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EX-32.2 - CERTIFICATION - ComSovereign Holding Corp.f10q0320ex32-2_comsovereign.htm
EX-32.1 - CERTIFICATION - ComSovereign Holding Corp.f10q0320ex32-1_comsovereign.htm
EX-31.2 - CERTIFICATION - ComSovereign Holding Corp.f10q0320ex31-2_comsovereign.htm
EX-31.1 - CERTIFICATION - ComSovereign Holding Corp.f10q0320ex31-1_comsovereign.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

or

 

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

 

For the transition period from ______________ to________________

 

Commission File No. 333-150332

 

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.)

 

5000 Quorum Drive, STE 400

Dallas, TX

  75254
(Address of principal executive office)   (Zip Code)

 

(904) 834-4400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) 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  ☐

  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  ☒  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    ☒ 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 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 August 7, 2020, there were 140,649,274 shares of registrant’s common stock outstanding.

 

 

 

 

 

EXPLANATORY NOTE

 

Due to certain circumstances related to COVID-19, on May 12, 2020, we filed a Current Report on Form 8-K to avail our company of an extension to file this Quarterly Report on Form 10-Q (this “Quarterly Report”), which was originally due on May 15, 2020. Specifically, we relied on an order issued on March 25, 2020 (which extended and superseded a prior order issued on March 4, 2020) by the U.S. Securities and Exchange Commission (the “SEC”), pursuant to Section 36 of the Securities Exchange Act of 1934, as amended (Release No. 34-88465) (the “Order”), regarding exemptions granted to certain public companies. The Order allows a registrant up to an additional 45 days after the original due date of certain reports required to be filed with the SEC if a registrant’s ability to file such report timely is affected due to COVID-19. 

 

This Quarterly Report could not be filed within the 45-day extension provided by the Order without unreasonable effort and expense due primarily to the delays we experienced in completing and filing our Annual Report on Form 10-K for the period January 10, 2019 (inception) through December 31, 2019. The five acquisitions completed by our subsidiary, ComSovereign Corp., as a privately-held company in 2019, required complex outside valuations and purchase price allocations in order to comply with generally accepted accounting principles in the United States (“U.S. GAAP”). This involved considerable effort, time and expense outside the normal course of our annual public company accounting and reporting practices. These complexities were further compounded by the delays and challenges caused by the COVID-19 pandemic and its impact on our day-to-day operations, including limited access to our facilities and limited support from our staff and professional advisors. In light of the above, we required additional time to review and prepare certain information for our audited financial statements included in our Annual Report on Form 10-K, which delayed our ability to complete and file this Quarterly Report.

 

 

 

TABLE OF CONTENTS

 

    PAGE 
PART I   FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 1
  Condensed Consolidated Statements of Operations for the three months ended March 31 2020 and the period January 10, 2019 (inception date) to March 31, 2019. 2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and the period January 10, 2019 (inception date) to March 31, 2019. 4
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and the period January 10, 2019 (inception date) to March 31, 2019. 5
  Notes to the Interim Unaudited Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4 Controls and Procedures 42
     
PART II OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3. Default Upon Senior Securities 43
Item 4. Mine Safety Disclosures 43
Item 5. Other Information 43
Item 6. Exhibits 43
  Signatures 44

 

i

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEET

 

(Amounts in US$’s, except share data)  March 31,
2020
   December 31,
2019
 
ASSETS  (Unaudited)     
Current Assets        
Cash  $752,113   $812,452 
Accounts receivable   1,812,629    2,168,659 
Receivables – related party   1,595    1,595 
Inventory   4,884,807    4,671,396 
Prepaid expenses   411,021    916,729 
Other current assets   92,594    94,538 
Total Current Assets   7,954,759    8,665,369 
Property and equipment, net   2,710,064    1,458,106 
Operating lease right-of-use assets   3,056,102    2,199,682 
Finance lease right-of-use-assets   17,509     
Intangible assets, net   49,171,931    51,277,482 
Goodwill   56,386,796    56,386,796 
Total Assets  $119,297,160   $119,987,435 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities          
Accounts payable  $3,228,578   $2,245,704 
Accrued interest   572,215    306,445 
Accrued liabilities   1,901,220    1,383,008 
Accrued liabilities – related party   357,547    461,254 
Accrued payroll   1,451,973    1,050,703 
Contract liabilities, current   238,526    149,923 
Accrued warranty liability   192,640    195,138 
Operating lease liabilities, current   509,079    467,979 
Finance lease liabilities, current   10,586     
Line of credit       2,000,000 
Notes payable – related party   1,492,953    1,492,953 
Current portion of long-term debt, net of unamortized discounts and debt issuance costs   10,473,880    5,389,492 
Total Current Liabilities   20,429,197    15,142,599 
Contract liabilities   126,529    152,892 
Operating lease liabilities   2,561,175    1,744,569 
Finance lease liabilities   6,578     
Total Liabilities   23,123,479    17,040,060 
COMMITMENTS AND CONTINGENCIES (Note 21)          
STOCKHOLDERS’ EQUITY          
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively        
Common stock, $0.0001 par value, 300,000,000 shares authorized, 128,541,338 and 128,326,243 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively   12,855    12,833 
Additional paid-in capital   130,803,318    130,553,180 
Accumulated deficit   (34,570,793)   (27,545,255)
Accumulated other comprehensive loss   (21,699)   (23,383)
Treasury stock, at cost, 100,000 shares as of March 31, 2020 and December 31, 2019, respectively   (50,000)   (50,000)
Total Stockholders’ Equity   96,173,681    102,947,375 
Total Liabilities and Stockholders’ Equity  $119,297,160   $119,987,435 

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

1

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

(Amounts in US$’s, except share data) 

For the Three
Months Ended
March 31,

2020

  

January 10,

2019
(Inception) to
March 31,
2019

 
Revenue  $2,485,204   $16,914 
Cost of Goods Sold   1,060,908    6,938 
Gross Profit   1,424,296    9,976 
           
Operating Expenses          
Research and development (1)   288,473    311 
Sales and marketing (1)   14,054    2,159 
General and administrative (1)   4,433,443    803,711 
Depreciation and amortization   2,832,152    233,228 
Total Operating Expenses   7,568,122    1,039,409 
Net Operating Loss   (6,143,826)   (1,029,433)
Other Income (Expense)          
Loss on investment   (24)    
Foreign currency transaction gain   90,818     
Interest expense   (973,169)   (31,234)
Gain on the sale of assets   663     
Total Other Expenses   (881,712)   (31,234)
Net Loss Before Income Taxes   (7,025,538)   (1.060,667)
Deferred Tax Benefit       289,990 
Net Loss  $(7,025,538)  $(770,677)
Loss per common share:          
Basic  $(0.05)  $(0.03)
Diluted  $(0.05)  $(0.03)
Weighted-average shares outstanding:          
Basic   128,365,109    28,065,385 
Diluted   128,365,109    28,065,385 

 

(1) These are exclusive of depreciation and amortization

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

2

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Unaudited)

 

(Amounts in US$’s)  For the Three
Months Ended
March 31,
2020
   January 10,
2019
(Inception) to
March 31,
2019
 
Net Loss  $(7,025,538)  $(770,677)
Other Comprehensive Loss:          
Foreign currency translation adjustment   (21,699)    
Total Comprehensive Loss  $(7,047,237)  $(770,677)

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

3

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019

 

(Amounts in US$’s, except  Preferred Stock   Common Stock   Additional
Paid-In
   Accumulated
Other
Comprehensive
    Treasury   Accumulated   Total
Stockholders’
 
share data)  Shares   Amount   Shares   Amount   Capital   Loss   Shares   Deficit   Equity 
December 31, 2019      $    128,326,243   $12,833   $130,553,180   $(23,383)  $(50,000)  $(27,545,255)  $102,947,375 
Issuance of common stock for settlement of accounts payable           165,095    17    193,143                193,160 
Issuance of common stock for debt issue costs             50,000    5    56,995                57,000 
Foreign currency translation adjustment                          1,684            1,684 
Net loss                               (7,025,538)   (7,025,538)
March 31, 2020      $    128,541,338   $12,855   $130,803,318   $(21,699)  $(50,000)  $(34,570,793)  $96,173,681 

 

 

(Amounts in US$’s, except  Preferred Stock   Common Stock   Additional
Paid-In
   Accumulated
Other
Comprehensive
    Treasury   Accumulated   Total
Stockholders’
 
share data)  Shares   Amount   Shares   Amount   Capital   Loss   Shares   Deficit   Equity 
January 10, 2019 (Inception)      $       $   $   $   $   $   $ 
Issuance of founder shares at inception           27,890,000    2,789                     2,789 
Issuance of preferred stock for VEO, Inc. acquisition   1,500,000    150            13,214,850                13,215,000 
Issuance of preferred stock for InduraPower, Inc. acquisition   800,000    80            7,047,920                7,048,000 
Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition   300,000    30            2,642,970                2,643,000 
Common stock issued as restricted stock awards           80,000    8    351,992                352,000 
Net loss                               (770,677)   (770,677)
March 31, 2019   2,600,000   $260    27,970,000   $2,797   $23,257,739   $   $   $(770,677)  $22,490,111 

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

4

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

(Amounts in US$’s) 

For the Three
Months Ended

March 31,
2020

   January 10,
2019
(Inception) to
March 31,
2019
 
Cash flows from operating activities:        
Net loss  $(7,025,538)  $(770,677)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   223,982    17,140 
Amortization   2,608,170    216,088 
Amortization of right-of-use asset   90,200    8,782 
Gain on the sale of assets   (663)    
Amortization of debt discounts and debt issuance costs   633,751     
Other, net   (138,877)   352,000 
Changes in assets and liabilities:          
Accounts receivable   356,030    (74,204)
Inventory   (45,305)   (1,161)
Prepaids   (572,283)   (1,248)
Other current assets   (1,944)   (288,766)
Accounts payable   1,155,034    72,536 
Accrued liabilities   783,982    70,630 
Operating lease liabilities   88,914    9,572 
Advances from related party   (103,707)   579,401 
Other current liabilities   487,375    1,052 
Net cash (used in) provided by operating activities   (490,252)   34,295 
Cash flows from investing activities:          
Acquisition of net assets   (253,773)    
Cash acquired in acquisitions       347,342 
Proceeds from disposal of property and equipment   663     
Net cash (used in) provided by investing activities   (253,110)   347,342 
Cash flows from financing activities:          
Principal payment on finance lease   (845)    
Proceeds from issuance of debt   3,047,971     
Repayment of debt   (2,365,787)   (10,232)
Net cash provided by financing activities   681,339     
Net (decrease)/increase in cash and cash equivalents   (60,339)   371,405 
Cash and cash equivalents, beginning of period   812,452     
Cash and cash equivalents, end of period  $752,113   $371,405 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period:          
Taxes  $   $ 
Interest   41,492     
Non-cash investing and financing activities:          
Issuance of preferred stock for VEO, Inc. acquisition       13,215,000 
Issuance of preferred stock for InduraPower, Inc. acquisition       7,048,000 
Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition       2,643,000 
Recognition of right-of-use asset and liability rent abatement   101,438    140,210 
Debt incurred to sellers for Fast Plastic Parts, LLC and Spring Creek Manufacturing, Inc. acquisition   575,574     
Issuance of  founder shares at inception       2,789 
Common stock issued for payment of accounts payable   193,160     
Common stock issued as debt issuance costs   57,000     

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

5

 

  

COMSOVEREIGN HOLDING CORP.

Notes to Consolidated Financial Statements

March 31, 2020

(Unaudited)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of Business

 

COMSovereign Holding Corp., formerly known as Drone Aviation Holding Corp. (“the “Company”), provides technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. The Company has assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. The Company focuses on special capabilities, including signal modulations, antennae, software, hardware, and firmware technologies that enable increasingly efficient data transmission across the radio-frequency spectrum. The Company’s product solutions are complemented by a broad array of services including technical support, systems design and integration, and sophisticated research and development programs. Since the Company’s business operations are in this early stages and the Company has a limited operating history as a consolidated company, the Company may be susceptible to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises as outlined in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. While the Company competes globally on the basis of its innovative technology, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of its global customer base and distribution, the Company’s  primary focus is on the North American telecom infrastructure and service market. The Company believes it is in a unique position to rapidly increase its near-term domestic sales as it is among the few U.S.-based providers of telecommunications equipment and services.

 

Corporate History 

 

The Company was incorporated in Nevada on April 17, 2014. On June 3, 2014, the Company acquired Drone Aviation Corp. through a share exchange transaction, and on March 26, 2015, Drone Aviation Corp. merged with and into the Company. As a result of the share exchange and merger with Drone Aviation Corp., the Company acquired Drone Aviation Corp.’s subsidiary, Lighter Than Air Systems Corp., which does business under the name Drone Aviation. 

 

On November 27, 2019, the Company completed the acquisition (the “ComSovereign Acquisition”) of ComSovereign Corp., a Delaware corporation (“ComSovereign”) in a stock-for-stock transaction with a total purchase price of approximately $75 million. The ComSovereign Acquisition was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquirer and the Company as the accounting acquiree. As a result, our condensed consolidated financial statements included in this Quarterly Report are those of ComSovereign for the period January 10, 2019 (inception) to March 31, 2019 and those of our company for the three-month period ended March 31, 2020. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only for the three-month period ended March 31, 2020.

 

ComSovereign Corp. was incorporated in the state of Delaware on January 10, 2019 and commenced operations through a series of acquisitions. 

 

On January 31, 2019, ComSovereign acquired the capital stock of VEO, a San Diego, California-based research and development company innovating Silicon Photonics (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.

 

6

 

 

On January 31, 2019, ComSovereign acquired the capital stock of InduraPower Inc. (“InduraPower”), a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries.  

 

On March 4, 2019, ComSovereign acquired the capital stock of Silver Bullet Technology, Inc. (“Silver Bullet”), a California-based engineering firm that designs and develops next generation network systems and components, including large scale network protocol development, software-defined radio systems and wireless network designs.  

 

On April 1, 2019, ComSovereign acquired the equity securities of DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), a Dallas-based manufacturer of high-capacity microwave and millimeter 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 by 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.

 

On April 1, 2019, ComSovereign acquired the capital stock of Lextrum Inc. (“Lextrum”), a Tucson, Arizona-based developer of full-duplex wireless technologies and components, including multi-reconfigurable RF antennae and software programs. This technology enables the doubling of a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies. 

 

On March 6, 2020, the Company’s newly-formed subsidiary, Sovereign Plastic LLC (“Sovereign Plastic”), acquired substantially all of the assets of a Colorado Springs, Colorado-based manufacturer of plastic and metal components to third-party manufacturers. The Company acquired its Sovereign Plastic business to increase its operating margins by reducing the manufacturing and production costs of its telecom products. Sovereign Plastic will also primarily operate as the material, component manufacturing and supply chain source for all of the Company’s subsidiaries. The Company does not expect the revenues of Sovereign Plastic from sales to third parties to be material. 

 

Each of the Company’s subsidiaries was acquired to address a different opportunity or segment within the North American telecom infrastructure and service market. 

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and with the rules and regulations of the Security and Exchange Commission (SEC) for interim financial information. As a result, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial positions, results of operations and cash flows for such periods. The results for the three months ended March 31, 2020 are not necessarily indicative of the Company’s results of operations, financial position or cash flows that may be expected for the full fiscal year or future operating periods. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

The unaudited consolidated financial statements as of, and for the period ended March 31, 2020 include the accounts of the Company and its wholly-owned subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO, InduraPower and Sovereign Plastic. All intercompany transactions and accounts have been eliminated.

 

Reclassifications

 

Certain December 31, 2019 amounts have been reclassified to be consistent with the current period presentation. 

 

7

 

 

Use of Estimates

 

The preparation of unaudited financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments 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. Estimates are based on historical factors, current circumstances and the experience and judgment of management. The Company evaluates its estimates, assumptions and judgments on an ongoing basis and may employ outside experts to assist in making these evaluations. Hence, changes in such estimates, based on more accurate information or different assumptions or conditions make cause actual results to differ from those estimates.

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There has been no material changes in the Company’s significant accounting policies as of and for the three months ended March 31, 2020, 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, 2019.

 

Accounting Standards Not Yet Adopted

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This guidance provides optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments that use LIBOR as a reference rate and is effective March 12, 2020 through December 31, 2022. The Company is currently evaluating the potential impact ASU 2020-04 will have on the Company’s condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. ASU 2019-12 will be effective for the Company in the fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the potential impact that adopting ASU 2019-12 will have on the Company’s condensed consolidated financial statements.

 

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) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, and ASU 2019-05 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This standard will become effective for interim and annual periods beginning after December 15, 2022 and earlier adoption is permitted. The Company is evaluating the impact the adoption of Topic 326 will have on the Company’s condensed consolidated financial statements.

 

3. GOING CONCERN

 

On August 27, 2014, the FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which 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 unaudited consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the three months ended March 31, 2020, the Company generated negative cash flows from operations of $490,252 and had an accumulated deficit of $34,570,793 and negative working capital of $12,474,438.

 

Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets and secure lines of credit. The Company anticipates an approximately $13,000,000 offering of equity securities in the third quarter of 2020.

 

The Company’s fiscal operating results, accumulated deficit, and negative working capital, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. However, the Company believes the fundraising actions outlined above, and its future operating cash flows, will enable it to meet its liquidity requirements through June 2021. There can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.

  

8

 

 

4. REVENUE

 

The following table is a summary of the Company’s timing of revenue recognition for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019:

  

(Amounts in US$’s)  March 31,
2020
   January 10,
2019
(Inception) to
March 31,
2019
 
Timing of revenue recognition:        
Services and products transferred at a point in time  $2,162,038   $1,203 
Services and products transferred over time   323,166    15,711 
Total revenue  $2,485,204   $16,914 

  

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, 2020 and the period January 10, 2019 (Inception) to March 31, 2019:

 

(Amounts in US$’s) 

For the Three
Months Ended

March 31,
2020

  

January 10,
2019
(Inception) to

March 31,
2019

 
Revenue by products and services:        
Products  $1,874,350   $1,203 
Services   610,854    15,711 
Total revenue  $2,485,204   $16,914 

 

Revenue by geographic destination consisted of the following for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019:

 

(Amounts in US$’s)  For the Three
Months Ended
March 31,
2020
  

January 10,
2019
(Inception) to

March 31,
2019

 
Revenue by geography:        
North America  $2,189,676   $16,914 
International   295,528     
Total revenue  $2,485,204   $16,914 

 

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, 2020, the Company did not have a contract assets balance.

 

The following table is a summary of the Company’s contract liabilities related to contracts with customers for the three months ended March 31, 2020.

 

(Amounts in US$’s)   Total 
Balance at December 31, 2019  $302,815 
Increase   62,240 
Balance at March 31, 2020  $365,055 

 

The increase in contract liabilities during the three months ended March 31, 2020 was primarily due to invoiced amounts that did not yet meet the revenue recognition criteria, partially offset by the revenue recognition criteria being met for previously deferred revenue. The amount of revenue recognized in the three months ended March 31, 2020 that was included in the prior period contract liability balance was $65,471. This revenue consisted of services provided to customers who had been invoiced prior to the current year.

 

9

 

  

5. EARNINGS (LOSS) PER SHARE

 

The Company accounts for earnings or loss per share pursuant to 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) 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.

 

There were no adjustments to net loss, the numerator, for purposes of computing basic earnings per share. The following table sets out the computation of basic and diluted income (loss) per share:

 

(Amounts in US$’s, except share data)  For the Three
Months Ended
March 31,
2020
  

January 10,
2019

(Inception) to
March 31,
2019

 
Numerator:        
Net loss  $(7,025,538)  $(770,677)
           
Numerator for basic earnings per share - loss available to common shareholders  $(7,025,538)  $(770,677)
           
Denominator:          
Denominator for basic earnings per share - weighted average common shares outstanding   128,365,109    28,065,385 
Dilutive effect of warrants and options        
Denominator for diluted earnings per share - weighted average common shares outstanding and assumed conversions   128,365,109    28,065,385 
Basic loss per common share  $(0.05)  $(0.03)
Diluted loss per common share  $(0.05)  $(0.04)

 

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 dilutive in periods of net loss available to common shareholders. Stock options 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, regardless of whether the Company is in a period of net loss available to common shareholders.

  

6. CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents are represented by operating accounts or money market accounts maintained with insured financial institutions, including all short-term, highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of March 31, 2020 and December 31, 2019.

  

Cash and cash equivalents consisted of the following as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)  March 31, 2020   December 31,
2019
 
Cash and cash equivalents  $752,113   $812,452 
Restricted cash included in other assets        
Total cash, cash equivalent, and restricted cash in the Statement of Cash Flows  $752,113   $812,452 

 

10

 

 

7. ACCOUNTS RECEIVABLE, NET

 

Trade accounts receivable consist of amounts due from the sale of the Company’s products. Such accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 to 45 days of receipt of the invoice. The Company provides 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.

 

Accounts receivable consisted of the following as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
Account receivables  $2,748,626   $2,859,660 
Less: Allowance for doubtful accounts   (935,997)   (690,830)
Total account receivables  $1,812,629   $2,168,659 

 

8. INVENTORY

 

Inventory is valued at the lower of cost and net realizable value (“NRV”). The cost of inventory is calculated on a standard cost basis, which approximates weighted average actual cost. NRV is determined as the market value for finished goods, replacement cost for raw materials and finished goods market value less cost to complete for work in progress inventory. The Company regularly reviews inventory quantities on hand and records an impairment for excess and obsolete inventory based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question. Indirect manufacturing costs and direct labor expenses are allocated systematically to the total production inventory.

 

Inventory consisted of the following as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)  March 31, 2020   December 31,
2019
 
Raw materials  $1,148,709   $1,041,256 
Work in progress   1,206,911    1,566,147 
Finished goods   3,538,127    3,060,518 
Total inventory   5,893,747    5,667,921 
Reserve   (1,008,940)   (996,525)
Total inventory, net  $4,884,807   $4,671,396 

  

9. PREPAID

 

Prepaid expenses consisted of the following as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
Prepaid products and services  $352,909   $873,617 
Prepaid rent and security deposit   58,112    43,112 
   $411,021   $916,729 

  

11

 

 

10. PROPERTY AND EQUIPMENT, NET

 

Property and equipment are stated at cost when acquired. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows:

 

Asset Type   Useful Life
Test equipment, research and development equipment   4-5 years
Computer hardware   2 years
Production fixtures   3 years
Leasehold improvements   5 years
Other   3-5 years

 

Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.

 

Property and equipment, net consisted of the following as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
Shop machinery and equipment  $9,451,941   $8,100,667 
Computers and electronics   571,692    558,561 
Office furniture and fixtures   303,401    341,214 
Leasehold improvements   222,332    222,332 
    10,549,366    9,222,774 
Less - accumulated depreciation   (7,839,302)   (7,764,668)
   $2,710,064   $1,458,106 

 

For the three months ended March 31, 2020, the Company did not invest in capital expenditures.

 

The Company recognized $223,981 and $17,140 of depreciation expense for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019, respectively.

  

11. LEASES

 

Operating Leases

 

The Company has operating leases for office, manufacturing, and warehouse space. Amounts recognized as of March 31, 2020 and December 31, 2019 for operating leases were as follows:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
ROU assets  $3,056,102   $2,199,682 
Lease liability  $3,070,254   $2,212,548 

 

12

 

 

During the quarter ended March 31, 2020, the Company recognized 3-months of rent abatement for its executive office located at 5000 Quorum Drive, Dallas, TX 75254, resulting in a reduction of the right-of-use asset and lease liability by $101,438.

 

As part of the Acquired Business transaction on March 6, 2020, the Company assumed a lease for 23,300 square feet of flexible office space with a remaining term of approximately 62 months that will expire on May 30, 2025. A right-of-use asset and lease liability for $1,048,058 was recorded on March 6, 2020. Monthly payments will range from $17,600 to $20,903 during the life of the lease. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate based on other leases with similar terms. The lease agreement has no renewal option.

 

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

 

(Amounts in US$’s)  March 31,
2020
 
ROU Asset – December 31, 2019  $2,199,682 
Increase   1,048,058 
Decrease   (101,438)
Amortization   (90,200)
ROU Asset – March 31, 2020  $3,056,102 
      
Lease liability – December 31, 2019  $2,212,548 
Increase   1,048,058 
Decrease   (101,438)
Amortization   (88,914)
Lease liability – March 31, 2020  $3,070,254 
      
Lease liability – short term  $509,079 
Lease liability – long term   2,561,175 
Lease liability – total  $3,070,254 

 

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, 2020 and December 31, 2019, respectively:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
Weighted average remaining lease term   4.89 years    4.56 years 
Weighted average discount rate   6.07%   6.50%

 

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 Consolidated Balance Sheet as of March 31, 2020:

 

(Amounts in US$’s)  Operating
Leases
 
     
Remainder of 2020  $471,035 
2021   741,696 
2022   660,091 
2023   671,761 
2024   635,306 
Thereafter   371,116 
Total minimum lease payments   3,551,005 
Less: effect of discounting   (480,751)
Present value of future minimum lease payments   3,070,254 
Less: current obligations under leases   (509,079)
Long-term lease obligations  $2,561,175 

 

13

 

 

Finance Leases

 

As part of the Acquired Business transaction on March 6, 2020, the Company assumed a finance lease for certain equipment with a remaining term of approximately 20 months. The finance lease includes a bargain purchase option of $1 for the equipment at the end of the term on October 1, 2021. A right-of-use asset and lease liability for $18,009 was recorded on March 6, 2020. Monthly payments are $964.76 during the life of the lease, excluding the bargain purchase option. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate.

 

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

 

(Amounts in US$’s)  March 31,
2020
 
ROU Asset – December 31, 2019  $ 
Increase   18,009 
Decrease    
Amortization   (500)
ROU Asset – March 31, 2020  $17,509 
      
Lease liability – December 31, 2019  $ 
Increase   18,009 
Decrease    
Interest accretion   120 
Principle payment   (965)
Lease liability – March 31, 2020  $17,164 
      
Lease liability – short term  $10,586 
Lease liability – long term   6,578 
Lease liability – total  $17,164 

 

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of March 31, 2020 and December 31, 2019, respectively:

 

(Amounts in US$’s)  March 31,
2020
   December 31,
2019
 
Weighted average remaining lease term   1.58 years     
Weighted average discount rate   8%    

 

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value and has established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

 

Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable market-based inputs or observable inputs that are corroborated by market data; and

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of March 31, 2020 approximated their fair value due to their short-term nature.

  

14

 

 

13. BUSINESS ACQUISITIONS

 

The Company’s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill.

 

For the fiscal year 2019, the Company recorded acquisitions as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

During the three months ended March 31, 2020, the Company recorded the following acquisitions.

 

Fast Plastic Parts, LLC and Spring Creek Manufacturing, Inc. Acquisition

 

On March 6, 2020, the Company completed the acquisition of the net assets of Fast Plastic Parts, LLC and 100% of the shares of common stock of Spring Creek Manufacturing, Inc. (together, the “Acquired Business”). The consideration paid was the purchase price of $829,347, representing cash paid on the closing date of $253,773 and short-term debt incurred to the sellers of $575,574. Based in Colorado Springs, Colorado, the acquired business occupies a 23,300-square-foot manufacturing facility that houses a full-production machine shop, a comprehensive line of state-of-the-art plastic injection molding machinery, as well as light-assembly fulfilment and packaging lines serving customers 24x7. To finance the cash paid on the closing date and a portion of the short term debt incurred, the Company entered into a new promissory note with an unaffiliated lender in the principal amount of $500,000 for proceeds of $446,000 that matures on December 5, 2020 and 50,000 shares of common stock. See Note 15 for further discussion of the promissory note. The Company expensed acquisition related costs of $16,592 in the three months ended March 31, 2020, which is included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.

 

The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the consolidated balance sheet at March 31, 2020:

 

(Amounts in US$’s)  Fair Value 
Inventory  $168,106 
Prepaid expenses   66,575 
Property & equipment   1,365,319 
Operating lease right-of-use-assets   1,048,058 
Finance lease right-of-use assets   18,009 
Intangible assets:     
Customer relationships   500,226 
Total assets  $3,166,293 
Current portion of long-term debt   1,270,879 
Operating lease liabilities, current   166,919 
Finance lease liabilities, current   6,578 
Operating lease liabilities, net of current portion   881,139 
Finance lease liabilities, net of current portion   11,431 
Total purchase consideration  $829,347 

 

This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of August 10, 2020.

 

15

 

 

VEO, Inc.

 

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of VEO. At the effective date of the acquisition, all of the outstanding capital stock of VEO that was issued and outstanding at such time was exchanged for 1,500,000 unregistered Preferred Series A shares of ComSovereign.

 

Purchase consideration has been evaluated based on the business enterprise valuation of VEO. The shares of Preferred Series A issued to acquire VEO were valued at $8.81 per share (non-marketable basis).

  

VEO Purchase Price

 

(Amounts in US$’s, except share data)  Consideration 
Number of Preferred Series A paid   1,500,000 
Per share value  $8.81 
Purchase price  $13,215,000 

 

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of January 31, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Cash  $55,261 
Fixed and other long-term assets   4,000 
Assumed liabilities   (40,531)
Intangible assets and goodwill:     
Technology   6,410,000 
Goodwill   6,786,270 
Total intangible assets and goodwill   13,196,270 
Total Consideration  $13,215,000 

 

InduraPower, Inc.

 

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholders of InduraPower. At the effective date of the acquisition, all of the outstanding capital stock of InduraPower that was issued and outstanding at such time was exchanged for 800,000 unregistered shares of Preferred Series A of ComSovereign.

 

Purchase consideration has been evaluated based on the business enterprise valuation of InduraPower. The shares of Preferred Series A issued to acquire InduraPower were valued at $8.81 per share (non-marketable basis).

 

InduraPower Purchase Price

 

(Amounts in US$’s, except share data)  Consideration 
Number of Preferred Series A paid   800,000 
Per share value  $8.81 
Purchase price  $7,048,000 

 

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of January 31, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Cash  $18,791 
Debt-free net working capital (excluding cash)   263,459 
Fixed and other long-term assets   97,384 
Assumed liabilities   (1,240,097)
Intangible assets and goodwill:     
Technology   1,000,000 
Goodwill   6,908,463 
Total intangible assets and goodwill   7,908,463 
Total Consideration  $7,048,000 

  

16

 

 

Silver Bullet Technology, Inc.

 

On March 4, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of Silver Bullet. At the effective date of the acquisition, all of the outstanding capital stock of Silver Bullet that was issued and outstanding at such time was exchanged for 300,000 unregistered shares of Preferred Series A of ComSovereign.

 

Purchase consideration has been evaluated based on the business enterprise valuation of Silver Bullet. The shares of Preferred Series A issued to acquire Silver Bullet were valued at $8.81 per share (non-marketable basis).

 

Silver Bullet Purchase Price

 

(Amounts in US$’s, except share data)  Consideration 
Number of Preferred Series A paid   300,000 
Per share value  $8.81 
Purchase price  $2,643,000 

 

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of March 4, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Cash  $273,290 
Debt-free net working capital (excluding cash)   103,537 
Fixed and other long-term assets   21,000 
Liabilities assumed   (84,382)
Intangible assets and goodwill:     
Technology   210,000 
Trade name   200,000 
Customer relationships   400,000 
Goodwill   1,519,555 
Total intangible assets and goodwill   2,329,555 
Total Consideration  $2,643,000 

 

DragonWave-X LLC and Lextrum, Inc.

 

On April 1, 2019, ComSovereign entered into a stock-for-stock exchange with the owner of DragonWave and Lextrum. At the effective date of the acquisition, all of the equity interests of DragonWave and Lextrum were exchanged for an aggregate of 13,237,149 shares of ComSovereign’s restricted common stock.

 

Purchase consideration has been evaluated based on the business enterprise valuation of DragonWave and Lextrum. The shares of common stock issued to acquire DragonWave and Lextrum were valued at $4.40 per share (non-marketable basis).

 

DragonWave and Lextrum Purchase Price

 

(Amounts in US$’s, except share data)  Consideration 
Number of common stock paid   13,237,149 
Per share value  $4.40 
Purchase price  $58,243,456 
DragonWave  $42,081,392 
Lextrum  $16,162,064 

17

 

 

DragonWave

 

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of April 1, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Cash  $1,274,072 
Debt-free net working capital (excluding cash)   (1,099,194)
Note payable   (5,690,000)
Fixed and other long-term assets   2,455,714 
Intangible assets:     
Technology   13,750,000 
Trade name   4,210,000 
Customer relationships   13,080,000 
Goodwill   14,100,800 
Total intangible assets and goodwill   45,140,800 
Total Consideration  $42,081,392 

 

Lextrum

 

The allocation of the total purchase price to the acquired tangible and intangible assets and liabilities assumed by ComSovereign based on the fair values as of April 1, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Cash  $8,105 
Debt-free net working capital (excluding cash)   (103,611)
Fixed and other long-term assets    
Intangible assets:     
Technology   11,430,000 
Goodwill   4,827,570 
Total intangible assets   16,257,570 
Total Consideration  $16,162,064 

 

Historical Drone Aviation Holding Corp

 

The allocation of the total purchase price to Drone Aviation Holding Corp’s acquired tangible and intangible assets and assumed liabilities based on the fair values as of November 27, 2019 was as follows:

 

(Amounts in US$’s)  Fair Value 
Working capital  $2,399,800 
Other assets   220,672 
Intangible assets and goodwill:     
Intellectual property   3,729,537 
Trade name   1,233,204 
Customer relationships   1,630,792 
Noncompete   937,249 
Goodwill   18,106,237 
Total intangible assets and goodwill   25,637,019 
Total Consideration  $28,257,491 

 

14. 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.

 

18

 

 

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. 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. During the three months ended March 31, 2020, the Company recorded no impairments.

 

Investments

 

An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless (1) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of the fair value up to (or beyond) the cost of the investment; and (2) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other that temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and fair value.

 

The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2020:

 

(Amounts in US$’s)  Total 
Balance at December 31, 2019  $56,386,796 
Balance at March 31, 2020  $56,386,796 

 

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of March 31, 2020 and December 31, 2019:

 

(Amounts in US$’s)   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Definite-lived intangible assets:            
Trade names  $5,643,204   $(489,222)  $5,153,982 
Technology   32,800,000    (4,308,333)   28,491,667 
Customer relationships   15,110,792    (2,054,894)   13,055,898 
Intellectual property   3,729,537    (51,799)   3,677,738 
Noncompete   937,249    (39,052)   898,197 
Total definite-lived intangible assets at December 31, 2019  $58,220,782   $(6,943,300)  $51,277,482 
Trade names  $5,643,204   $(690,765)  $4,952,438 
Technology   32,802,395    (5,675,165)   27,127,230 
Customer relationships   15,611,018    (2,822,136)   12,788,882 
Intellectual property   3,729,537    (207,196)   3,522,340 
Noncompete   937,249    (156,208)   781,041 
Total definite-lived intangible assets at March 31, 2020  $58,723,403   $(9,551,470)  $49,171,931 

 

Amortization expense of intangible assets was $2,608,170 and $216,088 for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019, respectively.

 

As of March 31, 2020, assuming no additional amortizable intangible assets, the expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows:

 

   Estimated 
(Amounts in US$’s)   The remainder
of 2020
   2021   2022   2023   2024 
Amortization expense  $7,852,075   $10,446,204   $10,016,632   $10,016,632   $7,961,738 

 

   Estimated 
(Amounts in US$’s)   2025   2026 
Amortization expense  $2,559,307   $319,343 

 

19

 

 

15. DEBT AGREEMENTS

 

Beneficial Conversion Features and Warrants

 

The Company evaluates the conversion feature of convertible debt instruments to determine whether the conversion feature was beneficial as described in ASC 470-30, Debt with Conversion and Other Options. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in capital. The Company calculates the fair value of warrants with the convertible instruments using the Black-Scholes valuation model.

 

Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value of the BCF and warrants are recorded as a debt discount and is accreted over the expected term of the convertible debt as interest expense.

 

Debt Discounts

 

The Company records debt discounts as a deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet with the respective debt discount amortized in interest expense on its Consolidated Statement of Operations. In connection with the issuance of certain notes payable and senior convertible debentures, the Company, or its subsidiaries, issued warrants to purchase shares of its common stock and has BCFs. The warrants are exercisable at various exercise prices per share. The Company evaluated the terms of these warrants at issuance and concluded that they should be treated as equity. The fair value of the warrants was determined by using the Black-Scholes model and was recorded as a debt discount offsetting the carrying value of the debt obligation in the Consolidated Balance Sheet.

 

Debt Issuance Costs

 

The Company presents debt issuance costs as a direct deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet and amortizes these costs over the term of the related debt liability using the straight-line method, which approximates the effective interest method. Amortization is recorded in interest expense on the Consolidated Statement of Operations.

  

20

 

 

Long-term debt consisted of the following as of March 31, 2020 and December 31, 2019:

 

      March 31, 2020   December 31, 2019 
(Amounts in US$’s)  Maturity
Date
  Amount
Outstanding
   Interest
Rate
   Amount
Outstanding
   Interest
Rate
 
Secured Notes Payable                   
Secured note payable*  February 28, 2020  $788,709    8.5%  $788,709    8.5%
Secured note payable*  March 1, 2022   202,519    9.0%   224,288    9.0%
Secured note payable*  September 1, 2021   19,106    7.9%   21,571    7.9%
Secured note payable  November 26, 2021   2,000,000    9.0%   2,000,000    9.0%
Secured note payable  December 26, 2020   542,857    78.99%        
Secured note payable  June 1, 2020   979,381    5.0%        
Secured note payable  August 31, 2020   2,007,971    5.0%        
Total secured notes payable      5,032,572         3,034,568      
                        
Notes Payable                       
Equipment financing loan  September 15, 2020   2,034    8.8%   3,828    8.8%
Note payable*  July 9, 2019   200,000    18.0%   200,000    18.0%
Note payable*  September 1, 2019   200,000    18.0%   200,000    18.0%
Note payable  September 30, 2020   500,000    10.0%   500,000    10.0%
Note payable  September 30, 2020   175,000    10.0%   175,000    10.0%
Note payable  March 30, 2020   5,000,000    10.0%   5,000,000    10.0%
Note payable*  July 9, 2019   200,000    18.0%   200,000    18.0%
Notes payable*  December 6, 2019   200,100    18.0%   450,100    18.0%
Note payable*  June 30, 2020   409,586    0%        
Note payable*  June 30, 2020   165,987    0%        
Note payable  September 4, 2020   500,000    0%        
Note payable  February 16, 2023   86,866    3.0%        
Equipment financing loan*  November 9, 2023   63,652    8.5%        
Equipment financing loan*  December 19, 2023   93,993    6.7%        
Equipment financing loan*  January 17, 2024   43,144    6.7%        
Total notes payable      9,348,333         6,728,928      
                        
Senior Convertible Debentures                       
Senior convertible debenture*  December 31, 2019   100,000    15.0%   100,000    15.0%
Senior convertible debenture  December 31, 2019       15.0%   25,000    15.0%
Senior convertible debenture  December 31, 2021   250,000    10.0%   250,000    10.0%
Total senior convertible debentures      350,000         375,000      
Total long-term debt      14,730,905         10,138,496      
Less unamortized discounts and debt issuance costs      (4,257,025)        (4,749,004)     
Total long-term debt, less discounts and debt issuance costs      10,473,880         5,389,492      
Less current portion of long-term debt      (10,473,880)        (5,389,492)     
Debt classified as long-term debt     $        $      

 

*Note is in default. Refer to further discussion below.

 

21

 

 

Secured Notes Payable

 

In August 2016, InduraPower entered into a promissory note not to exceed the principal amount of $550,000 bearing interest at 8.5% per annum with a maturity date of August 31, 2018. InduraPower could draw funds under the note through February 28, 2017. Interest on this note was payable monthly and the full principal balance was due at maturity. On September 11, 2019, the note was amended with both parties agreeing that the outstanding balance of $813,709 would be due on February 28, 2020. As of March 31, 2020, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note is currently past due. This promissory note is secured by substantially all of the assets of InduraPower.

 

In August 2016, InduraPower entered into a promissory note in the principal amount of $450,000 that bears interest at 9.0% per annum and matures on March 1, 2022. Accrued interest only payments were due monthly beginning October 1, 2016 through March 1, 2017. Monthly payments of $9,341 for interest and principal are due on this note for the following 60 consecutive months. As of March 31, 2020, an aggregate principal amount of $202,519 was outstanding under this note. This promissory note is secured by all assets, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses those covenants, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The outstanding balance is presented as a current liability as of March 31, 2020. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

 

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 with an interest rate of 7.785% per annum and a maturity date of September 1, 2021. Beginning April 1, 2017, equal monthly payments of $1,011 for interest and principal are due on the note for 60 consecutive months. As of March 31, 2020, an aggregate principal amount of $19,106 was outstanding under this note. This promissory note is secured by business equipment, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses those covenants, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The outstanding balance is presented as a current liability as of March 31, 2020. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

 

In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2,000,000 loan that bears interest at the rate of 9% per annum and matures 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 is 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. As of March 31, 2020, an aggregate principal amount of $2,000,000 was outstanding under this note. In connection with this loan, DragonWave incurred $20,000 of debt discounts and $4,700,000 of debt issuance costs. The debt issuance costs were the result of the issuance of 1,050,000 shares of common stock of the Company and a cash payment of $80,000. For the three months ended March 31, 2020, $590,000 of these costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of March 31, 2020, there were $16,667 of debt discounts and $3,916,667 of debt issuance costs remaining.

 

On February 26, 2020, the Company entered into a $600,000 secured business loan bearing interest at 78.99% per annum which matures on December 26, 2020. Principal and interest payments of $19,429 are due weekly. The loan is secured by the assets of the Company.  As of March 31, 2020, an aggregate principal amount of $542,857 was outstanding under this note.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed a secured loan with FirstBank in the principal amount of $979,381 bearing interest at 5% per annum and with a maturity date of June 1, 2020. The loan is secured by certain assets of the Company’s subsidiary, Sovereign Plastic. This loan is subjected to clauses, whereby Sovereign Plastic is required to meet certain financial and non-financial terms at the end of each fiscal year. Payments in the amount of $22,404 for interest and principal are due over the next 2 months and the balance is due at maturity. As of March 31, 2020, an aggregate principal amount of $979,381 was outstanding under this loan. On August 5, 2020, the maturity date of this loan was extended to September 15, 2020.

 

On March 19, 2020, the Company entered into a secured loan agreement in the amount of $2,007,971 bearing interest at 5% per annum with a maturity date of August 31, 2020. Interest payments of $8,428 are due monthly, with the full principal amount due at maturity. The loan is secured by certain intellectual property assets of the Company. The proceeds of the note payable were used to repay the balance of the CNB Note (revolving line of credit.) that was entered into in 2017. As of March 31, 2020, an aggregate principal amount of $2,007,971 was outstanding under this loan.

  

22

 

 

Notes Payable

  

InduraPower has a financing loan for certain of its equipment that bears interest at 8.775% per annum and is due on September 15, 2020. Principal and interest payments of $1,872 are due quarterly. As of March 31, 2020, the loan had an outstanding balance of $2,034.

 

In September 2017, ComSovereign entered into a promissory note in the principal amount of $137,500 that bore interest at a rate of 12% per annum and was due on October 17, 2017. The note was repaid during fiscal 2019. On June 10, 2019, ComSovereign entered into a new promissory note with the same lender for $200,000 with an original issue discount of $6,000 and a maturity date of July 9, 2019. The full $200,000 balance was due at maturity. Since this note was not repaid and is currently past due, interest is being accrued at a rate of 18% per annum. Additionally, on August 14, 2019, ComSovereign borrowed from the same lender an additional $200,000 promissory note that matured on September 1, 2019. As this note is currently past due, interest is being accrued at a rate of 18% per annum. As of March 31, 2020, an aggregate principal amount of $400,000 was outstanding under these notes.

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller on a promissory note in the principal amount of $500,000 bearing interest at 12.0% per annum with a maturity date of October 17, 2017. On October 1, 2019, the maturity date was extended until September 30, 2020 and the interest rate was reduced to 10% per annum. All unpaid accrued interest from October 2017 through September 30, 2019 was converted into 150,000 shares of common stock of ComSovereign. Accrued interest and the full principal balance are due at maturity. As of March 31, 2020, an aggregate principal amount of $500,000 was outstanding under this note. On April 30, 2020, the Company also issued 14,496 shares of common stock in lieu of an aggregate cash interest payment payable by ComSovereign through December 31, 2019 on this outstanding note payable.

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of a promissory note in the principal amount of $175,000 that bore interest at the rate of 15% per annum and was due on November 30, 2017. The interest rate increased to 18% per annum when the note became past due. On October 1, 2019, ComSovereign amended the promissory note to extend the maturity date to September 30, 2020 and to change the interest rate to 10% per annum. Both parties to the note also agreed to convert all unpaid accrued interest into 10,000 shares of common stock of ComSovereign, valued at $44,000. Accrued interest and principal are due and payable at maturity. As of March 31, 2020, the aggregate principal amount of $175,000 was outstanding under this note.

 

In October 2017, DragonWave entered into a 90-day promissory note in the principal amount of $4,400,000 and received proceeds of $4,000,000. In January 2018, the promissory note was amended to accrue interest at the rate of 8% per annum and to extend the maturity date another 90 days. In August 2018, the maturity date was extended to December 31, 2018 with new payment terms. In September 2018, the maturity date was extended to February 28, 2019 with new payment terms. In October 2018, DragonWave amended the promissory note to clarify the payment of interest. On September 3, 2019, the promissory note was increased to $5,000,000 as all unpaid accrued interest was added to the principal balance. Additionally, the maturity date was extended to March 30, 2020 and the interest rate was changed to 10% per annum. Under this new amendment, principal and interest payments are due and payable monthly. As of March 31, 2020, an aggregate principal amount of $5,000,000 was outstanding under this note. On April 21, 2020, the maturity date of this note was extended to August 31, 2020, and the interest rate was increased to 12% per annum. 

 

On June 10, 2019, ComSovereign entered into a promissory note in the principal amount of $200,000 with an original issue discount of $6,000 and a maturity date of July 9, 2019. The full $200,000 balance was due at maturity. Since this note was not repaid and is currently past due, interest is being accrued at a rate of 18% per annum. As of March 31, 2020, an aggregate principal amount of $200,000 was outstanding under this note.

 

On November 7, 2019, ComSovereign entered into several promissory notes in the aggregate principal amount of $450,100 that bore an effective interest rate at 133% per annum due to a single payment incentive, which matured on December 6, 2019. An aggregate principal amount of $200,100 was owed to three related parties out of the $450,100 promissory notes. Accrued interest and principal were due and payable at maturity. These notes are currently past due, and the Company is using an interest rate of 18% per annum to accrue interest on these notes. As of March 31, 2020, $250,000 of the aggregate principal amount had been repaid, with the remainder of $200,100 currently past due and outstanding.

    

23

 

 

On March 5, 2020, the Company sold a promissory note in the principal amount of $500,000 that matures on September 30, 2020 for a purchase price of $446,000. Additionally, in lieu of interest, the Company issued to the lender 50,000 shares of its common stock. As of March 31, 2020, an aggregate principal amount of $500,000 was outstanding under this note.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed a note payable in the amount of $86,866 bearing interest at 3% per annum and with a maturity date of February 16, 2023. Monthly payments in the amount of $3,773 for principal and interest are due over the term. As of March 31, 2020, an aggregate principal amount of $86,866 was outstanding under this note.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company entered into several promissory notes with the sellers in the aggregate principal amount of $409,586 that do not bear interest and with a maturity date of June 30, 2020 and monthly principal payments. These notes are currently past due as of the filing date of this Form 10-Q, and there are no penalties associated with this default. As of March 31, 2020, the aggregate amount of $409,586 was outstanding under these notes.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company agreed to pay an aggregate of $165,987 to the sellers on or before June 30, 2020. The agreement was not interest bearing. This obligation is currently past due as of the filing date of this Form 10-Q, and there are no penalties associated with this default. As of March 31, 2020, an aggregate amount of $165,987 was outstanding.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed equipment financing loans with an aggregate principal balance of $64,865. Monthly principal and interest payments of approximately $1,680 are due over the term. This loan is currently past due as of the filing date of this Form 10-Q, and there are no penalties associated with this default. As of March 31, 2020, an aggregate amount of principal of $63,652 was outstanding under these loans.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed equipment financing loans with an aggregate principal balance of $95,810. Monthly principal and interest payments of approximately $2,361 are due over the term. This loan is currently past due as of the filing date of this Form 10-Q, and there are no penalties associated with this default. As of March 31, 2020, an aggregate amount of principal of $93,933 was outstanding under these loans.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed equipment financing loans with an aggregate principal balance of $43,957. Monthly principal and interest payments of approximately $1,063 are due over the term. This loan is currently past due as of the filing date of this Form 10-Q, and there are no penalties associated with this default. As of March 31, 2020, an aggregate amount of principal of $43,144 was outstanding under these loans.

 

Senior Convertible Debentures

  

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of $100,000 aggregate principal amount of 8% Senior Convertible Debentures of the seller that bore interest at the rate of 8% per annum and matured on December 31, 2019. Interest was payable semi-annually in cash or, at the seller’s option, in shares of the seller’s common stock at the conversion price that was equal to the lesser of (1) $8.00 or (2) 80% of the common stock price offered under the next equity offering. As of March 31, 2020, an aggregate principal amount of $100,000 was outstanding under these debentures. These debentures are past due and interest accrues at a rate of 15% per annum. On April 30, 2020, these debentures were modified to remove the conversion feature and only have settlement through cash.

  

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of $25,000 aggregate principal amount of 8% Senior Convertible Debentures of the seller that bore interest at the rate of 8% per annum and matured on December 31, 2019. Interest was payable semi-annually in cash or, at the seller’s option, in shares of the seller’s common stock at the conversion price that was equal to the lesser of (1) $8.00 or (2) 80% of the common stock price offered under the next equity offering. These debentures were past due and interest accrued at a rate of 15% per annum. As of March 31, 2020, the aggregate principal amount of $25,000 under these debentures was fully repaid.

 

24

 

 

On September 24, 2019, ComSovereign sold $250,000 aggregate principal amount of 10% Senior Convertible Debentures that bear interest at a rate of 10% per annum and mature on December 31, 2021. Interest is paid semi-annually in arrears in June and December of each year in cash or, at ComSovereign’s option, in shares of common stock at the conversion price that was equal to the lesser of (1) $2.50 or (2) a future effective price per share of any common stock sold by ComSovereign. Upon an event of default, the interest rate shall automatically increase to 15% per annum. As of March 31, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures. In connection with these debentures, ComSovereign recognized a BCF of $69,000 and a debt discount of $181,000 associated with the issuance of warrants, both of which are recorded as debt discounts. During the three months ended March 31, 2020, $25,000 of these costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of March 31, 2020 and December 31, 2019, there were $200,000 and $225,000 of debt discounts remaining, respectively. On April 30, 2020, these debentures were amended to provide for the conversion of the debentures into shares of the Company’s common stock instead of ComSovereign’s common stock. Additionally, the conversion price was changed from $2.50 per share to $0.756 per share. As a result, all the outstanding warrants were exercised at $0.01 per share into 283,530 shares of the Company’s common stock. The Company also issued 6,700 shares of common stock on April 30, 2020 in lieu of an aggregate cash interest payment payable by ComSovereign through December 31, 2019 on these outstanding convertible debentures.

 

The agreements governing the secured notes payable, notes payable and senior convertible debentures contain customary covenants, such as debt service coverage ratios, 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

 

Other than for reasons of noncompliance with debt covenants as noted above, all long-term debt obligations are classified as current on the Condensed Consolidated Balance Sheet, due to the significant debt issuance costs discounting these obligations and causing classification as noncurrent to be negative.

 

Future maturities contractually required by the Company under long-term debt obligations are as follows for the years ending December 31:

 

(Amounts in US$’s)    
Remainder of 2020  $12,261,404 
2021   2,345,483 
2022   65,483 
2023   57,748 
2024   1,057 
Thereafter    
Total  $14,730,905 

 

See Note 23 – Subsequent Events for details regarding additional debt incurred after March 31, 2020.

 

25

 

 

16. 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 the Company if 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 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.

 

Receivable – Related Party

 

As of March 31, 2020 and December 31, 2019, the receivables - related party balance was $1,595, which represented amounts owed by Dr. Dustin McIntire, the Company’s Chief Technology Officer, for personal charges he incurred using his company credit card.

 

Accrued Liabilities – Related Party

 

As of March 31, 2020 and December 31, 2019, the accrued liabilities – related party balance was $354,481 and $461,254, respectively, which represented amounts owed to various contractors, officers and employees of the Company as described below.

 

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 that bears interest at 7.785% per annum and matures on September 1, 2021. At the same time, InduraPower also entered into a promissory note in the principal amount of $450,000 with the same lender that bears interest at 9.0% per annum and matures on March 1, 2022. A requirement of the promissory notes is to maintain a balance of at least $155,159 at J.P. Morgan while the promissory notes are outstanding. Sergei Begliarov, Chief Executive Officer of InduraPower, provided cash of $153,761 to comply with the requirements of the promissory notes. The $153,761 was recorded in accrued liabilities – related party as of March 31, 2020 and December 31, 2019.

 

During 2019 and the three months ended March 31, 2020, Sergei Begliarov paid $71,199 and $3,001 worth of expense of behalf of InduraPower. Daniel L. Hodges, Chairman and Chief Executive Officer of ComSovereign at the time, paid $6,588 of rent on behalf of InduraPower during 2019 and an additional $65 during the three months ended March 31, 2020. Additionally, during 2019, TM Technologies, Inc. (“TM”), described below, paid $29,300 worth of expense of behalf of InduraPower. These amounts were recorded in accrued liabilities – related party as of March 31, 2020 and December 31, 2019, respectively.

 

On November 10, 2017, the Company and Global Security Innovative Strategies, LLC (“GSIS”), a company in which David Aguilar, a member of the Company’s Board of Directors, is a principal, entered in an agreement (the “GSIS Agreement”) pursuant to which GSIS agreed to 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. The GSIS Agreement had an initial term of six months beginning on November 1, 2017. On September 26, 2018, the parties amended the GSIS Agreement to extend the period of service through September 2019 with monthly automatic renewals thereafter. The Company also agreed to issue an option to purchase 100,000 shares of the Company’s common stock at a strike price of $1.00, or $100,000. This option immediately vested and terminates on September 26, 2022. Pursuant to the GSIS Agreement, GSIS is paid a fee of $10,000 per month. In addition, GSIS is paid for the expenses incurred in connection with the performance of its duties under the GSIS Agreement. Either party may terminate or renew the GSIS Agreement at any time, for any reason or no reason, upon at least 30 days’ notice to the other party. GSIS was owed $41,263 for normal monthly retainers and expenses incurred as of March 31, 2020 and $23,036 as of December 31, 2019. This amount was recorded in accrued liabilities – related party as of March 31, 2020 and December 31, 2019, respectively.

 

During 2018 and 2019, Daniel L. Hodges paid $29,120 of rent on behalf of Lextrum. This amount was recorded in accrued liabilities – related party as of March 31, 2020 and December 31, 2019.

 

On March 21, 2019, concurrent with the resignation of Kevin Hess, the Company’s former Chief Technology Officer, the Company and Cognitive Carbon Corporation (“CCC”), entered into an agreement pursuant to which CCC agreed to provide Chief Technology Officer services, sales and marketing services and outsourced software and platform development services which are to be provided personally by Kevin Hess or third-party development firms of his choosing for outsourced development. CCC will receive $19,750 per month for one year for the Chief Technology Officer services and potential bonuses and an amount up to $120,000 for outsourced software and platform development. Felicia Hess, the Company’s Chief Quality Officer, who is married to Kevin Hess, is the President and a director of CCC. CCC was owed $23,250 for normal monthly fees as of March 31, 2020 and $148,250 as of December 31, 2019. This amount was recorded in accrued liabilities – related party as of March 31, 2020 and December 31, 2019, respectively.

 

26

 

 

Notes Payable – Related Party

 

On August 5, 2019, Mr. Hodges and his wife, loaned DragonWave $200,000 at an interest rate of 5.0% per annum and a maturity date of December 31, 2019. Interest was payable monthly while the full principal balance was due at maturity. As of March 31, 2020 and December 31, 2019, $200,000 plus accrued interest was outstanding under the loan, and the loan was past due.

 

Mr. Hodges is also the founder, Chairman and Chief Executive Officer of TM Technologies, Inc. (“TM”). Mr. Hodges also controls TM by virtue of his ownership and control of a majority of the outstanding equity securities of TM. Mr. Brent Davies, who is on the Company’s Board of Directors and Audit Committee, is also CFO and a board member of TM.  During 2019, TM also performed engineering services on behalf of DragonWave.

  

In October 2017, TM loaned $250,000 to DragonWave. On October 31, 2019, this loan was increased to $1,292,953 at an interest rate of 5% per annum with a maturity date of August 31, 2020. This loan was partially used to simulate and test emplacement of the modulation technology within one of DragonWave’s Harmony line radios. Interest and principal are due at maturity. As of March 31, 2020 and December 31, 2019, $1,292,953 plus accrued interest was outstanding under this loan.

 

17. SHAREHOLDERS’ EQUITY

 

For the three months ended March 31, 2020

  

As of March 31, 2020, the Company had 100,000,000 shares of preferred stock authorized for issuance, none of which were issued and outstanding and 300,000,000 shares of common stock authorized for issuance and 128,541,338 shares of common stock issued and outstanding.

 

Consulting Agreement

 

On January 31, 2020, the Company entered into an agreement with a consultant to its subsidiary, Lextrum, to amend a consulting agreement between the consultant and Lextrum to allow the consultant to elect to take from 50% to 100% of his compensation in the form of common stock of the Company. Common stock to be issued to the consultant will be paid on a quarterly basis. On March 12, 2020, the Company issued 165,095 shares of its common stock in satisfaction of $106,238 that was owed by Lextrum to the consultant for services previously rendered. The fair value on the issue date of the 165,095 shares was $193,161. The Company booked the difference between the fair value of the shares issued and the amount owed by Lextrum to the consultant as general and administrative expense in the Company’s condensed consolidated financial statements. To date, no additional shares of common stock have been issued pursuant to this agreement.

 

For the period January 10, 2019 (Inception) through March 31, 2019

 

As of March 31, 2019, ComSovereign Corp had 5,000,000 Preferred Series A shares authorized for issuance, 2,600,000 of which were issued and outstanding and 300,000,000 shares of common stock authorized for issuance, 27,970,000 of which were outstanding. All the Preferred Series A shares issued were for the acquisitions of VEO, InduraPower and Silver Bullet during fiscal 2019. On November 15, 2019, each Preferred Series A share was converted into one common share of ComSovereign. These shares ceased to exist when they were converted.

 

As of March 31, 2019, the Company had 100,000,000 shares of preferred stock authorized for issuance, none of which were issued and outstanding and 300,000,000 shares of common stock authorized for issuance and 27,656,121  shares of common stock issued and outstanding.

 

As of March 31, 2019, the Company had outstanding warrants to purchase an aggregate of 2,280,000 shares of common stock. Of those 2,280,000 warrants, 70,000 had an exercise price of $5.00 per share; 60,000 had an exercise price of $2.91 per share; 100,000 had an exercise price of $1.00 per share; and the remaining 2,050,000 had an exercise price of $0.50 per share.

 

Dividends

 

The Company did not pay dividends to holders of its common stock during the three months ended March 31, 2020. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on applicable laws and the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. In addition, current or future loan agreements may restrict the Company’s ability to pay dividends. The Company does not anticipate declaring or paying any cash dividends on common stock in the foreseeable future.

  

18. SHARE-BASED COMPENSATION

 

The Company accounts for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires companies to measure the cost of employee and non-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 and non-employee is required to provide service in exchange for the award, usually the vesting period.

 

Share-based compensation for employees and non-employees is recorded in the Consolidated Statement of Operations as a component of general and administrative expense with a corresponding increase to additional paid-in capital in shareholders’ equity.

   

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Stock Options

 

On March 20, 2019, the Company granted options outside of any equity plan to two employees and one non-employee for the purchase of an aggregate of 180,000 shares of the Company’s common stock. All the options have an exercise price of $1.06 per share and expire on March 20, 2023. Under the Black-Scholes option pricing model, the fair value of the 180,000 options on the date of grant was estimated at $123,130.

 

No options were granted during the three months ended March 31, 2020.

 

The following table summarizes the assumptions used to estimate the fair value of stock options granted during the period January 10, 2019 (inception) to March 31, 2019:

 

      2019  
Expected dividend yield             0%  
Expected volatility         90%  
Risk-free interest rate         2.40-2.47%  
Expected life of options         4.0 years  

   

The following table represents stock option activity for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019:

 

   Number of
Options
   Weighted-
Average
Exercise
Price per
Share
   Weighted-
Average
Contractual
Life in
Years
   Aggregate
Intrinsic
Value
 
Outstanding – December 31, 2019   8,695,000   $0.63    1.34   $2,264,760 
Granted   

    

    

    

 
Exercised   

        

    

 
Cancelled or Expired   (3,630,000)   0.61    

    

 
Outstanding – March 31, 2020   5,065,000   $0.65    1.94   $3,183,450 
Exercisable – March 31, 2020   5,065,000   $0.65    1.94   $3,183,450 

 

   Number of
Options
   Weighted-
Average
Exercise
Price per
Share
   Weighted-
Average
Contractual
Life in
Years
   Aggregate
Intrinsic
Value
 
Outstanding – January 10, 2019   13,990,000   $0.61    3.15   $ 
Granted   180,000    1.06         
Exercised   

             
Cancelled or Expired                
Outstanding – March 31, 2019   14,170,000   $0.61    1.82   $6,359,500 
Exercisable – March 31, 2019   13,710,000   $0.60    1.81   $6,345,500 

 

For the three months ended March 31, 2020, there were no unvested stock options.

 

The Company did not record any share-based compensation expense for the three months ended March 31, 2020. Compensation expense related to stock options is recorded in share-based compensation expense in the Consolidated Statement of Operations. For the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019, there were no unrecognized compensation expense related to stock options.

 

Restricted Stock Awards

 

On March 25, 2019, ComSovereign’s Board of Directors granted an aggregate of 80,000 restricted stock awards (“RSAs”) to a non-employee for consulting services, of which 60,000 RSAs immediately vested and 20,000 RSAs vested upon the change in control of ComSovereign in connection with the ComSovereign Acquisition. The grant date fair value of these RSAs was $4.40 per share of common stock for a total value of $352,000. ComSovereign recognized the full $352,000 of stock compensation expense for the RSAs during the period January 10, 2019 (inception) to March 31, 2019.

 

For the three months ended March 31, 2020, the Company did not recognize any expense related to RSAs. For the period January 10, 2019 (Inception) through March 31, 2019, the Company  recognized $72,500  compensation expense related to RSAs. See Note 1 – Description of Business and Basis of Presentation for information about the shares issued in connection with the formation of ComSovereign.

 

See Note 23 – Subsequent Events for information related to the adoption of the 2020 Long-Term Incentive Plan.

 

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19. WARRANTS

 

No warrants were granted during the three months ended March 31, 2020 and for the period January 10, 2019 (inception) to March 31, 2019.

 

The following table represents warrant activity for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019:

 

   Number of
Warrants
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Life in
Years
   Aggregate
Intrinsic
Value
 
Outstanding – December 31, 2019   503,523   $0.95    1.96   $258,328 
Exercisable –  December 31, 2019   503,523   $0.95    1.96   $258,328 
Granted   -      -      -      -   
Exercised   -      -      -      -   
Forfeited or Expired   -      -      -      -   
Outstanding – March 31, 2020   503,523   $0.95    1.72   $414,069 
Exercisable – March 31, 2020   503,523   $0.95    1.72   $414,069 

 

   Number of
Warrants
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Life in
Years
   Aggregate
Intrinsic
Value
 
Outstanding – January 10, 2019   2,280,000   $0.72    3.44   $ 
Exercisable – January 10, 2019   2,280,000   $0.72    3.44   $ 
Granted                
Exercised                
Forfeited or Expired                
Outstanding – March 31, 2019   2,280,000   $0.72    3.19   $1,132,500 
Exercisable – March 31, 2019   2,280,000   $0.72    3.19   $1,132,500 

 

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20. INCOME TAXES

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act”) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the Tax Cuts and Jobs Act (“TCJ Act”), and estimated tax payments. We do not currently expect the CARES Act to have a material impact on our financial results. We will continue to monitor and assess the impact of the CARES Act and similar legislation with respect to what impact they may have on our business and financial results.

 

The Company’s income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to income (loss) from continuing operations before tax for the three months ended March 31, 2020 and the period January 10, 2019 (Inception) to March 31, 2019 due to the following:

 

   March 31, 2020   March 31, 2019 
(Amounts in US$’s)  US$’s   Rates   US$’s   Rates 
Income tax benefit at statutory federal income tax rate  $(1,475,300)   21.00%  $(243,591)   21.00%
State tax expense, net of federal benefit   (281,000)   4.00%   (46,398)   4.00%
Permanent items   400    (0.01)%        
Valuation allowance   1,755,900    (24.99)%        
Income tax expense (benefit)           $(289,990)   25.00%

 

To determine the quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in various jurisdictions in which we are subject to tax. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense. As of March 31, 2020, and December 31, 2019, we had not recorded any liabilities for uncertain tax positions. There were no discrete items for the quarter ended March 31, 2020.

 

We record valuation allowances to reduce our deferred tax asset to an amount that we believe is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the period in which those temporary differences become deductible. During the three months ended March 31, 2020, the Company recorded a change in the valuation allowance of $1,756,000 as compared to $0 for the three months ended March 31, 2019.

 

It is our policy to establish reserves based on management’s assessment of exposure for certain tax positions taken in previously filed tax returns that may become payable upon audit by taxing authorities. Our tax reserves are analysed quarterly, and adjustments are made as events occur that we believe warrant adjustments to those reserves. Management has not recorded any reserves for uncertain tax positions.

  

21. 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 17, 2020, Arrow Electronics, Inc. (“Arrow”) filed suit against DragonWave and the Company in the United States District Court for the District of Colorado, Case No. 1:20-cv-00149-NRN. Arrow alleged that in November and December 2018, DragonWave took delivery of merchandise from Arrow worth approximately $124,000 and ordered additional merchandise from Arrow worth approximately $520,000, but that DragonWave defaulted in December 2018 on its obligations to pay Arrow. Arrow further alleged that in November 2019, Arrow, DragonWave entered into a forbearance agreement acknowledging indebtedness to Arrow of approximately $124,000, plus an additional commitment to purchase inventory of $520,000 plus fees of $10,000, to be paid in certain installments. On June 12, 2020, Arrow and DragonWave entered into a settlement agreement whereby DragonWave is obligated to pay Arrow $503,500 on or before August 15, 2020, $125,000 for inventory received previously and $378,500 for additional inventory to be shipped after payment is received by Arrow from the Company.

 

On February 7, 2020, DragonWave agreed to repurchase inventory held by Tessco Technologies Incorporated (“Tessco”), one of DragonWave’s customers and note holders. Upon receipt of the inventory, which is valued at $121,482, DragonWave agreed to reimburse Tessco $56,766, representing the balance due after making the initial payment of $60,000. The return of inventory and payment to Tessco of $56,776 was required by February 28, 2020 but has not yet been made. On June 5, 2020, Tessco filed a complaint for confessed judgment against DragonWave in the Circuit Court for Baltimore, Maryland, Case No. 5539212, for approximately $60,000, which it claims is the reimbursement amount. The Company does not intend to oppose the entry of this judgment. As of March 31, 2020, the inventory has been received and cash payment made.

 

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22. CONCENTRATION

   

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, 2020, accounts receivable from three customers comprised 71% of the Company’s total trade accounts receivable, and none of this balance had been characterized as uncollectible as of March 31, 2020.

   

23. SUBSEQUENT EVENTS

 

Corporate Acquisition

 

On July 6, 2020, the Company completed its acquisition (the “Acquisition”) of Virtual Network Communications Inc., a Virginia corporation (“VNC”), pursuant to an Agreement and Plan of Merger and Reorganization dated as of May 21, 2020 (the “Merger Agreement”), by and among the Company and its wholly-owned subsidiaries, CHC Merger Sub 7, Inc. and VNC Acquisition LLC, VNC and Mohan Tammisetti, solely in his capacity as the representative of the security holders of VNC.  VNC is an EDGE telecom access radio developer and provider of both 4G LTE/Advanced and 5G capable radio equipment. Additionally, VNC has virtualized and patented an entire LTE Advanced network core solution that the Company believes eliminates much of the costly backbone equipment of telecom networks. VNC also has developed and is currently selling a rapidly deployable network system that can be combined with the tethered aerostats and drones offered by the Company’s Drone Aviation subsidiary and enabled and operated in nearly any location in the world.

 

In connection with the Acquisition, the Company paid to the stockholders and certain other stakeholders of VNC (i) $1,785,139 in cash and (ii) 11,738,210 shares of the Company’s common stock, of which an aggregate of 4,000,000 shares is being held in an escrow fund for purposes of satisfying any post-closing indemnification claims of the former VNC security holders under the Merger Agreement. Pursuant to the Merger Agreement, the Company also issued to the holders of outstanding options and warrants of VNC, whether vested or unvested, in replacement of such options or warrants, options or warrants to purchase an aggregate of 4,261,790 shares of the Company’s common stock, all of which were fully vested. In addition, at the closing of the Acquisition, the Company paid approximately $1.142 million of outstanding payables of VNC.

 

Debt Agreements

 

In connection with the transactions contemplated by the Merger Agreement, on July 2, 2020, the Company sold an aggregate of 29 units (the “Units”) to accredited investors, including 19 Units to Dr. Dustin McIntire, the Company’s Chief Technology Officer, for a purchase price of $100,000 per Unit, or $2,900,000 in the aggregate. Each Unit consisted of a 9% Senior Convertible Debenture (the “July 9% Debentures”) of the Company in the principal amount of $100,000 and warrants (the “July Warrants”) to purchase 10,000 shares of the Company’s common stock. The July 9% Debentures bear interest at the rate of 9% per annum, mature on September 30, 2020 and are convertible into shares of the Company’s common stock at a conversion price of $1.00 per share, subject to adjustment. The July Warrants are exercisable to purchase shares of the Company’s common stock at an exercise price of $1.00 per share, subject to adjustment, and expire on the earlier of (i) December 31, 2022 or (ii) the second anniversary of the Company’s consummation of a public offering of its common stock in connection with an up-listing of its common stock to a national securities exchange. The proceeds from the sale of the Units were applied to the cash consideration the Company paid in the Acquisition and related expenses.

 

On April 29, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an investor, pursuant to which the Company sold to the investor $571,428 aggregate principal amount of 12.5% OID convertible promissory notes (the “OID Notes”) and warrants (the “April Warrants”) to purchase up to 317,460 shares of the Company’s common stock in two tranches. On April, 29, 2020, the Company issued and sold to the investor an OID Note in the principal amount of $285,714 and April Warrants to purchase 158,730 shares of common stock for proceeds of $250,000 (representing an original issue discount of 12.5%). On July 7, 2020, the Company sold to the investor an additional OID Note in the principal amount of $285,714 and April Warrants to purchase an additional 158,730 shares of common stock for proceeds of $250,000 (representing an original issue discount of 12.5%). 

 

The OID Notes mature on January 29, 2021. However, the Company has the right to redeem all or a portion of the OID Notes on ten days prior written notice, during which time the holder of the OID Notes may convert the principal amount and all accrued interest on the OID Notes into shares of common stock as discussed below. The holder of the OID Notes also has the right to demand prepayment of the OID Notes if the Company consummates an offering of its equity securities in which it receives gross proceeds of at least $3,500,000.

 

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The OID Notes bear interest at the rate of 12.5% per annum and are convertible into shares of the Company’s common stock at a conversion price equal to $0.90 per share or, upon the occurrence and during the continuance of an Event of Default (as defined in the OID Notes), if lower, at a conversion price equal to 65% of the lowest daily volume weighted average price (VWAP) of the common stock during the 20 consecutive trading days immediately preceding the applicable conversion date. However, the holder of the OID Notes will not have the right to convert any portion of the OID Notes if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion and under no circumstances may convert the OID Notes if the investor, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of the common stock outstanding immediately after giving effect to its conversion.

 

The April Warrants are exercisable to purchase shares of common stock for a purchase price of $0.99 per share, subject to adjustment, at any time on or prior to April 29, 2025, and may be exercised on a cashless basis if the shares of common stock underlying the April Warrants are not then registered under the Securities Act of 1933, as amended.

 

In connection with this transaction, the Company paid to a placement agent a cash fee equal to 10% of the gross proceeds received by the Company from the investor in this transaction, as well as a one-time expense fee of $2,500 for aggregate out-of-pocket expenses incurred collectively in this transaction. In addition, the Company granted to the placement agent five-year warrants, substantially in the form of the April Warrants, to purchase an aggregate of 55,556 shares of common stock at an exercise price of $1.10 per share. 

 

On May 29, 2020, DragonWave entered into a promissory note in the principal amount of $290,000 with an original issue discount of $40,000 for proceeds of $250,000. The note matures on September 30, 2020 and will bear an interest rate of 12% per annum on any principal balance not paid from the maturity date until paid in full. The promissory note is guaranteed by the Company and Mr. Hodges.

  

On July 2, 2020, the Company borrowed $100,000 from an accredited investor and issued to such investor a promissory note evidencing such loan that bears interest at the rate of 15% per annum and matures on September 30, 2020.  As additional consideration for such loan, the Company issued to such investor 25,000 shares of common stock.

 

On July 17, 2020, the Company borrowed $200,000 from an accredited investor and issued to such investor a promissory note evidencing such loan that bears interest at the rate of 15% per annum and matures on October 13, 2020.  As additional consideration for such loan, the Company issued to such investor 40,000 shares of common stock.

 

2020 Long-Term Incentive Plan

 

On April 22, 2020, the Company’s Board of Directors adopted the 2020 Long-Term Incentive Plan (the “2020 Plan”) which was approved by the stockholders on or about May 6, 2020. Employees, officers, directors and consultants that provide services to the Company or one of its subsidiaries may be selected to receive awards under the 2020 Plan. Awards under the 2020 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards and performance-based awards.

 

A total of 10,000,000 shares of the Company’s common stock are authorized for issuance with respect to awards granted under the 2020 Plan. Any shares subject to awards that are not paid, delivered or exercised before they expire or are cancelled or terminated, or fail to vest, as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become available for other award grants under the 2020 Plan. As of August 10, 2020, no stock grants had been issued under the 2020 Plan, and 10,000,000 shares authorized under the 2020 Plan remained available for award purposes.

 

The 2020 Plan will terminate on May 1, 2030. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2020 Plan is ten years after the initial date of the award.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 fact, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements.

  

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on July 6, 2020.

 

Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2020 and 2019 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 and the related notes (“Notes”) in Part 1 of this Quarterly Report on Form 10-Q.

 

Growth and percentage comparisons made herein generally refer to the three months ended March 31, 2020 compared to the period January 10, 2019 (Inception) to March 31, 2019 unless otherwise indicated.

 

Business Overview

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio and partnership of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency 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 compete globally on the basis of our innovative technology, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of our global customer base and distribution, our primary focus is on the North American telecom and infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.

 

ComSovereign Acquisition

 

On November 27, 2019, we completed the acquisition ( the “ComSovereign Acquisition”) of ComSovereign Corp, a Delaware corporation (“ComSovereign”), in a stock-for-stock transaction with a total purchase price of approximately $75 million. The ComSovereign Acquisition was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquirer and our company as the accounting acquiree. As a result, our condensed consolidated financial statements included in this Quarterly Report are those of ComSovereign for the period January 10, 2019 (inception) to March 31, 2019 and those of our company for the three-month period ended March 31, 2020. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only for the three-month period ended March 31, 2020.

 

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Our Operating Units

 

Through a series of acquisitions, we and our operating subsidiaries have expanded our service offerings and geographic reach over the past two years. Our company is comprised of the following principal operating units:

 

  DragonWave-X LLC. DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), a Dallas-based manufacturer of high-capacity microwave and millimeter point-to-point telecom backhaul radio units, was acquired by ComSovereign in April 2019. 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.

 

 

Virtual NetCom LLC. Virtual NetCom LLC (“VNC”) is a Virginia-based EDGE telecom access radio developer and provider of both 4G LTE/Advanced and 5G capable radio equipment. Additionally, VNC has virtualized and patented an entire LTE Advanced network core solution that we believe eliminates much of the costly backbone equipment of telecom networks. VNC also has developed and is currently selling a rapidly-deployable network system that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world. We acquired VNC in July 2020.

 

  Drone Aviation. Lighter Than Air Systems Corp., which does business under the name Drone Aviation (“Drone Aviation”), is based in Jacksonville, Florida and develops and manufactures cost-effective, compact and enhanced tethered unmanned aerial vehicles (UAVs), including lighter-than-air aerostats and drones that support surveillance sensors and communications networks. We acquired Drone Aviation in June 2014.

 

  InduraPower, Inc. InduraPower Inc. (“InduraPower”) is a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. ComSovereign acquired InduraPower in January 2019.

 

  Silver Bullet Technology, Inc. Silver Bullet Technology, Inc. (“Silver Bullet”) is a California-based engineering firm that designs and develops 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.

 

  Lextrum, Inc. Lextrum, Inc. (“Lextrum”) is a Tucson, Arizona-based developer of full-duplex wireless technologies and components, including multi-reconfigurable radio frequency (RF) antennae and software programs. This technology enables the doubling of a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies. ComSovereign acquired Lextrum in April 2019.

 

 

VEO (“VEO”), based in San Diego, California, is a research and development company innovating Silicon Photonics (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.

 

  Sovereign Plastic LLC. Sovereign Plastic LLC (“Sovereign Plastic”), based in Colorado Springs, Colorado, operates as the material, component manufacturing and supply chain source for all of our subsidiaries, and also provides plastic and metal components to third-party manufacturers. Its ability to rapidly prototype new product offerings and machine moldings, metals and plastic castings has reduced the production cycle for many of our components from months to days. We acquired Sovereign Plastic in March 2020

 

Significant Components of Our Results of Operations

 

Revenues

 

Our revenues are generated primarily from the sale of our products, which consist primarily of backhaul telecom radios and tethered aerostats and drones. 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.

 

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We expect our total revenues for the year ending December 31, 2020 to materially exceed those of fiscal 2019 for the following reasons:

   

  ComSovereign experienced working capital shortages during fiscal 2019 due in part to preparatory actions, including manufacturing line readiness and subsidiary integration actions, which impeded the ability of DragonWave to have products manufactured and shipped during the period. As of March 31, 2020, we had a backlog of orders for our mobile network backhaul products in the amount of $278,776 with the majority of the products shipped in the second quarter of 2020.

 

  Our fiscal 2019 revenues did not include the 2019 revenues of Drone Aviation prior to November 27, 2019. In 2020, we will include all of the revenues of Drone Aviation in our consolidated results of operations.

 

  During fiscal 2019, we received only nominal revenues from the sale of prototype intelligent battery back-up power solutions. In 2020, we expect to commence commercial production of our intelligent batteries for the telecom, aerospace and transportation industries, which we expect will significantly increase our revenues from the sale of those products.

 

During fiscal 2019, approximately 34% of our sales were to customers located outside of the United States, primarily in Saudi Arabia and Canada. We expect that over the short term the percentage of our sales to foreign customers will increase during the build-up of our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to 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 DragonWave’s microwave products to a single third-party manufacturer, Benchmark, which manufactures our products from its facilities. Cost of goods sold also includes costs associated with supply operations, including personnel-related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to the services we provide. 

 

Gross profit has been and will continue to be affected by various factors, including changes in our supply chain and evolving product mix. The margin profile of our current products and future products will vary depending on operating performance, features, materials, manufacturer and supply chain. Gross margin will vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing, our production costs, costs of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors. 

 

Operating Expenses 

 

We classify our operating expense as research and development, sales and marketing, and general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions, benefits and bonuses. Additionally, we separate depreciation and amortization into its own category. 

 

Research and Development 

 

In addition to personnel-related costs, research and development expense consists of costs associated with the design and development of our products, product certification, travel and recruiting. We generally recognize research and development expense as incurred. Development costs incurred prior to establishment of technological feasibility are expensed as incurred. We expect our research and development costs to continue to increase as we develop new products and modify existing products to meet the changes within the telecom landscape.

 

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Sales and Marketing 

 

In addition to personnel costs for sales, marketing, service and product management personnel, sales and marketing expense consists of the expenses associated with our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approvals of our products, travel, entertainment and recruiting. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales, marketing, service and product management organization in support of our investment in our growth opportunities, whether through the development and rollout of new or modified products or through acquisitions. 

 

General and Administrative 

 

In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs. We expect general and administrative expense to increase in absolute dollars as we continue to expand our product offerings and expand into new markets. During fiscal 2020, we expect to incur increases in supporting overhead costs, professional fees, transfer agent fees and expenses; development costs and other expenses related to operating as a public company. 

 

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. 

 

Share-Based Compensation 

 

Share-based compensation consists of expense related to the issuance of common stock, which can be in many forms, such as incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including performance-based awards under our long-term incentive plans or outside of such plans. The expense related to any stock grant will vary depending upon the number of shares of common stock to be issued, the fair value of the common stock on the date of grant and the vesting period. 

 

Interest Expense 

 

Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense. As many of our debt instruments are currently past due and, as a result, are accruing interest at increased interest rates, if we are able to refinance our debt or issue equity to reduce our outstanding debt, our interest expense would decrease due to lower interest rates on our debt or lower debt balances. 

 

Provision for Income Taxes 

 

On our condensed consolidated financial statements, a tax benefit of $289,990 was reported for the period January 10, 2019 (inception) to March 31, 2019, but no tax benefit has been reported for the three months ended March 31, 2020, as the potential tax benefit is offset by a valuation allowance of the same amount. We have recorded a 100% valuation allowance against net deferred tax assets due to the uncertainty of their ultimate realization. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period.

 

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Results of Operations

 

(Amounts in US$’s, except share data) 

For the Three
Months Ended
March 31,

2020

  

January 10,

2019
(Inception) to
March 31,

2019

 
Revenue  $2,485,204   $16,914 
Cost of Goods Sold   1,060,908    6,938 
Gross Profit   1,424,296    9,976 
           
Operating Expenses          
Research and development   288,473    311 
Sales and marketing   14,054    2,159 
General and administrative   4,433,443    803,711 
Depreciation and amortization   2,832,152    233,228 
Total Operating Expenses   7,568,122    1,039,409 
Net Operating Loss   (6,143,826)   (1,029,433)
Other Income (Expenses)          
Loss on investment   (24)    
Foreign currency transaction gain   90,818     
Interest expense   (973,169)   (31,234)
Other income   663     
Total Other Expenses   (881,712)   (31,234)
Net Loss Before Income Taxes   (7,025,538)   (1,060,667)
Deferred Tax Benefit       289,990 
Net Loss  $(7,025,538)  $(770,677)
Basic and Diluted Loss Per Share   (0.05)   (0.03)

 

Three Months Ended March 31, 2020 compared to the period January 10, 2019 (Inception) to March 31, 2019

 

From the date of its incorporation (January 10, 2019) until the date of its first acquisition, as described above, ComSovereign had no business operations. ComSovereign’s entire activity after its inception date through the date of consummation of the ComSovereign Acquisition was limited to the evaluation of and consummation of business acquisition transactions as well as preparatory actions, including manufacturing line readiness and subsidiary integration actions, which impeded the ability of DragonWave to have products manufactured and shipped during the period. For the period January 10, 2019 (inception) to March 31, 2019, ComSovereign generated only nominal revenues.

 

Total Revenues

 

For the three months ended March 31, 2020, total revenues were $2,485,204 which were derived primarily from mobile network backhaul products and to a lesser extent, from the sale of our aerostat products and accessories after November 27, 2019, the date of the ComSovereign Acquisition, and from the test-market sale of certain high-performance after-market models of our intelligent batteries.

 

For the period January 10, 2019 (inception) to March 31, 2019, total revenues were $16,914, which were derived primarily from consulting fees earned by our Silver Bullet subsidiary.

 

Cost of Goods Sold and Gross Profit

 

For the three months ended March 31, 2020, cost of goods sold were $1,060,908, which primarily consisted of the payment to our contact manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with the manufacturing of our aerostat products and accessories and our intelligent batteries. Gross profit for the three months ended March 31, 2020 was $1,424,296 with a gross profit margin of 57% for the same period.

 

For the period January 10, 2019 (inception) to March 31, 2019, cost of goods sold were $6,938, which primarily consisted of the payment to our contact manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with the manufacturing of our intelligent batteries. Gross profit for the period January 10, 2019 (inception) to March 31, 2019 was $9,976 with a gross profit margin of 59% for the same period.

 

Research and Development Expense

 

For the three months ended March 31, 2020, research and development expenses were $288,473, which primarily consisted of payroll and related costs.

 

For the period January 10, 2019 (inception) to March 31, 2019, research and development expense was $311 which primarily consisted of payroll and related costs.

 

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Sales and Marketing Expense

 

For the three months ended March 31, 2020, sales and marketing expenses were $14,054, which primarily consisted of payroll and related costs.

 

For the period January 10, 2019 (inception) to March 31, 2019, sales and marketing expense was $2,159 which primarily consisted of payroll and related costs.

 

General and Administrative Expenses

 

For the three months ended March 31, 2020, general and administrative expenses were $4,433,443, which primarily consisted of payroll and related costs of $1,909,098, business overhead costs of $1,405,080, rent of $219,393 and travel of $78,022.

 

For the period January 10, 2019 (inception) to March 31, 2019, general and administrative expenses were $803,711, which primarily consisted of payroll and related costs of $67,719, share-based compensation of $352,000, professional fees of $365,547 and business overhead costs of $25,394.

 

Depreciation and Amortization

 

For the three months ended March 31, 2020, depreciation and amortization were $2,832,152, which primarily included $2,608,171 of amortization on definite-lived intangible assets as well as $223,981 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements. 

 

For the period January 10, 2019 (inception) to March 31, 2019, depreciation and amortization were $233,228, which primarily included $216,088 of amortization on definite-lived intangible assets as well as $17,140 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements.

 

Other Income and Expenses

 

For the three months ended March 31, 2020, total other expenses were $881,712, which primarily consisted of $973,169 of interest expense and amortized discounts on our outstanding debt and a $24 loss on our investments, which was partially offset by a $90,818 gain on foreign exchange transactions and a $663 proceeds from the disposal of property and equipment.

 

For the period January 10, 2019 (inception) to March 31, 2019, total other expenses were $31,234, which consisted of $31,234 of interest expense.

  

Provision for Income Taxes 

 

For the three months ended March 31, 2020, there was no provision for income taxes due to an increase in the valuation allowance of $1,756,000 recorded on the total tax provision, because we believe that it is more likely than not that the tax asset will not be utilized during the next year.

 

Net Loss 

 

For the three months ended March 31, 2020, we had a net loss of $7,025,538 related to the items described above.

 

For the period January 10, 2019 (Inception) to March 31, 2019, we had net loss of $770,677 related to the items described above.

 

Going Concern

 

The accompanying unaudited consolidated financial statements and notes have been prepared assuming we will continue as a going concern. For the three months ended March 31, 2020, we generated negative cash flows from operations of $490,252 and had an accumulated deficit of $34,570,793 and negative working capital of $12,474,438.

 

Management anticipates that we will be dependent, for the near future, on additional investment capital to fund growth initiatives. We intend to position ourselves so that we will be able to raise additional funds through the capital markets and secure lines of credit. We anticipate an approximately $13,000,000 offering of equity securities in the third quarter of 2020.

 

Our fiscal operating results, accumulated deficit, and negative working capital, among other factors, raise substantial doubt about our ability to continue as a going concern. However, we believe the fundraising actions outlined above, and our future operating cash flows, will enable us to meet our liquidity requirements through June 2021. There can be no assurance that we will be successful in any capital-raising efforts that we may undertake, and our failure to raise additional capital could adversely affect our future operations and viability.

 

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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 March 31, 2020, we had $752,113 in cash compared to $812,452 at December 31, 2019, a decrease of $60,339. As of March 31, 2020, we had $1,812,629 in accounts receivable compared to $2,168,659 at December 31, 2019, a decrease of $356,030 resulting from increased collections in the first three months of 2020.

 

As of March 31, 2020, we had total current assets of $7,954,759 and total current liabilities of $20,429,197, or negative working capital of $12,474,438, compared to total current assets of $8,665,369 and total current liabilities of $15,142,599, or negative working capital of $6,477,230 at December 31, 2019. This is a decline of more than $5,997,208 over the working capital balance at the end of 2019.

  

On or prior to June 30, 2021, we have undiscounted obligations relating to the payment of indebtedness as follows: 

 

  $788,709 related to secured notes payable that are past due;

 

  $800,100 related to notes payable that are past due;

 

  $100,000 related to senior convertible debentures that are past due;

 

  $1,549,036 related to notes payable that is due in the second quarter of 2020

 

  $7,935,005 related to notes payable that are due in the third quarter of 2020; and

 

  $1,042,857 related to notes payable that are due in the fourth quarter of 2020.

 

We anticipate meeting our cash obligations on our indebtedness that is payable on or prior to June 30, 2021 from earnings from operations, including, in particular, DragonWave, which was acquired in April 2019, and VNC, which was acquired in July 2020, and possibly from the proceeds of additional indebtedness or equity raises. If we are not successful in obtaining additional financing when required, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our debt obligations as they become due, although there can be no assurance that we will be able to do so.

 

Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of our operations. We have been investing in research and development in anticipation of increasing revenue opportunities in our cellular network solutions business, which has contributed to our losses from operations. Our management has taken several actions to ensure that we will have sufficient liquidity to meet our obligations through June 30, 2021, including the reduction of certain general and administrative expenses such as travel, facilities cost and downsizing. Additionally, if our actual revenues are less than forecasted, we anticipate implementing headcount reductions to a level that more appropriately matches the then-current revenue and expense levels. We also are evaluating other measures to further improve our liquidity, including, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common shares. In April 2020, we entered into agreements with certain debt holders to extend the maturity dates on such debt. We are currently in discussions with potential investors regarding the sale of our equity securities to enhance our liquidity position. Our management believes that these actions will enable us to meet our liquidity requirements through June 30, 2021. There is no assurance that we will be successful in any capital-raising efforts that we may undertake to fund operations during the next 12 months. 

 

We plan to generate positive cash flow from our recently completed acquisitions to address some of our liquidity concerns. However, to execute our business plan, service our existing indebtedness, finance our proposed acquisitions and implement our business strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership in us and could also result in a decrease in the market price of our common stock. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in their current form. 

 

We had no capital expenditures during the three-month period ended March 31, 2020. We expect our capital expenditures for next 12 months will be consistent with our prior spending. These capital expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment. We expect to fund such capital expenditures out of our working capital.

 

Line of Credit and Debt Agreements

 

Summary information with respect to our debt agreements or other credit facilities is set forth in Notes 15 and 23 of the Notes to the Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report.

 

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Sources and Uses of Cash 

 

(Amounts in US$’s)  For the Three
Months Ended
March 31,
2020
   January 10,
2019
(Inception) to
March 31,
2019
 
Cash flows (used in) provided by operating activities  $(490,252)  $34,295 
Cash flows (used in) provided by investing activities   (253,110)   347,342 
Cash flows (used in) provided by financing activities   681,339    (10,232)
Net increase in cash and cash equivalents   (60,339)  $371,405 

 

Operating Activities

 

For the three months ended March 31, 2020, net cash used in operating activities was $490,252. Net cash used in operating activities primarily consisted of the net operating loss of $7,025,538 and gain on the sale of fixed assets of $663, which was partially offset by depreciation and amortization of $2,832,152, amortized discounts and debt issuance costs on our outstanding debt of $633,751 and right-of-use asset amortization of $90,200. Additionally, working capital changes provided $3,118,722 in cash during the period.

 

For the period January 10, 2019 (inception) to March 31, 2019, cash provided by operating activities was $34,295. Net cash provided by operating activities primarily consisted of the net operating loss of $770,677, which was partially offset by depreciation and amortization of $233,228, right-of-use asset amortization of $8,782 and $352,000 of shares issued for restricted stock awards. Additionally, working capital changes provided $210,962 in cash during the period.

 

Investing Activities

 

For the three months ended March 31, 2020, net cash used in investing activities was $253,110 Investing activities primarily consisted of acquisition of the net assets of Fast Plastic Parts, LLC for the purchase price of $829,347, representing cash paid on the closing date of $253,773 and short-term debt incurred to the sellers of $575,574, which was partially offset by proceeds from the disposal of property and equipment of $663.

 

For the period January 10, 2019 (inception) to March 31, 2019, net cash provided by investing activities was $347,342. Investing activities primarily consisted of cash from the ComSovereign’s acquisitions of Silver Bullet Technology, Inc., InduraPower, Inc. and VEO, Inc.

 

Financing Activities

 

For the three months ended March 31, 2020, financing activities provided cash of $681,339. Financing activities primarily consisted of $3,047,971 of proceeds from the issuance of debt, which was offset by the repayment of $2,365,787 of debt and $845 principal payment on finance leases.

 

For the period January 10, 2019 (inception) to March 31, 2019, cash used in financing activities was 10,232. Financing activities primarily consisted of repayment of debt.

 

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Off-Balance Sheet Arrangements

 

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

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required under Regulation S-K for smaller reporting companies.

  

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.

 

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 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 management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective as of 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 fiscal year ended December 31, 2019, management has identified the following material weaknesses in our disclosure controls and procedures:

 

 

management lacks personnel with sufficient knowledge and experience with U.S. GAAP to prepare and review our financial statements, footnotes and supporting schedules;

 

 

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

 

 

we have identified a significant number of material transactions that were not properly recorded or were not recorded at all in the subsidiary ledgers;

 

 

a lack of timely reconciliations of the account balances affected by the improperly recorded or omitted transactions; 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 the material weaknesses in our internal control over financial reporting is ongoing.

 

(b) Changes in Internal Control Over Financial Reporting.

 

There has been no changes in our internal control over financial reporting as of and for the three months ended March 31, 2020, as compared to the internal control over financial reporting weaknesses described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material developments in any of the legal proceedings discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Item 1A. Risk Factors

 

Not required under Regulation S-K for smaller reporting companies.

  

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

 

There have been no sales of unregistered securities within the last two years that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:

 

On July 2, 2020, as partial consideration for a loan we received from an accredited investor, we issued 25,000 shares of our common stock. Such shares were issued by us in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder, and the certificate representing such shares has a legend imprinted on it stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration.

 

On July 17, 2020, as partial consideration for a loan we received from an accredited investor, we issued 40,000 shares of our common stock. Such shares were issued by us in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder, and the certificate representing such shares has a legend imprinted on it stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration. 

  

Item 3. Default Upon Senior Securities Sales of Equity Securities and Use of Proceeds

 

None

 

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

  

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SIGNATURES

 

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

 

ComSovereign Holding Corp.
     
Date: August 10, 2020   /s/ Daniel L. Hodges
  Daniel L. Hodges
  Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 10, 2020   /s/ Brian Mihelich
  Brian Mihelich
  Chief Financial Officer
    (Principal Financial Officer)

 

 

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