September 30, 2017 decreased $31,057 or 48% from $64,651 for the same period in 2016. Costs included materials, parts and labor~~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 ~~sale~~services we provide. Additionally, cost of ~~aerostat~~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 ~~accessories. The $59,511~~future products will vary depending on operating performance, features, materials, manufacturer, and supply chain. Gross margin will vary as a function of product mix, 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 ~~profit for~~margins will fluctuate from period to period depending on the ~~quarter ended September 30, 2017 was a decrease~~interplay of ~~$22,046 or 27% from the $81,557 in gross profit for the same quarter of 2016. Gross profit margins were 64%~~these various factors.

Operating Expenses

We classify our operating expense as research and ~~56% for the quarters ended September 30, 2017 and 2016, respectively.~~

~~General and Administrative Expense: General and administrative expense primarily consists of payroll and related costs,~~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 ~~business overhead~~associated with the design, development, and certification of our products. We generally recognize research and development expense as incurred. Development costs ~~related~~incurred prior to ~~maintaining a public entity.~~ establishment of technological feasibility are expensed as incurred.

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 and partnerships.

General and Administrative

In addition to personnel costs, general and administrative expenses ~~increased $657,447~~consist of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs.

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.

Impairment Expense

We account 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 ~~17% to $4,544,499~~on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth quarter of 2020, we adopted ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Impairment expense is recorded when the carrying value of a reporting unit (including goodwill and intangibles) exceeds the fair value of the reporting unit.

Gain or Loss on Sales

A gain or loss on sales is recognized on sales of legal entities or sales of long-lived assets and included in income from continuing operations in the ~~quarter ended September 30, 2017 from $3,887,052 for the same period~~income statement. The amount of consideration promised in ~~2016. Contributing to the increase was non-cash stock based compensation of $3,591,430 which increased $974,945 from $2,616,485~~a contract that is included in the ~~same period~~calculation of ~~2016~~a gain or loss includes both the transaction price and ~~an increase~~the carrying amount of ~~$54,343~~liabilities assumed.

Gain on the Sale of Assets

A gain or loss is recognized on the sale and leaseback of long-lived assets and included in ~~marketing expense to $97,215~~income from $42,872 for the same period in 2016, offset by research and develop costs of $97,979, a decrease of $306,925 from the same period in 2016 and legal expenses of $16,015 which decreased $84,013 from $100,028 for the same period in 2016.

~~Loss from Operations: Loss from~~continuing operations for the quarter ended September 30, 2017 increased $679,493 or 18% to $4,484,988 from loss from operations of $3,805,495 for the same period in 2016. The decrease was primarily due to a decrease in gross profit of $22,046 and by the increase of general and administrative expense of $657,447 as discussed above.

~~Other Expense: Total other expense of $278,837 for the quarter ended September 30, 2017 was $350,992 greater than the total other income of $72,155~~ in the ~~same period~~income statement. The amount of consideration promised in ~~2016. This increase was primarily due to $376,636~~a contract that is included in the calculation of a gain or loss includes the transaction price and the carrying amount of assets acquired, liabilities assumed, and closing costs.

Interest Expense

Interest expense is comprised of interest expense associated with our secured notes payables, unsecured notes payables and unsecured convertible notes ~~payable, bank and related party lines of credit and~~payables. The amortization of debt ~~discount, $681,988 loss~~discounts is also recorded ~~on debt extinguishment from the modification~~as part of ~~terms~~interest expense.

Results of the 2016 related party convertible note payable partially offset by $779,787 non-cash income due to a derivative gain on convertible debt. In the same period of 2016, the other income mainly included $75,000 debt forgiveness.Operations

	For the Three Months Ended
	March 31,
(Amounts in thousands, except share and per share data)	2023			2022

Revenue	$	483		$	2,053
Cost of goods sold		301			1,483
Gross profit		182			570
Operating expenses (income)
Research and development ⁽¹⁾		57			1,172
Sales and marketing ⁽¹⁾		-			66
General and administrative ⁽¹⁾		2,179			5,780
Depreciation and amortization		69			741
Impairment		896			-
Gain on sale (SKS) ⁽²⁾		(454	)		-
Gain on the sale of assets		-			(8,441	)
Total operating expenses (income), net		2,747			(682	)
(Loss) income from operations		(2,565	)		1,252
Other expense
Interest expense		(419	)		(879	)
Loss on extinguishment of debt		-			(173	)
Loss on inducement of debt conversions		(1,946	)		-
Total other expense		(2,365	)		(1,052	)
(Loss) income from continuing operations		(4,930	)		200
Loss from discontinued operations, net of tax		-			(64	)
Net (loss) income	$	(4,930	)	$	136

~~Net Loss~~: Net loss increased $1,030,485 or 28% to $4,763,825 for the quarter ended September 30, 2017 from net loss of $3,733,340 for the same period in 2016. The decrease in net loss was due to factors discussed above.

⁽¹⁾	These are exclusive of depreciation and amortization
⁽³⁾	Sky Sapience (“SKS”)

~~Nine~~

Three Months Ended ~~September 30, 2017~~March 31, 2023 Compared to Three Months Ended March 31, 2022

Total Revenues

For the three months ended March 31, 2023 total revenues were $0.5 million compared to ~~Nine Months Ended September 30, 2016~~

~~Revenues: Revenues of $474,634~~$2.1 million for the ~~nine~~three months ended ~~September 30, 2017 decreased $599,038~~March 31, 2022. The decrease of $1.6 million, or ~~56% from $1,073,672 for the same period~~76%, primarily consisted of decreases in ~~2016. Sources of revenue were derived primarily from~~our mobile network backhaul products and aerostat products ~~refurbishments~~ and accessories ordered in 2016 and delivered in 2017. The reason for the decrease is that revenues in the nine months of 2017 were primarily related to refurbishments and enhancements of aerostat systems and the revenues in the nine months of 2016 were primarily from the sale of an aerostat system. Also contributingdue to the ~~decrease in~~Company’s liquidity challenges and idling and sales volume was a longer sales cycle stemming in part from the recent change in presidential administration and congressional budgeting delays. We expect increased sales in future periods based on a product pipeline developed following our increased marketing efforts discussed in the Business Overview section above.of businesses.

Cost of Goods Sold and Gross Profit~~: Cost~~

For the three months ended March 31, 2023, cost of goods sold ~~of $283,590~~was $0.3 million compared to $1.5 million for the ~~nine~~three months ended ~~September 30, 2017 decreased $90,522~~March 31, 2022. The decrease of $1.2 million, or ~~24% from $374,112~~80%, is primarily due to reduced revenues. The Company sells multiple products with varying profit margins. The product mix had higher margins during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Gross profit for the ~~same~~three months ended March 31, 2023 was $0.2 million compared to $0.6 million for the three months ended March 31, 2022. The decrease in gross profit margin of $0.4 million, or 68%, was driven primarily by decreased revenues during the current quarter compared to the corresponding period in ~~2016. Costs~~fiscal year 2022.

Research and Development Expense

For the three months ended March 31, 2023, research and development expense was $0.1 million compared to $1.2 million for the three months ended March 31, 2022. The decrease of $1.1 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 ~~both periods included materials, parts~~order to focus on revenue enhancement.

Sales and ~~labor associated~~Marketing Expense

For the three months ended March 31, 2023, sales and marketing expense was $0.0 million compared to $0.1 million for the three months ended March 31, 2022. The decrease of $0.1 million primarily consisted of decreases in sales costs and cutbacks due to the Company’s liquidity challenges.

General and Administrative Expenses

For the three months ended March 31, 2023, general and administrative expense was $2.2 million compared to $5.8 million for the three months ended March 31, 2022. The decrease of $3.6 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges.

Depreciation and Amortization

For the three months ended March 31, 2023, depreciation and amortization was $0.1 million compared to $0.7 million for the three months ended March 31, 2022. The decrease of $0.6 million was primarily due to the sale of our Tucson Building (see Note 11 – Property and Equipment, Net) and equipment during early 2022.

Impairment Expense

For the three months ended March 31, 2023 the Company recorded impairment expense of $0.9 million in connection with the impairment of its goodwill and intangible assets (see Note 20 – Correction of an Error).

Gain on Sale of SKS

For the three months ended March 31, 2023, there was a gain of $0.5 million due to the sale of SKS comprised of a note receivable for $0.6 million and cash proceeds of $0.5 million, partially offset by net assets of $0.6 million and closing costs in connection with the sale of ~~aerostat products, refurbishments and accessories. The aerostat system delivered in~~$0.1 million.

Gain on the ~~first quarter~~Sale of ~~2016 had~~Assets

For the three months ended March 31, 2022 there was a ~~73% gross profit margin which was greater than the gross profit realized in the first quarter~~gain of ~~2017 on aerostat system refurbishments~~$8.4 million due to the ~~increased time~~sale of our Tucson Building (see Note 13 – Leases) and ~~material costs~~equipment.

Other Expense

For the three months ended March 31, 2023, other expense was $2.4 million compared to ~~disassemble and reassemble refurbished systems. The $191,044 gross profit~~$1.1 million for the ~~nine~~three months ended September 30, 2017 was a decrease of $508,516 or 73% from the $699,560 in gross profit for the same period of 2016. Gross profit margins were 40% and 65% for the nine months ended June 30, 2017 and 2016, respectively.

~~General and Administrative Expense~~: General and administrative expense primarily consists of payroll and related costs, sales and marketing costs, research and development costs, business overhead and costs related to maintaining a public entity. General and administrative expenses decreased $463,904 or 6% to $7,432,226 in the nine months ended September 30, 2017 from $7,896,130 for the same period in 2016. Contributing to the decrease was non-cash stock-based compensation of $4,829,598 for the nine months ended September 30, 2017, a decrease of $36,726 from $4,866,324 in the same period in 2016. Research and development costs decreased $687,696 due to drone products becoming ready for market, partially offset by an amortization expenseMarch 31, 2022. The increase of ~~$121,667 related to assets acquired from AFI in 2015 and fully integrated in 2016, and~~$1.3 million primarily consisted of an increase in ~~marketing expenses~~loss on inducement of ~~$70,552~~debt conversions of $1.9 million offset by decreases in the loss on extinguishment of debt of $0.2 million and ~~an increase in travel~~interest expense of ~~$61,826.~~$0.4 million.

(Loss) Income from Continuing Operations

For the three months ended March 31, 2023, we had a net loss from continuing operations of $4.9 million compared to net income from continuing operations of $0.2 million for the three months ended March 31, 2022, related to the items described above.

Loss from Discontinued Operations~~: Loss~~

For the three months ended March 31, 2023, we had a net loss from discontinued operations of $0 compared to a net loss from discontinued operations of $0.1 million for the ~~nine~~three months ended September 30, 2017 increased $44,612 or 1% to $7,241,182 from loss from operations of $7,196,570 for the same period in 2016. The decrease was primarily due to a decrease in gross profit of $508,516 partially offset by an increase of general and administrative expense of $463,904 as discussed above.March 31, 2022.

~~Other Expense~~: Total other expense of $408,742 for the nine months ended September 30, 2017 was $491,617 greater than the total other income of $82,875 in 2016. This increase was primarily due to $1,555,240 interest expense associated with convertible notes payable, bank and related party lines of credit and amortization of debt discount, $681,988 loss recorded on debt extinguishment from the modification of terms of the 2016 related party convertible note payable partially offset by $1,831,635 non-cash income due to a derivative gain on convertible debt. In the same period of 2016, the other income mainly included $75,000 recorded for gain on debt forgiveness and $11,000 recorded for gain on settlement of make whole provision.

~~Net Loss~~: Net loss increased $536,229 or 8% to $7,649,924 for the nine months ended September 30, 2017 from net loss of $7,113,695 for the same period in 2016. The decrease in net loss was due to factors discussed above.

Liquidity and Capital Resources

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its ~~needs for~~ cash requirements. As of ~~September 30, 2017, the Company~~March 31, 2023, we had ~~$1,764,389~~$3.1 million in cash compared to ~~$2,015,214 in cash at~~$1.9 million on December 31, ~~2016, a decrease~~2022, an increase of ~~$250,825.~~ $1.2 million resulting primarily from $0.6 million of cash provided by operating activities, $0.4 million of cash provided by the sale of SKS (see Note 3 – Discontinued Operations and Assets and Liabilities Held for Sale), and $0.2 million of proceeds from debt.

As of ~~September 30, 2017, the Company~~March 31, 2023, we had ~~accounts receivable of $100,749 compared to $394,000 at December 31, 2016,~~ a ~~decrease of $293,251 resulting from increased collections in the first nine months of 2017.~~

The Company had total current assets of $2,671,573 and total current liabilities of $2,338,139, or working capital of $333,434 at September 30, 2017 compared to total current assets of $2,989,713 and total current liabilities of $3,080,628, or working capital deficit of ~~$90,915 at December 31, 2016.~~

~~We have historically financed our operations through operating revenues and sales of equity and convertible debt securities. Although as of September 30, 2017 we have cash of $1,764,389, we have~~$16.3 million compared to a working capital deficit of ~~$333,434~~$15.9 million as of December 31, 2022.

As of March 31, 2023, we had undiscounted obligations relating to the payment of indebtedness as follows:

●

$11.8 million related to indebtedness that is due during the remainder of 2023; and

●

$0.6 million related to indebtedness that is due during 2024.

Subsequent to March 31, 2023, the following developments should be noted:

●

an additional promissory note with a face value of $0.3 million was issued.

Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, and ~~incurred~~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 ~~net loss from operations~~decrease in the market price of ~~$6,926,527. Furthermore, the Company has~~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 ~~history~~going concern. At March 31, 2023, we had an accumulated deficit of ~~negative cash flow from operations, primarily due to historically heavy investment in research~~$302.5 million and ~~development and costs associated with maintaining~~we had a ~~public entity. While we expect a substantial reduction in research and development costs, we believe our existing~~ working capital ~~and access to capital are sufficient~~deficit of $16.3 million. These factors raise substantial doubt about our ability to continue as a going concern.

Our historical 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 ~~for~~have been scaled back to the ~~next 12 months.~~

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 ~~anticipation~~the near term, there will be limited opportunities to raise capital of ~~increased sales resulting from~~significance until our ~~developing product pipeline,~~Nasdaq compliance issues are resolved, as discussed in Nasdaq Compliance Developments herein.

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, and these planned actions do not alleviate the substantial doubt. If we are not able to obtain additional financing on ~~August 2, 2017,~~a timely basis, we ~~completed financing transactions that provide us with up~~may have to ~~$4,000,000 in cash~~delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on our business, financial condition and ~~extended the maturity date on $3,000,000~~results of ~~convertible debt until April 2019 providing us with significant increased liquidity~~operations, and ~~a strengthened balance sheet. The following is a summary of these completed financing transaction:~~

~~Revolving Line of Credit from City National Bank of Florida.~~ ~~On August 2, 2017, the Company issued a promissory note~~ultimately, we could be forced to City National Bank of Florida (“CNB”) in the principal amount of $2,000,000, the CNB Note. The note evidences a revolving line of credit with advances that may be requested by the Company until the maturity date of August 2, 2018 so long as no event of default existsdiscontinue operations, liquidate assets and/or seek reorganization under the ~~note,~~U.S. bankruptcy code. Determining the ~~Company~~extent to which conditions or Mr. Nussbaum does not cease doing business, Mr. Nussbaum does not seek to revoke or modify his guarantee of the Note, the Company does not misapply the proceeds of this loan or CNB in good faith does not believe itself insecure. The CNB Note bears interest at a variable rate equal to 0.250 percentage points over the Wall Street Journal Prime Rate payable monthly. The Company will pay to CNB a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may prepay the note at any time without penalty. In the event of a default, the interest rate will increase to the highest lawful rate. The Company is obligated to maintain depository accounts with CNB with a minimum average annual balance of $600,000. In the event the Company does not maintain this account balance, CNB may charge the Company a fee equal to 2% of the deficiency as additional interest under the note. The CNB Note is personally guaranteed by Mr. Nussbaum,events raise substantial doubt about the Company’s ~~Chief Executive Officer pursuant~~ability to ~~written guarantee in favor of CNB (the “CNB Guarantee”). Mr. Nussbaum~~continue as a going concern and the ~~Company are obligated~~extent to maintain an unencumbered liquidity of no less than $6,000,000 in the form of cash, repurchase agreements, certificates of deposit or marketable securities acceptable to CNB. In addition, to secure our obligations under the note, we entered into a security agreement in favor of CNB (the “Security Agreement”) encumbering all of our accounts, inventorywhich mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and equipment along with an assignment of a bank account we maintain at CNB with an approximate balance of $90,000. As of September 30, 2017, we have drawn a total of $1,000,000 under the CNB Note leaving availability of $1,000,000 under such note.

~~Series 2017 Secured Convertible Note~~. On August 2, 2017, the Company issued a Secured Convertible Promissory Note Series 2017 due August 2, 2018 in the aggregate principal amount of $2,000,000 (the “Series 2017 Convertible Note”) in a private placement to Frost Nevada Investments Trust (“Frost Nevada”). Frost Nevada is a trust that is controlledestimation by ~~Dr. Frost, a substantial shareholder of~~ the Company. The ~~note evidences~~Company makes assumptions that management’s plans will be effectively implemented but may not alleviate substantial doubt and its ability to continue as a revolving line of credit with advances that may be requested by the Company until the maturity date of August 2, 2018 so long as no event of default exists under the loan. The Company may request advances of principal under this note equal to and at the same time as it requests advances, if any, pursuant to the CNB Note. The note bears interest at a variable rate equal to 0.250 percentage points over the Wall Street Journal Prime Rate. The Company may prepay the notes at any time without penalty. If the Company does not prepay the note in full or the holder does not convert the note before the maturity date, the Company may pay the outstanding principal amount and any accrued and unpaid interest on the maturity date with cash or with common stock or through a combination of cash and stock at Frost Nevada’s discretion. The conversion price under the note is $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. The Series 2017 Convertible Note is secured by a security interest in all of the Company’s assets. This security interest is subordinate to the security interest of CNB discussed above.

~~As of September 30, 2017, we have drawn a total of $1,000,000 under the Series 2017 Secured Convertible Note leaving availability of $1,000,000 under such note.~~

going concern.

~~Amendments to Related Party Convertible Promissory Notes~~. On August 3, 2017, the Company entered into amendments (the “Convertible Note Amendments”) with the owners and holders of the following convertible promissory notes issued by the Company (the “Convertible Notes”):

●

The Convertible Note Amendments extend the maturity date for each of the Convertible Notes to April 1, 2019 (the “Maturity Date”) and revise the conversion price to mean $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. Consistent with the original terms of the Convertible Notes, interest accrues at the rate of 6% interest per annum and is payable on the Maturity Date. The accrued interest is payable at the holders’ option in cash or shares of our common stock valued at the $1.00 per share conversion price. The Convertible Note Amendments provide that an event of default in the City National Bank Loan will be treated as an event of default under the Convertible Notes.

Sources and Uses of Cash

Nine Months Ended
September 30,

2017 2016
Cash flows (used in) operating activities $ (2,250,150 ) $ (1,991,165 )
Cash flows (used in) investing activities (675 ) (14,099 )
Cash flows provided by financing activities 2,000,000 2,965,000
Net (decrease) increase in cash and cash equivalents $ (250,825 ) $ 959,736

	For the Three Months
	Ended March 31,
(Amounts in thousands)	2023		2022
Cash flows provided by (used in) operating activities	$	589	$	(8,462	)
Cash flows provided by investing activities		436		14,909
Cash flows provided by (used in) by financing activities		170		(7,587	)
Net cash used in discontinued operations		-		(335	)
Net increase (decrease) in cash	$	1,195	$	(1,475	)

Operating Activities

For the three months ended March 31, 2023, net cash provided by operating activities was $0.6 million. Net cash provided by operating activities primarily consisted of net loss from continuing operations of $4.9 million, which was partially offset by adjustments for non-cash expenses of $3.1 million and net cash used to fund changes in the levels of operating assets and liabilities of $2.5 million.

~~Operating Activities~~

For the three months ended March 31, 2022, net cash used in operating activities was $8.5 million. Net cash used in operating activities ~~during~~primarily consisted of the ~~nine~~net income from continuing operations of $0.2 million, which was offset by deductions for non-cash income of $6.1 million, and net cash used to fund changes in the levels of operating assets and liabilities of $2.6 million.

Investing Activities

For the three months ended ~~September 30, 2017~~March 31, 2023, net cash provided by investing activities was ~~$2,250,150,~~$0.4 million. Investing activities consisted of proceeds from the sale of SKS of $0.4 million.

For the three months ended March 31, 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 ~~an increase~~partially offset by the acquisition of ~~$258,985, or 13%, from $1,991,165~~property and equipment of $0.2 million.

Financing Activities

For the three months ended March 31, 2023, net cash provided by financing activities was $0.2 million. Financing activities consisted of proceeds of debt of $0.2 million.

For the three months ended March 31, 2022, net cash used in operating activities for the nine months ended September 30, 2016. The net loss of ($7,649,924) for the first nine months of 2017 was $536,229 greater than the same period of 2016, which was ($7,113,695). In addition to the decreased net loss, the Company recognized $36,726 less non-cash stock based compensation in the first nine months of 2017 than the previous year, offset by a $167,643 decrease in working capital for the nine months ended September 30, 2017 compared to the same period in 2016. The Company recognized a non-cash gain on derivative liability of $1,831,635, an increase of $1,831,659 ~~over~~the same period in 2016, which was $(24). Amortization expense of $219,000 on intangible assets during the nine months ended September 30, 2017 was $121,667, or 125%, greater than the same period in 2016, which was $97,333.

~~Investing Activities~~:

~~Net cash used in investing~~financing activities was $675 and $14,099 during the nine months ended September 30, 2017 and 2016, respectively, which in each case was related to purchase of shop machines and equipment, computers and electronics and furniture and equipment.

~~Financing Activities:~~

$7.6 million. Financing activities ~~during the first nine months~~primarily consisted of ~~2017 included $1,000,000 proceeds from a bank line~~repayment of ~~credit and $1,000,000 proceeds from a related party convertible note payable. Financing activities for the first nine months~~debt of ~~2016 included $3,000,000 in proceeds from the issuance of convertible notes payable offset by $35,000 paid to satisfy the delinquent Oklahoma Technology Commercialization Center loan.~~$7.6 million.

Off-Balance Sheet Arrangements

We dodid not have any ~~off balance~~off-balance sheet arrangements that ~~materially~~have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

~~The~~There have been no material changes to the Company’s significant accounting policies ~~are more fully described~~as set forth in ~~Note 1 of~~ the ~~Financial Statements~~Company’s audited consolidated financial statements included in the ~~Company’s~~ Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 17, 2017. As disclosed therein, the preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.2022.

~~Accounts Receivable and Credit Policies~~:

Accounts receivable-trade consists of amounts due from the sale of tethered aerostats, accessories, spare parts, and customization and refurbishment of aerostats. Such accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days of receipt of the invoice. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. At September 30, 2017 and December 31, 2016, none of the Company’s accounts receivable-trade was deemed uncollectible.

~~Revenue Recognition and Unearned Revenue~~:

The Company recognizes revenue when all four of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred and title has transferred or services have been rendered; 3) our price to the buyer is fixed or determinable; and 4) collectability is reasonably assured. We record unearned revenue as a liability and the associated costs of sales as work in process inventory. There is a balance of $34,549 in accounts receivable at September 30, 2017 for employee commission advances and no balance in unearned revenue.

~~Derivative Financial Instruments~~:

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option pricing model, in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

~~Stock-Based Compensation~~:

We account for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation.” ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

~~Recently Issued Accounting Pronouncements~~

~~Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.~~

~~ITEM~~Item 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~Quantitative and Qualitative Disclosures about Market Risk

~~As a~~Not required under Regulation S-K for smaller reporting ~~company, as that term is defined in Item 10(f)(1) of Regulation S-K, we are not required to provide information required by this Item.~~companies.

~~ITEM~~Item 4. ~~CONTROLS AND PROCEDURES~~Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

~~Our management, with~~The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the ~~participation~~Securities Exchange Act of ~~our~~1934. This term refers to the controls and procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our Chief Executive Officer and ~~Chief~~Acting Principal Financial and Accounting Officer has evaluated the effectiveness of our disclosure controls and procedures ~~pursuant to Rule 13a-15 under the Exchange Act~~ as of the end of the period covered by this ~~Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes~~report. Based upon that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

~~Management, with the participation of~~evaluation, our Chief Executive Officer and ~~Chief~~Acting Principal Financial and Accounting Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2017. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer,has concluded that our disclosure controls and procedures were not effective as of ~~September 30, 2017~~the end of the period covered by this report.

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the ~~reasons discussed below. In addition,~~fiscal year ended December 31, 2022, management ~~identified~~concluded that the following material weaknesses that were first identified in ~~its assessment of the effectiveness of~~2021, continued to exist in our disclosure controls and ~~procedures as~~procedures:

●

we do not effectively segregate certain accounting duties due to the small size of our accounting staff;

●

there is a lack of timely reconciliations of account balances; and

●

there is a lack of documented and tested internal controls to meet the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002.

Our remediation of ~~September 30, 2017:~~

~~The Company did not effectively segregate certain accounting duties due to~~ the ~~small size of its accounting staff.~~

A material ~~weakness is a deficiency, or a combination of control deficiencies,~~weaknesses in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Notwithstanding the determination that our internal control over financial reporting was not effective, as of June 30, 2017, and that there was a material weakness as identified in this Quarterly Report, we believe that our consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the years covered hereby in all material respects.

~~We expect to be dependent upon our Chief Financial Officer who~~ is knowledgeable and experienced in the application of U.S. Generally Accepted Accounting Principles to maintain our disclosure controls and procedures and the preparation of our financial statements for the foreseeable future. We plan on increasing the size of our accounting staff at the appropriate time for our business and its size to ameliorate our concern that we do not effectively segregate certain accounting duties, which we believe would resolve the material weakness in disclosure controls and procedures, but there can be no assurances as to the timing of any such action or that we will be able to do so. ongoing.

(b) Changes in ~~internal control over financial reporting.~~Internal Control Over Financial Reporting.

There ~~were~~have been no changes in our internal control over financial reporting ~~that occurred~~ during the ~~quarter~~three months ended ~~September 30, 2017~~March 31, 2023 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect our internal control over financial reporting.

PART II -– OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings ~~which~~that arise in the ordinary course of business. ~~Except as discussed below, we are not~~Neither our Company nor any of our subsidiaries currently ~~aware of~~is a party to any ~~such~~ legal ~~proceedings or claims~~proceeding that, ~~we believe will have,~~ individually or in the aggregate, is material to our Company as a ~~material adverse effect~~whole, except as disclosed in Item 3 of our Annual Report on ~~our business, financial condition, or operating results.~~Form 10-K for the year ended December 31, 2022 as filed with the SEC on December 7, 2023 and as follows.

~~Banco Popular North America. v Aerial Products Corporation d/b/~~On January 9, 2023, a ~~Southern Balloon Works, et al. (Fourth Judicial Circuit~~former employee of a subsidiary of InduraPower, filed suit against the Company and the former CEO, Daniel Hodges, in the Pima County Superior Court, ~~Duval County Florida-Civil Division)~~Arizona, Case No. ~~16:2016:CA-003343~~C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. The Company filed an answer to the complaint and the proceedings are currently in the discovery phase. The Company strongly dispute plaintiff’s allegations and intends to vigorously defend the lawsuit.

On or about January 10, 2023, a recruiting and staffing company obtained a default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for $145,917 and post-judgment interest at 7%. As of March 31, 2023, the Company accrued for the full amount of the judgment. The judgment holder obtained a garnishment order against Company’s banking accounts and has received approximately $17,600 in cash through the date of this filing.

On or about May ~~16, 2016, Banco Popular North America (“Banco”)~~22, 2023, a landlord filed ~~a lawsuit in Duval County, Florida~~suit against the Company in the Circuit Court, Fairfax County, Virgina, Case No. 202307755, for breach of a commercial lease. The plaintiff obtained a default judgment in the amount of approximately $130,000 which remains unpaid as of the ~~Fourth Judicial Circuit against Aerial Products Corporation d/b/a Southern Balloon Works (“Aerial Products”), Kevin M. Hess, LTAS, and~~date of this filing. As of March 31, 2023, the Company ~~to collect~~accrued for the full amount of the judgment in accrued liabilities on ~~a delinquent Small Business Administration loan that Banco made in 2007 to Aerial Products with Mr. Hess as~~ the personal guarantor. LTAS and the Company filed an Answer on June 30, 2016 and Responses to Interrogatories on December 16, 2016 and we are now in the discovery phase of litigation. The lawsuit is active and discovery is ongoing. It is our position that neither LTAS nor the Company are continuations of Aerial Products, and LTAS and the Company has denied all allegations made by Banco and is vigorously defending itself. The Company has evaluated the probability of loss as possible but the range of loss is unable to be estimated.condensed consolidated balance sheet.

~~Other than the Banco matter, there are no material claims, actions, suits, proceedings inquiries, labor disputes or investigations pending.~~

Item 1A. Risk Factors

~~Smaller reporting companies~~Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2022 Annual Report on Form 10-K filed with the SEC on December 7, 2023.

Our stockholders’ equity fails to meet the minimum requirement for continued listing requirements of the Nasdaq Capital Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.

On December 12, 2023, the Company received written notice from Nasdaq that because the Company’s stockholders’ equity as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 was ($15,001,000), we do not meet the minimum stockholders’ equity requirement of $2,500,000 as set forth in Nasdaq Listing Rule 5550(b)(1), and do not otherwise satisfy the alternative minimum requirements for market value of listed securities ($35 million) or net income from continuing operations ($500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years), and therefore the Company’s securities are subject to delisting.

If our securities were delisted from Nasdaq, among other things, it would likely lead to a number of negative implications, including an adverse effect on the ~~information required~~price of our securities, reduced liquidity in our securities, no market for our securities and no ability for you to sell our securities, greater difficulty in obtaining financing, potential loss of confidence by ~~this Item.~~employees, loss of institutional investor interest and fewer business development opportunities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Issuance~~There have been no sales of ~~Common Stock~~

~~On August 3, 2017,~~unregistered securities within the ~~Company awarded 250,000~~reporting period that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:

Between January 18, 2023 and February 2, 2023, we issued to seven investors an aggregate of 280,625 shares of our common stock upon the ~~Company’s unregistered restricted Common Stock~~special limited time offer to ~~two members~~convert certain principal of outstanding senior secured convertible promissory notes at a discounted rate of 81% of the ~~Strategic Advisory Board for services.~~

~~Issuance of Secured Convertible Promissory Note~~

~~On August 2,~~closing market price on the ~~Company~~day the special notices were received. The weighted average conversion price was $5.71 per share and such shares were issued a Secured Convertible Promissory Note Series 2017 due August 2, 2018 in the aggregate principal amount of $2,000,000 (the “Series 2017 Convertible Note”) in a private placement to Frost Nevada Investments Trust (“Frost Nevada”).

~~The Series 2017 Convertible Note was issued~~by us in reliance upon the exemption from ~~securities~~ registration ~~afforded by the provisions of~~available under Section ~~4(a)(2)~~3(a)(9) of the Securities ~~Act of 1933, as amended (the “Securities Act”).~~

Act.

~~Issuance of Stock Options and Warrants~~

On August 3,2017, the Company issued outside its 2015 Equity Plan, 5,210,000 options to purchase the Company’s common stock to officers, directors and employees for services provided. Jay Nussbaum was issued 2,000,000 options, Felicia Hess was issued 1,200,000 options, Dan Erdberg was issued 1,140,000 options, Kendall Carpenter was issued 275,000 options, Directors David Aguilar, Mike Haas and General Wayne Jackson were issued 100,000, 10,000 and 10,000 options, respectively. The remaining 475,000options were issued to employees and consultants. These stock options immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021.

On August 3, 2017, the Company issued outside its 2015 Equity Plan, 30,000 warrants to purchase the Company’s common stock to consultants for services provided. These warrants immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021.

~~The Stock Options and Warrants were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act.~~

~~ITEM~~Item 3. ~~DEFAULTS UPON SENIOR SECURITIES~~Default Upon Senior Securities

~~None.~~(a) Defaults Upon Senior Securities

~~ITEM 4. MINE SAFETY DISCLOSURES~~

~~Not applicable.~~

~~ITEM 5. OTHER INFORMATION~~

~~On November 9, 2017,~~In connection with our acquisition of Fastback on January 29, 2021, we issued to the sellers $11.2 million aggregate principal amount of convertible promissory notes that mature on January 29, 2026. There is a provision in the convertible promissory notes that an event of default could be declared if the Company ~~entered into amendments (the “November 2017 Convertible Note Amendments”)~~fails to file its requisite its securities filings timely. The Company was delinquent with its Form 10-Q filings. To date, while the ~~owners~~convertible promissory note holders have reserved their rights, the convertible promissory notes have not been declared in default, and holders of the Series 2016 Convertible Notes to permit the payment of, at the holders’ election, accrued and unpaid interest either in monthly or quarterly payments at any time after the Effective Date. Accrued interest may be paid with: (i) cash; (ii) the issuance and delivery to the holder of shares of common stock of the Company athas a plan to regain compliance with such filings. Upon the ~~conversion price provided for in the Series 2016 Convertible Note; or (iii) any combination of cash and shares of Common Stock, as determined by the holder in its sole discretion.~~

~~Item~~~~6. EXHIBITS~~

~~The Exhibits listed in the accompanying Exhibit Index are filed, furnished herewith, or incorporated by reference as part~~filing of this Quarterly Report on Form 10-Q ~~in each case~~for the quarter ended March 31, 2023, the Company will be compliant with the filing requirement. No adverse actions have been taken against the Company and we expect none insofar as ~~set forth~~filing compliance is regained. During January 2023, pursuant to a limited time offer, certain Fastback convertible promissory note holders agreed to amend their notes and convert an aggregate of $1.3 million principal of their notes and $0.3 million of accrued interest into 280,625 shares of the Company’s common stock.

On May 27, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the ~~Exhibit Index.~~original principal amount of $11.0 million and warrants to purchase up to 18,200 shares of our common stock, par value $0.0001 per share, for a purchase price of $10.0 million (representing an original issue discount of 10.0% on the note), of which we received $5.0 million on May 28, 2021 and $5.0 million on June 2, 2021. On August 25, 2021, we entered into a first amendment and limited waiver to the securities purchase agreement dated as of May 27, 2021 and amended and restated the convertible note.

The amended note bears interest at the rate of 6% per annum from the date of funding and matures on May 27, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $611,000 each, commencing in November 2021. We had the right to make interest and principal payments in the form of shares of common stock, which shares will be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $77,000.

On August 25, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $5.8 million and warrants to purchase up to 13,158 shares of our common stock, par value $0.0001 per share (the “Common Stock”), for a purchase price of $5.0 million (representing an original issue discount of 16.0% on the note), which $5.0 million was received on August 26, 2021.

The note bears interest at the rate of 6% per annum from the date of funding and matures on August 25, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $322,000 each, commencing in November 2021. So long as shares of our common stock are registered for resale under the Securities Act of 1933, as amended, or may be sold without restriction on the number of shares or manner of sale, we had the right to make interest and principal payments in the form of additional shares of common stock, which shares would be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $185,000.

In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2.0 million loan that bears interest at the rate of 9% per annum and originally matured on November 26, 2021. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal was due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of DragonWave and is guaranteed by ComSovereign Corp. In January 2021, a total of $1.0 million of principal of this note, plus all related accrued interest and charges, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. In January 2022, a total of $500,000 was paid to the note holder. As of the date of this filing, this note had a remaining principal balance of $500,000.

(b) Material Arrearage in the Payment of Dividends.

On October 29, 2021, the Company sold in a public offering 320,000 shares of the Company’s newly-designated 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), at a public offering price of $25.00 per share, which is the initial liquidation preference of the Series A Preferred Stock.

The Series A Preferred Stock has been listed on The Nasdaq Capital Market under the symbol “COMSP”.

Dividends at the rate of 9.25% per annum of the $25.00 liquidation preference per share (equivalent to an annual rate of $2.3125) on the Series A Preferred Stock are payable monthly in arrears on or about the twentieth (20th) day of each month. Dividends on the Series A Preferred Stock are cumulative. The Company paid dividends commencing on or about November 20, 2021, and paid the monthly dividend through May 20, 2022.

On or about May 25, 2022, the Company announced that it had suspended the payment on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $1,171,616.

Holders of the Series A Preferred Stock generally have no voting rights, except for limited voting rights, including if the Company fails to pay dividends on the Series A Preferred Stock for 18 or more monthly periods (whether or not consecutive). On November 18, 2023, we reached 18 monthly periods of dividend arrears. Therefore, the holders of shares of the Series A Preferred Stock will be entitled to vote at either (i) a special meeting called upon the written request of the holders of at least 25% of the Series A Preferred Stock or (ii) at our next annual meeting and each subsequent annual or special meeting of stockholders for the election of two additional directors to serve on our board of directors until all unpaid dividends with respect to the Series A Preferred Stock have been paid.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

The following documents are filed as a part of this report or incorporated herein by reference:

Exhibit Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of ~~the~~ Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	~~DRONE AVIATION HOLDING CORP.~~COMSovereign Holding Corp.

Date: January 9, 2024	/s/ David A. Knight
~~Date: November 13, 2017~~	~~By:~~David A. Knight
	~~/s/ JAY H. NUSSBAUM~~Chief Executive Officer
	(Principal Executive Officer)

~~Jay H. Nussbaum~~Date: January 9, 2024	/s/ David A. Knight
		~~Chief Executive Officer~~ ~~(Principal Executive Officer)~~David A. Knight

~~Date: November 13, 2017~~	~~By:~~	~~/s/ KENDALL CARPENTER~~
		~~Kendall Carpenter~~
		~~Chief Financial Officer~~ (Acting Principal Financial ~~Officer~~ and ~~Principal~~ Accounting ~~Officer)~~Officer

~~EXHIBIT INDEX~~

Incorporation by Reference
Exhibit
Number Exhibit Description Form Filing Date Exhibit Number
SEC File
No.
Filed Herewith
2.1 Agreement and Plan of Merger, dated April 30, 2014, between Drone Aviation Holding Corp. and MacroSolve, Inc. 8-K 5/5/14 2.1 333-150332
2.2 Plan of Merger, effective March 26, 2015, between Drone Aviation Holding Corp. and Drone Aviation Corp. 10-K 3/31/15 10.14 333-150332
2.3 Asset Purchase Agreement, dated July 20, 2015, between Drone AFS Corp. Drone Aviation Holding Corp., Adaptive Flight, Inc., and the shareholders of Adaptive Flight, Inc. 8-K 7/21/15 10.1 333-150332
3.1 Articles of Incorporation of Drone Aviation Holding Corp., dated April 17, 2014 8-K 5/5/14 3.1 333-150332
3.2 Certificate of Amendment to Articles of Incorporation of Drone Aviation Holding Corp., dated October 29, 2015 8-K 10/30/15 3.1 333-150332
3.3 Bylaws of Drone Aviation Holding Corp. 8-K 5/5/14 3.6 333-150332
3.4 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock 8-K 5/5/14 3.2 333-105332
3.5 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock 8-K 5/5/14 3.3 333-105332
3.6 Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock 8-K 5/5/14 3.4 333-105332
3.7 Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock 8-K 5/5/14 3.5 333-105332
3.8 Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock 8-K 6/5/14 3.1 333-105332
3.9 Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock 8-K 6/5/14 3.2 333-105332
3.10 Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock 8-K 6/3/15 3.3 333-105332
3.11 Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock 8-K 8/28/14 3.1 333-105332
3.12 Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock 8-K 6/3/15 3.4 333-105332
3.13 Certificate of Designation of Preferences, Rights and Limitations of Series G Convertible Preferred Stock 8-K 6/3/15 3.1 333-105332
3.14 Certificate of Correction to the Certificate of Designation of Preferences, rights and Limitations of Series G Convertible Preferred Stock 8-K 6/3/15 3.2 333-105332

Incorporation by Reference
Exhibit
Number Exhibit Description Form Filing Date Exhibit Number
SEC File
No.
Filed Herewith
4.1 Form of Convertible Promissory Note Series 2016 due October 1, 2017 8-K 9/30/16 4.1 333-105332
4.1(a) (a) Form of Amendment to Convertible Promissory Note Series 2016 10-Q 8/4/17 4.1(a) 333-150332
4.1(b) (b) Form of November 2017 Amendment to Convertible Promissory Note Series 2016 10-Q 11/13/17 X
4.2 Form of Secured Convertible Promissory Note Series 2017-08 due August 2, 2018 10-Q 8/4/17 4.2 333-150332
10.1 Form of Indemnification Agreement for Directors and Officers 8-K 6/5/14 10.4 333-105332
10.2 Independent Contractor Agreement, dated July 29, 2013, by and among US Technik, Inc., Lighter Than Air Systems Corp., and World Surveillance Group, Inc. 8-K 6/5/14 10.9 333-105332
10.3 Form of Independent Contractor Agreement for members of the Strategic Advisory Board of Drone Aviation Holding Corp. 8-K 8/28/14 10.2 333-10532
10.4* Employment Agreement, dated May 18, 2015, between Drone Aviation Holding Corp. and Daniyel Erdberg 10-Q 5/15/15 10.17 333-150332
10.4(a)* (a) Amendment No. 1 to Employment Agreement, dated October 2, 2015, between Drone Aviation Holding Corp. and Daniyel Erdberg 8-K 10/7/15 10.2 333-150332
10.4(b)* (b) Amendment No. 2 to Employment Agreement, dated April 27, 2016, between Drone Aviation Holding Corp., and Daniyel Erdberg 10-Q 4/29/16 10.4 333-150332
10.4(c)* (c) Amendment No. 3 to Employment Agreement, dated September 26, 2016, by and between Drone Aviation Holding Corp. and Daniyel Erdberg 8-K 9/30/16 10.5 333-150332
10.4(d)* (d) Amendment No. 4 to Employment Agreement, dated August 3, 2017, between Drone Aviation Holding Corp., and Daniyel Erdberg 10-Q 8/4/17 10.4(d) 333-150332
10.5* Employment Agreement, dated May 18, 2015, between Drone Aviation Holding Corp. and Felicia A. Hess 10-Q 5/15/15 10.15 333-150332
10.5(a)* (a) Amendment No. 1 to Employment Agreement, dated October 2, 2015, between Drone Aviation Holding Corp. and Felicia Hess 8-K 10/7/15 10.1 333-150332
10.5(b)* (b) Amendment No. 2 to Employment Agreement, dated April 27, 2016, between Drone Aviation Holding Corp. and Felicia Hess 10-Q 4/29/16 10.5 333-150332
10.5(c)* (c) Amendment No. 3 to Employment Agreement, dated September 26, 2016, by and between Drone Aviation Holding Corp. and Felicia Hess 8-K 9/30/16 10.3 333-150332
10.5(d)* (d) Amendment No. 4 to Employment Agreement, dated August 3, 2017, by and between Drone Aviation Holding Corp. and Felicia Hess 10-Q 8/4/17 10.5(d) 333-150332
10.6* Employment Agreement, dated May 18, 2015, between Drone Aviation Holding Corp. and Kendall Carpenter 10-Q 5/15/15 10.16 333-150332
10.6(a)* (a) Amendment No. 1 to Employment Agreement, dated April 27, 2016, between Drone Aviation Holding Corp. and Kendall Carpenter 10-Q 4/29/16 10.3 333-150332
10.6(b)* (b) Amendment No. 2 to Employment Agreement, dated September 26, 2016, by and between Drone Aviation Holding Corp. and Kendall Carpenter 8-K 9/30/16 10.6 333-150332
10.6(c)* (c) Amendment No. 3 to Employment Agreement, dated August 3, 2017, by and between Drone Aviation Holding Corp. and Kendall Carpenter 10-Q 8/4/17 10.6(c) 333-150332
10.7* Director Agreement, dated June 4, 2015, between Drone Aviation Holding Corp. and Jay Nussbaum 8-K 6/5/15 10.1 333-150332
10.8 Intellectual Property Assignment Agreement, dated July 20, 2015, between Adaptive Flight, Inc., and Drone AFS Corp. 8-K 7/21/15 10.5 333-150332

Incorporation by Reference
Exhibit
Number Exhibit Description Form Filing Date Exhibit Number
SEC File
No.
Filed Herewith
10.9 Form of Non-Exclusive, Perpetual Intellectual Property and Patent License Agreement of Drone Aviation Holding Corp., dated July 20, 2015 8-K 7/21/15 10.6 333-150332
10.10* Drone Aviation Holding Corp. 2015 Equity Incentive Plan 8-K 9/11/15 99.1 333-150332
10.11* Amended and Restated Employment Agreement, dated October 2, 2015, between Drone Aviation Holding Corp. and Kevin Hess 8-K 10/7/15 10.3 333-150332
10.11(a)* (a) Amendment No. 2 to Employment Agreement, dated April 27, 2016, between Drone Aviation Holding Corp. and Kevin Hess 10-Q 4/29/16 10.1 333-150332
10.11(b)* (b) Amendment No. 3 [sic] to Employment Agreement, dated September 26, 2016, between Drone Aviation Holding Corp. and Kevin Hess 8-K 9/30/16 10.4 333-150332
10.12 Form of Drone Aviation Holding Corp. Warrant to purchase Common Stock issued to Dougherty & Company, LLC, as Placement Agent 8-K 11/23/15 4.1 333-150332
10.13 Form of Drone Aviation Holding Corp. Common Stock Purchase Agreement for Private Offering Under Section 4(a)(2) of the Securities Act of 1933 and Rule 506(b) 8-K 11/23/15 10.1 333-150332
10.14 Form of Preferred Stock Conversion and Lockup Agreement for Series A Convertible Preferred Stock 8-K 11/23/15 10.2 333-150332
10.15 Form of Preferred Stock Conversion and Lockup Agreement for Series B Convertible Preferred Stock 8-K 11/23/15 10.3 333-150332
10.16 Form of Exchange Agreement for Series B-1 Convertible Preferred Stock 8-K 11/23/15 10.9 333-150332
10.17 Form of Preferred Stock Conversion and Lockup Agreement for Series C Convertible Preferred Stock 8-K 11/23/15 10.4 333-150332
10.18 Form of Preferred Stock Conversion and Lockup Agreement for Series D Convertible Preferred Stock 8-K 11/23/15 10.5 333-150332
10.19 Form of Preferred Stock Conversion Agreement for Series E Convertible Preferred Stock 8-K 11/23/15 10.6 333-150332
10.20 Form of Preferred Stock Conversion Agreement for Series F Convertible Preferred Stock 8-K 11/23/15 10.7 333-150332
10.21 Form of Preferred Stock Conversion Agreement for Series G Convertible Preferred Stock 8-K 11/23/15 10.8 333-150332
10.22* Employment Agreement, dated April 27, 2016, between Drone Aviation Holding Corp. and Jay H. Nussbaum 10-Q 4/29/16 10.2 333-150332
10.22(a)* (a) Amendment No. 1 to Employment Agreement, dated September 26, 2016, by and between Drone Aviation Holding Corp. and Jay H. Nussbaum 8-K 9/30/16 10.2 333-150332
10.22(b)* (b) Amendment No. 2 to Employment Agreement, dated August 3, 2017, by and between Drone Aviation Holding Corp. and Jay H. Nussbaum 10-Q 8/4/17 10.22(b) 333-150332
10.23* Form of Drone Aviation Holding Corp. Restricted Stock Agreement (Non-Assignable) (Effective April 27, 2016) 10-Q 7/29/16 10.7 333-150332

Incorporation by Reference
Exhibit
Number Exhibit Description Form Filing Date Exhibit Number
SEC File
No.
Filed Herewith
10.24* Form of Drone Aviation Holding Corp. Restricted Stock Agreement (Non-Assignable) 8-K 9/30/16 10.7 333-150332
10.25 Form of Subscription Agreement for Convertible Promissory Notes Series 2016 due October 1, 2017 8-K 9/30/16 10.1 333-150332
10.26* Offer Letter between Drone Aviation Holding Corp. and David V. Aguilar, accepted January 9, 2017 8-K 1/12/17 10.1 333-150332
10.27* Director Agreement, dated January 9, 2017, between Drone Aviation Holding Corp. and David V. Aguilar 8-K 1/12/17 10.2 333-150332
10.28* Form of Drone Aviation Holding Corp. Nonqualified Stock Option Agreement 8-K 1/12/17 10.3 333-150332
10.29 Form of Promissory Note and Security Agreement issued by Drone Aviation Holding Corp. to City National Bank of Florida dated August 2, 2017 10-Q 8/4/17 10.29 333-150332
10.30 Form of Guarantee issued by Jay Nussbaum to City National Bank of Florida dated August 2, 2017 10-Q 8/4/17 10.30 333-150332
10.31 Indemnification Agreement between Drone Aviation Holding Corp. and Jay H. Nussbaum 10-Q 8/4/17 10.31 333-150332
10.32* Form of Drone Aviation Holding Corp. Amendment to Restricted Stock Agreement dated August 3, 2017 10-Q 8/4/17 10.32 333-150332
10.33* Form of Amendment No. 2 to Independent Contractor Agreement dated August 3, 2017 10-Q 8/4/17 10.33 333-150332
10.34* Warrant issued by Drone Aviation Holding Corp. to Dr. Phillip Frost dated August 3, 2017 10-Q 8/4/17 10.34 333-150332
10.35 Consulting Agreement between Drone Aviation Holding Corp. and Global Security Innovative Strategies, LLC dated November 10, 2017 X
31.1 Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – – X
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – – X
32 Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – – X
101 INS XBRL Instance Document – – – – X
101 SCH XBRL Taxonomy Extension Schema Document – – – – X
101 CAL XBRL Taxonomy Calculation Linkbase Document – – – – X
101 LAB XBRL Taxonomy Labels Linkbase Document – – – – X
101 PRE XBRL Taxonomy Presentation Linkbase Document – – – – X
101 DEF XBRL Taxonomy Extension Definition Linkbase Document – – – – X

* Indicates management contract or compensatory plan or arrangement.

iso4217:USD xbrli:shares

	9/30/2017			12/31/2016
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	1,764,389		$	2,015,214
Accounts receivable - trade		100,749			394,000
Inventory, net		735,161			459,885
Prepaid expenses and deposits		71,274			120,614

Total current assets		2,671,573			2,989,713

PROPERTY AND EQUIPMENT,at cost:		180,302			179,627
Less - accumulated depreciation		(87,134	)		(60,784	)

Net property and equipment		93,168			118,843

OTHER ASSETS:
Goodwill		99,799			99,799
Intangible assets, net		1,070,667			1,289,667

Total other assets		1,170,466			1,389,466

TOTAL ASSETS	$	3,935,207		$	4,498,022

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade and accrued liabilities	$	149,922		$	293,922
Accounts payable due to related party		188,217			46,849
Bank Line of Credit		1,000,000			-
Related party convertible note payable, net of discount of $0 and $2,092,156, respectively		1,000,000			907,844
Derivative liability		-			1,832,013

Total current liabilities		2,338,139			3,080,628

LONG TERM LIABILITIES:
Related party convertible notes payable		3,000,000			-

TOTAL LIABILITIES	$	5,338,139		$	3,080,628

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS’ EQUITY (DEFICIT):
Convertible Preferred stock, Series A, $.0001 par value; authorized 595,000 shares; 0 and 100,100 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively	$	-		$	10
Convertible Preferred stock, Series B, $.0001 par value; authorized 324,671 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series B-1, $.0001 par value; authorized 156,231 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series C, $.0001 par value; authorized 355,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series D, $.0001 par value; authorized 36,050,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series E, $.0001 par value; authorized 5,400,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series F, $.0001 par value; authorized 3,300,999 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Convertible Preferred stock, Series G, $.0001 par value; authorized 8,000,000 shares; 0 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
Common stock, $.0001 par value; authorized 300,000,000 shares; 9,182,470 and 8,682,220 shares issued and outstanding, at September 30, 2017 and December 31, 2016		918			868
Additional paid-in capital		25,918,859			21,089,301
Retained Deficit		(27,322,709	)		(19,672,785	)

Total stockholders’ equity (deficit)		(1,402,932	)		1,417,394

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	3,935,207		$	4,498,022

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2017			2016			2017			2016

Revenues	$	93,105		$	146,208		$	474,634		$	1,073,672

Cost of goods sold		33,594			64,651			283,590			374,112

Gross profit		59,511			81,557			191,044			699,560

General and administrative expense		4,544,499			3,887,052			7,432,226			7,896,130

Loss from operations		(4,484,988	)		(3,805,495	)		(7,241,182	)		(7,196,570	)

Other income (expense)
Derivative Gain		779,787			24			1,831,635			24
Interest expense		(376,636	)		(2,869	)		(1,558,389	)		(3,149	)
Gain on settlement of make whole provision		-			-			-			11,000
Loss on debt extinguishment		(681,988	)		-			(681,988	)		-
Debt Forgiveness		-			75,000			-			75,000

Total other income (expense)		(278,837	)		72,155			(408,742	)		82,875

NET LOSS		(4,763,825	)		(3,733,340	)		(7,649,924	)		(7,113,695	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS		(4,763,825	)		(3,733,340	)		(7,649,924	)		(7,113,695	)

Weighted average number of common shares outstanding - basic and diluted		9,087,361			6,977,777			8,880,168			6,285,681

Basic and diluted net loss per share	$	(0.52	)	$	(0.54	)	$	(0.86	)	$	(1.13	)

	For the Nine Months Ended
	9/30/2017			9/30/2016
OPERATING ACTIVITIES:
Net loss	$	(7,649,924	)	$	(7,113,695	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense of debt discount		1,409,790			2,822
Gain on derivative liability		(1,831,635	)		(24	)
Depreciation expense		26,350			25,132
Amortization expense of intangible assets		219,000			97,333
Gain on settlement of make whole provision		-			(11,000	)
Loss on debt extinguishment		681,988			-
Gain on settlement of debt		-			(75,000	)
Stock based compensation		4,829,598			4,866,324
Recovery of inventory allowance		-			(15,383	)
Changes in current assets and liabilities:
Accounts receivable		293,251			81,078
Inventory		(275,276	)		(220,186	)
Prepaid expenses and other current assets		49,340			(35,660	)
Accounts payable and accrued expense		(144,000	)		420,990
Due from related party		141,368			(7,896	)
Deferred revenue		-			(6,000	)

Net cash used in operating activities		(2,250,150	)		(1,991,165	)

INVESTING ACTIVITIES:
Cash paid on furniture and equipment		(675	)		(14,099	)

Net cash used in investing activities		(675	)		(14,099	)

FINANCING ACTIVITIES:
Proceeds from related party convertible note payable		1,000,000			-
Proceeds from bank line of credit		1,000,000			-
Cash repayment on OTCC loan		-			(35,000	)
Proceeds from convertible Note Payable Series 2016		-			3,000,000

Net cash provided by financing activities		2,000,000			2,965,000

NET INCREASE (DECREASE) IN CASH		(250,825	)		959,736

CASH, beginning of period		2,015,214			2,659,734

CASH, end of period	$	1,764,389		$	3,619,470

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months ended September 30:
Interest	$	5,875		$	3,149

Noncash investing and financing activities for the nine months ended September 30:
Common Stock issued for Adaptive Flight asset purchase make whole provision	$	-		$	150,500
Conversion of Series A preferred stock to common stock	$	25		$	-
Conversion of Series C preferred stock to common stock	$	-		$	18
Conversion of Series D preferred stock to common stock	$	-		$	5
Conversion of Series F preferred stock to common stock	$	-		$	5
Conversion of Series G preferred stock to common stock	$	-		$	5
Derivative liability on reset provision of Convertible Notes Payable Series 2016	$	-		$	2,394,974
Stock Issued for November 2015 PIPE Investors as consent shares	$	-		$	50

	September 30, 2017			December 31, 2016
Raw Materials	$	110,765		$	48,014
Work in Progress		287,175			254,258
Finished Goods		346,793			160,819
Less valuation allowance		(9,572	)		(3,206	)
Total	$	735,161		$	459,885

	Level 1		Level 2		Level 3		Total
LIABILITIES:
Derivative liabilities as of September 30, 2017	$	0	$	0	$	0	$	0
Derivative liabilities as of December 31, 2016	$	0	$	0	$	1,832,013	$	1,832,013

Fair value of derivative liabilities as of December 31, 2015	$	0
Fair value of derivative liability at September 30, 2016 recorded as debt discount		2,394,974
Change in fair value of derivative liabilities		(562,961	)
Fair value of derivative liabilities as of December 31, 2016	$	1,832,013
Change in fair value of derivative liabilities		(1,831,635	)
Gain on extinguishment of debt		(378	)
Fair value of derivative liabilities as of September 30, 2017	$	0

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Contractual Life in Years		Aggregate Intrinsic Value
Outstanding – December 31, 2016		442,500		$	5.81	$	1.72
Exercisable – December 31, 2016		407,500		$	5.57	$	1.65	$	0
Granted		5,310,000		$	1.04
Cancelled or Expired		(7,500	)	$	4.18
Outstanding – September 30, 2017		5,745,000		$	1.40		3.57	$	0
Exercisable – September 30, 2017		5,622,500		$	1.35		3.63	$	0

	Number of Warrants		Weighted Average Exercise Price per Share		Weighted Average Contractual Life in Years		Aggregate Intrinsic Value
Outstanding – December 31, 2016		183,737	$	7.35		2.70
Exercisable – December 31, 2016		171,237	$	7.15		2.79	$	0
Granted		2,030,000	$	1.00
Forfeited or Expired		0	$	0
Outstanding – September 30, 2017		2,213,737	$	1.53		4.59	$	0
Exercisable – September 30, 2017		2,213,737	$	1.53		4.59	$	0

	Nine Months Ended September 30,
	2017			2016
Cash flows (used in) operating activities	$	(2,250,150	)	$	(1,991,165	)
Cash flows (used in) investing activities		(675	)		(14,099	)
Cash flows provided by financing activities		2,000,000			2,965,000
Net (decrease) increase in cash and cash equivalents	$	(250,825	)	$	959,736

		Incorporation by Reference
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith
2.1	Agreement and Plan of Merger, dated April 30, 2014, between Drone Aviation Holding Corp. and MacroSolve, Inc.	8-K	5/5/14	2.1	333-150332
2.2	Plan of Merger, effective March 26, 2015, between Drone Aviation Holding Corp. and Drone Aviation Corp.	10-K	3/31/15	10.14	333-150332
2.3	Asset Purchase Agreement, dated July 20, 2015, between Drone AFS Corp. Drone Aviation Holding Corp., Adaptive Flight, Inc., and the shareholders of Adaptive Flight, Inc.	8-K	7/21/15	10.1	333-150332
3.1	Articles of Incorporation of Drone Aviation Holding Corp., dated April 17, 2014	8-K	5/5/14	3.1	333-150332
3.2	Certificate of Amendment to Articles of Incorporation of Drone Aviation Holding Corp., dated October 29, 2015	8-K	10/30/15	3.1	333-150332
3.3	Bylaws of Drone Aviation Holding Corp.	8-K	5/5/14	3.6	333-150332
3.4	Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock	8-K	5/5/14	3.2	333-105332
3.5	Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock	8-K	5/5/14	3.3	333-105332
3.6	Certificate of Designation of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock	8-K	5/5/14	3.4	333-105332
3.7	Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock	8-K	5/5/14	3.5	333-105332
3.8	Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock	8-K	6/5/14	3.1	333-105332
3.9	Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock	8-K	6/5/14	3.2	333-105332
3.10	Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock	8-K	6/3/15	3.3	333-105332
3.11	Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock	8-K	8/28/14	3.1	333-105332
3.12	Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock	8-K	6/3/15	3.4	333-105332
3.13	Certificate of Designation of Preferences, Rights and Limitations of Series G Convertible Preferred Stock	8-K	6/3/15	3.1	333-105332
3.14	Certificate of Correction to the Certificate of Designation of Preferences, rights and Limitations of Series G Convertible Preferred Stock	8-K	6/3/15	3.2	333-105332