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EX-32.2 - CERTIFICATION - ComSovereign Holding Corp.f10q0620ex32-2_comsovereign.htm
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EX-31.2 - CERTIFICATION - ComSovereign Holding Corp.f10q0620ex31-2_comsovereign.htm
EX-31.1 - CERTIFICATION - ComSovereign Holding Corp.f10q0620ex31-1_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 June 30, 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 14, 2020, there were 140,802,285 shares of registrant’s common stock outstanding.

  

 

 

 

 

 

TABLE OF CONTENTS

 

    PAGE 
PART I   FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 1
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020, the three months ended June 30, 2019 and the period January 10, 2019 (inception date) to June 30, 2019. 2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020, three months ended June 30, 2019 and the period January 10, 2019 (inception date) to June 30, 2019. 4
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and the period January 10, 2019 (inception date) to June 30, 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 36
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4 Controls and Procedures 46
     
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3. Default Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48
  Signatures 49

 

i

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEET

 

(Amounts in US$’s, except share data)  June 30,
2020
   December 31,
2019
 
ASSETS  (Unaudited)     
Current Assets        
Cash  $368,685   $812,452 
Accounts receivable, net   1,741,018    2,168,659 
Receivables – related party   1,595    1,595 
Inventory, net   4,607,419    4,671,396 
Notes receivable - VNC   251,042     
Prepaid expenses   405,052    916,729 
Other current assets   55,415    94,538 
Total Current Assets   7,430,226    8,665,369 
Property and equipment, net   2,452,145    1,458,106 
Operating lease right-of-use assets   2,878,467    2,199,682 
Finance lease right-of-use-assets   50,582     
Intangible assets, net   46,551,588    51,277,482 
Goodwill   56,386,795    56,386,796 
Total Assets  $115,749,802   $119,987,435 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities          
Accounts payable  $4,599,561   $2,245,704 
Accrued interest   863,615    306,445 
Accrued liabilities   2,349,665    1,383,008 
Accrued liabilities – related party   392,547    461,254 
Accrued payroll   1,838,393    1,050,703 
Contract liabilities, current   219,549    149,923 
Accrued warranty liability   191,447    195,138 
Operating lease liabilities, current   586,048    467,979 
Finance lease liabilities, current   28,580     
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   11,886,502    5,389,492 
Total Current Liabilities   24,448,860    15,142,599 
Contract liabilities – long term   131,567    152,892 
Operating lease liabilities – long term   2,385,625    1,744,569 
Finance lease liabilities – long term   21,578     
Total Liabilities   26,987,631    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 June 30, 2020 and December 31, 2019, respectively        
Common stock, $0.0001 par value, 300,000,000 shares authorized, 128,846,064 and 128,326,243 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively   12,885    12,833 
Additional paid-in capital   130,957,464    130,553,180 
Accumulated deficit   (42,136,478)   (27,545,255)
Accumulated other comprehensive loss   (21,699)   (23,383)
Treasury stock, at cost, 100,000 shares as of June 30, 2020 and December 31, 2019, respectively   (50,000)   (50,000)
Total Stockholders’ Equity   88,762,172    102,947,375 
Total Liabilities and Stockholders’ Equity  $115,749,802   $119,987,435 

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

1

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s, except share data)  2020   2019   2020   2019 
Revenue  $3,010,093   $985,997   $5,495,297   $1,002,911 
Cost of Goods Sold   1,552,724    881,332    2,613,632    888,270 
Gross Profit   1,457,369    104,665    2,881,665    114,641 
                     
Operating Expenses                    
Research and development (1)   413,012    60,653    701,485    60,964 
Sales and marketing (1)   15,571    1,656    29,625    3,815 
General and administrative (1)   4,246,748    3,589,224    8,680,321    4,392,935 
Depreciation and amortization   2,912,912    2,244,991    5,745,063    2,478,219 
Total Operating Expenses   7,588,243    5,896,524    15,156,494    6,935,933 
Net Operating Loss   (6,130,874)   (5,791,859)   (12,274,829)   (6,821,292)
Other Income (Expense)                    
Loss on investment           (24)    
Foreign currency transaction (gain)/loss   (51,030)   242,226    39,788    242,226 
Interest expense   (1,383,781)   (331,368)   (2,356,821)   (362,602)
Gain on the sale of assets       197,089    663    197,089 
Total Other Expenses   (1,434,811)   107,947    (2,316,394)   76,713 
Net Loss Before Income Taxes   (7,565,685)   (5,683,912)   (14,591,223)   (6,744,579)
Deferred Tax Benefit       1,396,155        1,686,145 
Net Loss  $(7,565,685)  $(4,287,757)  $(14,591,223)  $(5,058,434)
Loss per common share:                    
Basic  $(0.06)  $(0.15)  $(0.11)  $(0.14)
Diluted  $(0.06)  $(0.15)  $(0.11)  $(0.14)
Weighted-average shares outstanding:                    
Basic   128,658,540    28,065,385    128,570,426    36,463,393 
Diluted   128,658,540    28,065,385    128,570,426    36,463,393 

 

(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)

 

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s)  2020   2019   2020   2019 
Net Loss  $(7,565,685)  $(4,287,757)  $(14,591,223)  $(5,058,434)
Other Comprehensive Loss:                    
Foreign currency translation adjustment   ----       (21,699)    
Total Comprehensive Loss  $(7,565,685)  $(4,287,757)  $(14,612,922)  $(5,058,434)

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

3

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three and Six Months Ended June 30, 2020 and For the Three Months Ended June 30, 2019 and for the period January 10, 2019 (Inception) to June 30, 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 
Issuance of common stock for exercise of warrants           283,530    28    2,807                2,835 
Issuance of common stock for payment of accrued interest           21,196    2    38,362                38,364 
Warrants issued in conjunction with debt agreements                   44,323                44,323 
Beneficial conversion feature                   68,654                68,654 
Net loss                               (7,565,685)   (7,565,685)
June 30, 2020      $    128,846,064   $12,885   $130,957,464   $(21,699)  $(50,000)  $(42,136,478)  $88,762,172 

 

(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     $ 23,257,732     $     $     $ (770,677 )   $ 22,490,112  
Issuance of common stock for DragonWave-X LLC and Lextrum, Inc. acquisition                 13,237,149       1,324       58,242,131                         58,243,455  
Foreign currency translation adjustment                                   (21,699 )                 (21,699 )
Net loss                                               (4,287,757 )     (4,287,757 )
June 30, 2019     2,600,000     $ 260       41,207,149     $ 4,121     $ 81,499,863     $ (21,699 )   $     $ (5,058,434 )   $ 76,424,111  

 

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 Six
Months Ended
June 30,
2020
   January 10,
2019
(Inception) to
June 30,
2019
 
Cash flows from operating activities:        
Net loss  $(14,591,223)  $(5,058,434)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   518,944    107,223 
Amortization   5,226,119    2,370,996 
Amortization of operating right-of-use asset   267,835    27,676 
Gain on the sale of assets   (663)   (197,789)

Stock based compensation

       

351,992

 
Amortization of debt discounts and debt issuance costs   1,210,047     
Other, net   (18,927)   26,285 
Changes in assets and liabilities:          
Accounts receivable   427,641    520,209 
Inventory   232,083    87,109 
Prepaids   578,252    (515,214)
Other current assets   39,123    (1,352,985)
Accounts payable   2,534,517    (1,227,720)
Accrued liabilities   966,657    1,250,177 
Accrued interest   542,101    854,524 
Deferred revenue       (12,837)
Operating lease liabilities   (150,320)   29,227 
Advances from related party   (68,707)   1,111,863 
Other current liabilities   853,625    75,328 
Net cash (used in) operating activities   (1,432,896)   (1,552,370)
Cash flows from investing activities:          
Acquisition of net assets   (253,773)    
Sale of property and equipment   ---    396,395 
Cash acquired in acquisitions       1,629,519 
Purchases of property and equipment   (34,065)    
Note Receivable for Acquisition   (250,000)    
Proceeds from disposal of property and equipment   663     
Net cash (used in) provided by investing activities   (537,175)   2,025,914 
Cash flows from financing activities:          
Principal payment on finance lease   (3,413)    
Debt issuance costs   (48,500)    
Proceeds from issuance of debt   4,079,548     
Repayment of debt   (2,501,331)   7,692 
Net cash provided by financing activities   1,526,304    7,692 
Net (decrease)/increase in cash and cash equivalents   (443,767)   481,236 
Cash and cash equivalents, beginning of period   812,452     
Cash and cash equivalents, end of period  $368,685   $481,236 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period:          
Taxes  $   $ 
Interest   351,956     
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 
Issuance of common stock for Lextrum, Inc. acquisition       16,162,064 
Issuance of common stock for DragonWave-X LLC acquisition       42,081,392 
Recognition of operating right-of-use asset and liability       517,208 
Recognition of operating right-of-use asset and liability rent abatement   101,438     
Debt incurred to sellers for Fast Plastics 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   211,176     

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

5

 

  

COMSOVEREIGN HOLDING CORP.

Notes to Consolidated Financial Statements

June 30, 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 three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 2019 and those of the Company for the three-and six-month periods ended June 30, 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-and six-month periods ended June 30, 2020.

 

ComSovereign 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 Plastics LLC (“Sovereign Plastics”), acquired substantially all of the assets of a Colorado Springs, Colorado-based manufacturer of Plastics and metal components to third-party manufacturers. The Company acquired its Sovereign Plastics business to increase its operating margins by reducing the manufacturing and production costs of its telecom products. Sovereign Plastics 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 Plastics from sales to third parties to be material in the future. 

 

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 and six months ended June 30, 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 three- and six-month periods ended June 30, 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 Plastics. All intercompany transactions and accounts have been eliminated.

 

Reclassifications

 

Certain immaterial 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 have been no material changes in the Company’s significant accounting policies as of and for the three months ended June 30, 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

 

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

 

The accompanying unaudited consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2020, the Company generated negative cash flows from operations of $1,432,896 and had an accumulated deficit of $42,136,478 and negative working capital of $16,730,537.

 

8

 

 

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 approximate $15,000,000 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. Nevertheless, 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.

  

4. REVENUE

 

The following table is a summary of the Company’s timing of revenue recognition for the three and six months ended June 30, 2020 and for the three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 2019:  

  

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s)  2020   2019   2020   2019 
Timing of revenue recognition:                
Services and products transferred at a point in time  $2,953,382   $463,122   $5,115,420   $464,325 
Services and products transferred over time   56,711    522,875    379,877    538,586 
Total revenue  $3,010,093   $985,997   $5,495,297   $1,002,911 

 

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 and six months ended June 30, 2020 and for the three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 2019:

  

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s)  2020   2019   2020   2019 
Revenue by products and services:                
Products  $2,697,266   $463,122   $4,571,616   $464,325 
Services   312,827    522,875    923,681    538,586 
Total revenue  $3,010,093   $985,997   $5,495,297   $1,002,911 

 

9

 

 

Revenue by geographic destination consisted of the following for the for the three and six months ended June 30, 2020 and for the three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 2019:

   

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10, 2019
(Inception) to
June 30,
 
(Amounts in US$’s)   2020   2019   2020   2019 
Revenue by geography:                
North America  $2,735,074   $186,341   $4,924,750   $203,255 
International   275,019    799,656    570,547    799,656 
Total revenue  $3,010,093   $985,997   $5,495,297   $1,002,911 

 

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 June 30, 2020, the Company did not have a contract assets balance.

 

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

 

(Amounts in US$’s)   Total 
Balance at December 31, 2019  $302,815 
Increase   50,699 
Balance at June 30, 2020  $353,514 

 

The increase in contract liabilities during the six months ended June 30, 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 six months ended June 30, 2020 that was included in the prior period contract liability balance was $116,707. This revenue consisted of services provided to customers who had been invoiced prior to the current year.

  

 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.

 

10

 

 

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: 

 

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s, except share data)  2020   2019   2020   2019 
Numerator:                
Net Loss  $(7,565,685)  $(4,287,757)  $(14,591,223)  $(5,058,434)
Numerator for basic earnings per share – loss available to common shareholders  $(7,565,685)  $(4,287,757)  $(14,591,223)  $(5,058,434)
Denominator:                    
Denominator for basic earnings per share - weighted average common shares outstanding   128,658,540    28,065,385    128,570,426    36,463,393 
Dilutive effect of warrants and options                
Denominator for diluted earnings per share - weighted average common shares outstanding and assumed conversions   128,658,540    28,065,385    128,570,426    36,463,393 
Basic loss per common share  $(0.06)  $(0.15)  $(0.11)  $(0.14)
Diluted loss per common share  $(0.06)  $(0.15)  $(0.11)  $(0.14)

 

Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of options, warrants, or convertible debt 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 June 30, 2020 and December 31, 2019.

  

Cash and cash equivalents consisted of the following as of June 30, 2020 and December 31, 2019:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Cash and cash equivalents  $368,685   $812,452 
Total cash and cash equivalents in the Statement of Cash Flows  $368,685   $812,452 

 

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 June 30, 2020 and December 31, 2019:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Account receivables  $2,802,229   $2,859,489 
Less: Allowance for doubtful accounts   (1,061,211)   (690,830)
Total account receivables, net  $1,741,018   $2,168,659 

 

11

 

 

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 June 30, 2020 and December 31, 2019:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Raw materials  $1,208,021   $1,041,256 
Work in progress   1,038,681    1,566,147 
Finished goods   3,409,325    3,060,518 
Total inventory   5,656,027    5,667,921 
Reserve   (1,048,608)   (996,525)
Total inventory, net  $4,607,419   $4,671,396 

 

9. PREPAID

 

Prepaid expenses consisted of the following as of June 30, 2020 and December 31, 2019:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Prepaid products and services  $341,940   $873,617 
Prepaid rent and security deposit   63,112    43,112 
   $405,052   $916,729 

  

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.

 

12

 

 

Property and equipment, net consisted of the following as of June 30, 2020 and December 31, 2019:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Shop machinery and equipment  $9,452,873   $8,100,667 
Computers and electronics   587,659    558,561 
Office furniture and fixtures   337,394    341,214 
Leasehold improvements   243,567    222,332 
    10,621,493    9,222,774 
Less - accumulated depreciation   (8,169,348)   (7,764,668)
   $2,452,145   $1,458,106 

 

For the six months ended June 30, 2020, the Company invested $34,065 in capital expenditures.

 

The Company recognized $291,974 and $107,223 of depreciation expense for the three months ended June 30, 2020 and 2019, respectively, and $518,944 and $107,223 for the six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 2019, respectively.

  

11. LEASES

 

Operating Leases

 

The Company has operating leases for office, manufacturing, and warehouse space. Amounts recognized as of June 30, 2020 and December 31, 2019 for operating leases were as follows:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
ROU assets  $2,878,467   $2,199,682 
Lease liability  $2,971,673   $2,212,548 

  

During the quarter ended March 31, 2020, the Company recognized three 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)  For the six
months ended
June 30,
2020
 
ROU Asset – December 31, 2019  $2,199,682 
Increase   1,048,058 
Decrease   (101,438)
Amortization   (267,835)
ROU Asset – June 30, 2020  $2,878,467 
      
Lease liability – December 31, 2019  $2,212,548 
Increase   1,048,058 
Decrease   (101,438)
Amortization   (187,495)
Lease liability – June 30, 2020  $2,971,673 
      
Lease liability – short term  $586,048 
Lease liability – long term   2,385,625 
Lease liability – total  $2,971,673 

 

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The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of June 30, 2020 and December 31, 2019, respectively:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Weighted average remaining lease term   4.72 years    4.56 years 
Weighted average discount rate   6.01%   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 Condensed Consolidated Balance Sheet as of June 30, 2020:

 

(Amounts in US$’s)  Operating
Leases
 
     
Remainder of 2020  $323,725 
2021   740,907 
2022   660,091 
2023   671,761 
2024   635,306 
Thereafter   371,116 
Total minimum lease payments   3,402,906 
Less: effect of discounting   (431,233)
Present value of future minimum lease payments   2,971,673 
Less: current obligations under leases   (586,048)
Long-term lease obligations  $2,385,625 

 

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.

 

On June 11, 2020, the Company entered into a 24-month finance lease for certain equipment. The finance lease includes a bargain purchase option of $1 for the equipment at the end of the term on June 11, 2022. A right-of-use asset and lease liability for $35,562 was recorded on June 11, 2020. Monthly payments are $1,481.69 during the life of the lease, excluding the bargain purchase option. The lease included an implicit rate of return.

 

14

 

 

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

  

(Amounts in US$’s)  For the six
months ended
June 30,
2020
 
ROU Asset – December 31, 2019  $ 
Increase   53,571 
Decrease    
Amortization   (2,989)
ROU Asset – June 30, 2020  $50,582 
      
Lease liability – December 31, 2019  $ 
Increase   53,571 
Decrease    
Interest accretion   446 
Payment   (3,859)
Lease liability – June 30, 2020  $50,158 
      
Lease liability – short term  $28,580 
Lease liability – long term   21,578 
Lease liability – total  $50,158 

 

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of June 30, 2020 and December 31, 2019, respectively:

 

(Amounts in US$’s)  June 30,
2020
   December 31,
2019
 
Weighted average remaining lease term   1.81 years   4.56 years 
Weighted average discount rate   2.42%   6.50%

  

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 June 30, 2020 approximated their fair value due to their short-term nature.

 

15

 

 

13. BUSINESS 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 issued 50,000 shares of common stock. See Note 15 for further discussion of the promissory note. The Company expensed acquisition-related costs of $25,714 in the six months ended June 30, 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 Condensed Consolidated Balance Sheet at June 30, 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 14, 2020.

  

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).

   

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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 

   

17

 

 

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 

 

18

 

 

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

 

On November 27, 2019, the Company completed the ComSovereign Acquisition in a stock for stock transaction that was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquiror and the Company as the accounting acquiree.

 

The allocation of the total purchase price to the Company’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 

   

19

 

  

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.

 

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. For the six months ended June 30, 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 six months ended June 30, 2020:

 

(Amounts in US$’s)  Total 
Balance at December 31, 2019  $56,386,795 
Balance at June 30, 2020  $56,386,795 

 

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of June 30, 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   $(892,341)  $4,750,863 
Technology   32,800,000    (7,041,707)   25,758,293 
Customer relationships   15,611,018    (3,599,414)   12,011,604 
Intellectual property   3,729,537    (362,594)   3,366,943 
Noncompete   937,249    (273,364)   663,885 
Total definite-lived intangible assets at June 30, 2020  $58,721,008   $(12,169,420)  $46,551,588 

 

Amortization expense of intangible assets was $2,617,949 and $2,134,768 for the three months ended June 30, 2020 and 2019, respectively, and $5,226,119 and $2,370,996 for the six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 2019, respectively.

 

20

 

 

As of June 30, 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   $ 5,234,126     $ 10,446,204     $ 10,016,632     $ 10,016,632     $ 7,961,738  

 

   Estimated 
(Amounts in US$’s)   2025   2026 
Amortization expense  $2,559,307   $316,950 

 

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.

 

21

 

 

Long-term debt consisted of the following as of June 30, 2020 and December 31, 2019:

 

      June 30, 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   201,179    9.0%   224,288    9.0%
Secured note payable*  September 1, 2021   18,980    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   401,634    78.99%        
Secured note payable*  June 1, 2020   942,735    5.0%        
Secured note payable  August 31, 2020   2,007,971    5.0%        
Total secured notes payable      6,361,208         3,034,568      
                        
Notes Payable                       
Equipment financing loan  September 15, 2020   1,708    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*  August 31, 2020   5,000,000    12.0%   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   379,587    0%        
Note payable*  June 30, 2020   165,987    0%        
Note payable  September 4, 2020   500,000    0%        
Note payable*  February 16, 2023   83,309    3.0%        
Equipment financing loan*  November 9, 2023   62,428    8.5%        
Equipment financing loan*  December 19, 2023   92,165    6.7%        
Equipment financing loan*  January 17, 2024   42,326    6.7%        
PPP loans  April 30, 2022 through
May 26, 2022
   455,184    1%        
Note payable  September 30, 2020   290,000    0%        
Total notes payable      8,547,794         6,728,928      
                        
Senior Debentures                       
Senior debenture*  December 31, 2019   100,000    15.0%   100,000    15.0%
Total senior debentures      100,000         100,000      
                        
Convertible Notes Payable                       
Convertible note payable  January 29, 2021   285,714    12.5%        
Total convertible notes payable      285,714              
                        
Senior Convertible Debentures                       
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      250,000         275,000      
Total long-term debt      15,544,716         10,138,496      
Less unamortized discounts and debt issuance costs      (3,658,214)        (4,749,004)     
Total long-term debt, less discounts and debt issuance costs      11,886,502         5,389,492      
Less current portion of long-term debt      (11,886,502)        (5,389,492)     
Debt classified as long-term debt     $        $      

 

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

 

22

 

 

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 June 30, 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. This promissory note is currently past due. As of June 30, 2020, an aggregate principal amount of $201,179 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 June 30, 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. This promissory note is currently past due. As of June 30, 2020, an aggregate principal amount of $18,980 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 June 30, 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 June 30, 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 and six months ended June 30, 2020, $590,000 and $1,180,000 of these costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of June 30, 2020, there were $14,167 of debt discounts and $3,329,167 of debt issuance costs remaining.

23

 

 

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 June 30, 2020, an aggregate principal amount of $401,634 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 Plastics. This loan is subjected to covenants, whereby Sovereign Plastics is required to meet certain financial and non-financial covenants at the end of each fiscal year. Payments in the amount of $22,404 for interest and principal were due over the two months prior to maturity, with the balance due at maturity. As of June 30, 2020, an aggregate principal amount of $942,735 was past due under this loan. On August 5, 2020, the maturity date of this loan was extended to September 15, 2020, with a single payment of all unpaid principal and accrued interest then due, and the interest rate was increased to 36% per annum for any principal balance remaining unpaid past the extended maturity date.

 

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 June 30, 2020, an aggregate principal amount of $2,007,971 was outstanding under this loan. On August 5, 2020, the maturity date of this loan was extended to October 15, 2020.

 

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 June 30, 2020, the loan had an outstanding balance of $1,708.

 

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 June 30, 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. On April 21, 2020, all unpaid accrued interest from October 1, 2019 through December 31, 2019 was converted into 14,496 shares of issued common stock of the Company. Accrued interest and the full principal balance are due at maturity. As of June 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note.

 

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 June 30, 2020, the aggregate principal amount of $175,000 was outstanding under this note.

 

24

 

 

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, interest payments are due and payable monthly, which are currently past due. On April 21, 2020, the maturity date of this note was extended to August 31, 2020, the interest rate was increased to 12% per annum, and the Company provided to the lender 100,000 fully paid and non-assessable shares of its common stock that have been treated as debt issuance costs. As of June 30, 2020, an aggregate principal amount of $5,000,000 was outstanding under this note. 

 

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 June 30, 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. The Company repaid $250,000 of the aggregate principal amount of this promissory note during the first quarter of the current fiscal year. As of June 30, 2020, the remaining aggregate principal amount of $200,100 is currently past due and outstanding.

   

On March 5, 2020, the Company sold a promissory note in the principal amount of $500,000 that matures on September 4, 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 June 30, 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 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 June 30, 2020, the aggregate amount of $379,587 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 June 30, 2020, an aggregate amount of $165,987 was outstanding.

 

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. 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 June 30, 2020, an aggregate principal amount of $83,309 was outstanding under this note.

 

25

 

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed an equipment financing loan 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 June 30, 2020, an aggregate amount of principal of $62,428 was outstanding under this loan.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed an equipment financing loan 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 June 30, 2020, an aggregate amount of principal of $92,165 was outstanding under this loan.

 

In connection with the Acquired Business acquisition on March 6, 2020, the Company assumed an equipment financing loan 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 June 30, 2020, an aggregate amount of principal of $42,326 was outstanding under this loan.

 

Between April 30 and May 26, 2020, six of the Company’s subsidiaries received loan proceeds in the aggregate amount of $455,184 under the Paycheck Protection Program (“PPP”). The PPP loan has a maturity of 2 years and an interest rate of 1% per annum. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable pursuant to section 1106 of the CARES Act, after a period of up to 24 weeks, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness shall be calculated in accordance with the requirements of the PPP, including the provisions of Section 1106 of the CARES Act, although no more than 40 percent of the amount forgiven can be attributable to non-payroll costs. Further, the amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the period of up to 24 weeks. As of June 30, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans.

 

On May 29, 2020, the Company entered into a promissory note in the principal amount of $290,000 with an original issue discount of $40,000 and a maturity date of September 30, 2020. The full $290,000 balance is due at maturity, with interest accruing at a rate of 12% per annum for any principal balance remaining unpaid past the maturity date. As of June 30, 2020, an aggregate principal amount of $290,000 was outstanding under this note.

 

Senior 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. On April 30, 2020, these debentures were modified to remove the conversion feature and only have settlement through cash. As of June 30, 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.

 

26

 

 

 Convertible Notes Payable

 

On April, 29, 2020, the Company sold a $285,714 aggregate principal amount convertible promissory note with an original issue discount of $35,714 that bears interest at a rate of 12.5% per annum and matures on January 29, 2021. Accrued interest and principal are due on the maturity date. Upon maturity, the interest rate shall automatically increase to 18% per annum or the maximum amount permitted by applicable law on any unpaid principal and accrued interest. The Company also issued warrants to purchase 158,730 shares of common stock that are exercisable for a purchase price of $0.99 per share at any time on or prior to April 29, 2025. Warrants to purchase up to 27,778 shares of common stock, at an exercise price of 110% of the initial conversion price of the notes (i.e., an exercise price of $0.99), at any time on or prior to April 29, 2025, were also issued to an unrelated third party as a placement fee for the transaction. In connection with this note, the Company recognized a BCF of $68,654, a debt discount of $36,906 associated with the issuance of warrants to the note holder, and debt issuance costs of $37,418, which were all recorded as debt discounts. During the three and six months ended June 30, 2020, $39,709 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of June 30, 2020, there were $138,901 of debt discounts remaining, and an aggregate principal amount of $285,714 was outstanding under this note. On July 7, 2020, the Company sold to the same investor an additional original issue discount note in the principal amount of $285,714 and warrants to purchase an additional 158,730 shares of common stock, with similar terms.

 

Senior Convertible Debentures  

 

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. The aggregate principal amount of $25,000 under these debentures was fully repaid during the first quarter of the current fiscal year.

 

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. 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 were recorded as debt discounts. On April 21, 2020, all unpaid accrued interest through December 31, 2019 was converted into 6,700 shares of issued common stock of the Company. Also on April 21, 2020, all the outstanding warrants were exercised at $0.01 per share into 283,530 issued shares of the Company’s common stock, resulting in full recognition in interest expense of the remaining debt discount of approximately $139,000 associated with the issuance of warrants. 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. During the three and six months ended June 30, 2020, $151,700 and 176,700 of the costs recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of June 30, 2020 and December 31, 2019, there were $48,300 and $225,000 of debt discounts remaining, respectively. As of June 30, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures.

 

Certain 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.

 

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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  $12,334,317 
2021   2,631,197 
2022   520,667 
2023   57,478 
2024   1,057 
Thereafter    
Total  $15,544,716 

 

See Note 23 – Subsequent Events for details regarding additional debt incurred after June 30, 2020.

 

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 that can significantly influence the management or operating policies of the transacting parties or has an ownership interest in one of the other 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 June 30, 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 June 30, 2020 and December 31, 2019, the accrued liabilities – related party balance was $392,547 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 June 30, 2020 and December 31, 2019.

 

During 2019 and the six months ended June 30, 2020, Sergei Begliarov paid $71,199 and $8,001, respectively, of expenses on 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 six months ended June 30, 2020. Additionally, during 2019, TM Technologies, Inc. (“TM”), described below, paid $29,300 of expense on behalf of InduraPower. These amounts were recorded in accrued liabilities – related party as of June 30, 2020 and December 31, 2019, respectively.

  

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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 $71,263 for normal monthly retainers and expenses incurred as of June 30, 2020 and $23,036 as of December 31, 2019. This amount was recorded in accrued liabilities – related party as of June 30, 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 June 30, 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 June 30, 2020 and $148,250 as of December 31, 2019. This amount was recorded in accrued liabilities – related party as of June 30, 2020 and December 31, 2019, respectively.

 

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 June 30, 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 the Chief Financial Officer (CFO) and a board member of TM. In addition, Mr. Kevin Sherlock, the Company’s General Counsel, is also a director of TM. During 2019, TM also performed engineering services on behalf of DragonWave.

  

In October 2017, TM loaned $250,000 to DragonWave. 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 June 30, 2020 and December 31, 2019, $1,292,953 plus accrued interest was outstanding under this loan.

 

See Note 23 – Subsequent Events for information related to a $50,000 promissory note issued to Brent Davies on July 1, 2020.

 

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17. SHAREHOLDERS’ EQUITY

 

For the six months ended June 30, 2020

  

As of June 30, 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 128,846,064 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 its 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 $193,160. 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 June 30, 2019

 

As of June 30, 2019, ComSovereign 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, 41,207,149 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.

  

Dividends

 

The Company did not pay dividends to holders of its common stock during the six months ended June 30, 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 six months ended June 30, 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 June 30, 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 six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 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 – June 30, 2020   5,065,000   $0.65    1.69   $2,191,750 
Exercisable – June 30, 2020   5,065,000   $0.65    1.69   $2,191,750 

 

   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   (50,000)   0.90         
Outstanding – June 30, 2019   14,120,000   $0.61    1.57   $4,466,080 
Exercisable – June 30, 2019   13,745,000   $0.60    1.56   $4,466,080 

 

For the six months ended June 30, 2020, there were no unvested stock options.

 

The Company did not record any share-based compensation expense for the six months ended June 30, 2020. Compensation expense related to stock options is recorded in share-based compensation expense in the Consolidated Statement of Operations. For the six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 2019, there was no unrecognized compensation expense related to stock options.

 

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Restricted Stock Awards

 

On March 25, 2019, ComSovereign Corp.’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. ComSovereign Corp. did not recognize any additional stock compensation expense related to RSAs during the three months ended June 30, 2019.

 

For the six months ended June 30, 2020, the Company did not recognize any expense related to RSAs. For the period January 10, 2019 (Inception) through June 30, 2019, the Company recognized $62,500 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.

 

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 15, 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.

 

19. WARRANTS

 

On April 29, 2020, the Company issued a warrant to purchase 158,730 shares of the Company’s common stock. The warrant was issued in conjunction with the sale of the Company’s 12.5% OID Convertible Note. The warrant has an exercise price of $0.99 per share and an expiration date of April 29, 2025. In connection with this transaction and as a placement fee to an unrelated third party, the Company also issued a warrant to purchase 27,778 shares of the Company’s common stock. The warrant has an exercise price of $0.99 per share and an expiration date of April 29, 2025. None of these warrants were exercised during the six months ended June 30, 2020. No warrants were granted by the Company during the period January 10, 2019 (inception) to June 30, 2019.

 

On September 24, 2019, ComSovereign Corp. issued a warrant to purchase 150,000 shares of ComSovereign’s common stock, which was converted into the ability to purchase 283,530 shares of the Company’s common stock as a result of the ComSovereign Merger. The warrant was issued in conjunction with the sale of ComSovereign’s 10% Senior Convertible Debentures. The warrant had an exercise price of $0.01 per share and an expiration date of December 31, 2021. No warrants were exercised during fiscal 2019. On April 21, 2020, these warrants were exercised and exchanged for 283,530 shares of the Company’s common stock.

 

The following table summarizes the assumptions used to estimate the fair value of warrants granted during the six months ended June 30, 2020:

 

   2020 
Expected dividend yield   0%
Expected volatility   29.29%
Risk-free interest rate   0.36%
Expected life of warrants   5.0 years 

 

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The following table represents warrant activity for the six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 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   186,508    0.99    5.00    - 
Exercised   (283,530)   0.01    1.50    - 
Forfeited or Expired   -    -    -    - 
Outstanding – June 30, 2020   406,501   $1.62    2.98   $43,690 
Exercisable – June 30, 2020   406,501   $1.62    2.98   $43,690 

 

   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   (60,000)   2.91         
Outstanding – June 30, 2019   2,220,000   $0.66    3.03   $838,450 
Exercisable – June 30, 2019   2,220,000   $0.66    3.03   $838,450 

 

20. INCOME TAXES

 

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 six months ended June 30, 2020 and the period January 10, 2019 (Inception) to June 30, 2019 due to the following:

 

    Six Months
Ended
June 30,
2020
    January 10,
2019
(Inception) to
June 30,
2019
 
(Amounts in US$’s)   US$’s     Rates     US$’s     Rates  
Income tax benefit at statutory federal income tax rate   $ (3,009,100 )     21.00 %   $ (1,416,362 )     21.00 %
State tax expense, net of federal benefit     (573,200 )     4.00 %    

(269,783

)     4.00 %
Permanent items     400       (0.01 )%            
Other      6,100       (0.04 )%            
Valuation allowance     3,575,800       (24.99 )%   $         (25.00 )%
Income tax expense (benefit)                 1,686,145       25.00 %

 

To determine the quarterly provision for income taxes, the Company uses 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 the Company is 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. The Company recognizes interest and penalties related to uncertain tax positions, if any, as an income tax expense. As of June 30, 2020, and December 31, 2019, the Company had not recorded any liabilities for uncertain tax positions. There were no discrete items for the quarter ended June 30, 2020.

  

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The Company records valuation allowances to reduce its deferred tax asset to an amount that it believes 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 June 30, 2020, the Company recorded a change in the valuation allowance of $1,819,900 as compared to $0 for the three months ended June 30, 2019.

 

It is the Company’s 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. The Company’s tax reserves are analyzed quarterly, and adjustments are made as events occur that the Company believes 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 was obligated to pay Arrow $503,500 on or before August 15, 2020, DragonWave-X gave a consent judgment to Arrow in the amount of $503,000, and the Company guaranteed DragonWave-X’s payment to Arrow. The consent judgment against DragonWave-X was entered on June 15, 2020. Also on June 15, 2020 the Company was dismissed from the case. On August 14, 2020, Arrow and DragonWave entered into an amendment to the June 12, 2020 settlement agreement whereby DragonWave was obligated to pay Arrow $200,000 on or before August 17, 2020 and $313,000 on or before September 18, 2020. As of August 18, 2020 $200,000 was paid to Arrow.

 

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. On June 8, 2020, Tessco obtained an order entering judgement against DragonWave. As of August 17, 2020, the judgement remains unpaid.

 

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 June 30, 2020, accounts receivable from one customer comprised 38% of the Company’s total trade accounts receivable, and none of this balance had been characterized as uncollectible as of June 30, 2020.

 

23. SUBSEQUENT EVENTS

 

Corporate Acquisition

 

On July 6, 2020, the Company completed its acquisition (the “VNC 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.

 

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In connection with the VNC 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 VNC 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 July 1, 2020, the Company borrowed $50,000 from Mr. Davies and issued Mr. Davies a promissory note evidencing such loan that bears interest of $1,000 and matures on August 31, 2020.

  

Between July 2, 2020 and August 10, 2020, the Company borrowed an aggregate of $900,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes are between $50,000 and $200,000. The loans bear interest at a rate of 15% and have maturity dates between October 13, 2020 and November 9, 2020. As additional consideration for such loans, Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, transferred to such investors an aggregate of 170,000 shares of common stock. On July 29, 2020, the Company sold 91,841 shares of common stock at a price of $1.00 per share to one of the accredited investors.

 

Operating Lease

 

On August 14, 2020, the Company amended its lease for 5,533 square feet of office space in Jacksonville, Florida to extend the term through July 31, 2023 with monthly payments ranging from $4,786 to $5,078 over the extended lease term, a reduced monthly payment compared to the prior lease term.

 

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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 and six months ended June 30, 2020 compared to three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 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.

 

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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 three months ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 2019 and those of our company for the three and six month period ended June 30, 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- and six-month periods ended June 30, 2020.

 

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 November 2019.

 

  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.

 

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

 

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 June 30, 2020, we had a backlog of orders for our mobile network backhaul products in the amount of $432,698 with the majority of the products shipped in the third 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 the fourth quarter of 2020, we expect to commence commercial production of our intelligent batteries for the telecom, aerospace and transportation industries, which we expect will increase our revenues in 2020 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. 

 

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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 expenses 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.

 

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. 

 

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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 $1,686,145 was reported for the period January 10, 2019 (Inception) to June 30, 2019, but no tax benefit has been reported for the three or six months ended June 30, 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.

 

Results of Operations  

 

   Three Months Ended
June 30,
   Six Months
Ended
June 30,
   January 10,
2019
(Inception) to
June 30,
 
(Amounts in US$’s, except share data)  2020   2019   2020   2019 
Revenue  $3,010,093   $985,997   $5,495,297   $1,002,911 
Cost of Goods Sold   1,552,724    881,332    2,613,632    888,270 
Gross Profit   1,457,369    104,665    2,881,665    114,641 
                     
Operating Expenses                    
Research and development   413,012    60,653    701,485    60.964 
Sales and marketing   15,571    1,656    29,625    3,815 
General and administrative    4,246,748    3,589,224    8,680,321    4,392,935 
Depreciation and amortization   2,912.912    2,244,991    5,745,063    2,478,219 
Total Operating Expenses   7,588,243    5,896,524    15,156,494    6,935,933 
Net Operating Loss   (6,130,874)   (5,791,859)   (12,274,829)   (6,821,292)
Other Income (Expense)                    
Loss on investment           (24)    
Foreign currency transaction (gain)/loss   (51,030)   242,226    39,788    242,226 
Interest expense   (1,383,781)   (331,368)   (2,356,821)   (362,602)
Other income       197,089    663    197,089 
Total Other Expenses   (1,434,811)   107,947    (2,316,394)   76,713 
Net Loss Before Income Taxes   (7,565,685)   (5,683,912)   (14,591,223)   (6,744,579)
Deferred Tax Benefit       1,396,155        1,686,145 
Net Loss  $(7,565,685)  $(4,287,757)  $(14,591,223)  $(5,058,434)
Basic and Diluted Loss Per Common Share:  $(0.06)  $(0.15)  $(0.11)  $(0.14)

 

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Three and Six Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019 and the period January 10, 2019 (Inception) to June 30, 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 June 30, 2019, ComSovereign generated only nominal revenues.

 

Total Revenues

 

For the three months ended June 30, 2020, total revenues were $3,010,093 compared to $985,997 for the same period in 2019, 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 six months ended June 30, 2020, total revenues were $5,495,297 compared to $1,002,911 for the period January 10, 2019 (Inception) to June 30, 2019, 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.

 

Cost of Goods Sold and Gross Profit

 

For the three months ended June 30, 2020, cost of goods sold were $1,552,724 compared to $881,332 for the same period in 2019, 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 June 30, 2020 was $1,457,369 with a gross profit margin of 48% compared to $104,665 for the same period in 2019 with a gross profit margin of 11%.

 

For the six months ended June 30, 2020, cost of goods sold were $2,613,632 compared to $888,270 for the period January 10, 2019 (Inception) to June 30, 2019, 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 six months ended June 30, 2020 was 2,881,665 with a gross profit margin of 52% for the same period compared to $114,641 for the period January 10, 2019 (Inception) to June 30, 2019 with a gross profit margin of 11% for the same period.

 

These changes in gross profit margin resulted primarily from the increased gross profit margin of DragonWave during the six months ended June 30, 2020 and the acquisitions of Drone Aviation and Sovereign Plastics on November 27, 2019 and March 6, 2020, respectively. As described above, for the period January 10, 2019 (Inception) to June 30, 2019, ComSovereign generated only nominal revenues. DragonWave’s sales and gross profit margin increased following the preparatory actions performed in 2019, including manufacturing line readiness and subsidiary integration actions.

 

Research and Development Expense

 

For the three months ended June 30, 2020, research and development expenses were $413,012 compared to $60,653 for the same period in 2019, which primarily consisted of payroll and related costs.

 

For the six months ended June 30, 2020, research and development expenses were $701,485 compared to $60,964 for the period January 10, 2019 (Inception) to June 30, 2019, which primarily consisted of payroll and related costs.

 

These increases in research and development expenses resulted from multiple new technology integration efforts across our subsidiaries, including expenses related to additional contracted engineering services teams.

 

Sales and Marketing Expense

 

For the three months ended June 30, 2020, sales and marketing expenses were $15,571 compared to $1,656 for the same period in 2019, which primarily consisted of payroll and related costs.

 

For the six months ended June 30, 2020, sales and marketing expense was $29,625 compared to $3,815 for the period January 10, 2019 (Inception) to June 30, 2019, which primarily consisted of payroll and related costs.

 

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General and Administrative Expenses

 

For the three months ended June 30, 2020, general and administrative expenses were $4,246,748 compared to $3,589,224 for the same period in 2019. Such expenses primarily consisted of payroll and related costs of $2,129,164, business overhead costs of $238,921, professional fees of $1,333,897, rent of $286,103 and travel of $36,701 recorded in the second quarter of 2020 and payroll and related costs of $326,485, professional fees of $141,064, business overhead costs of $2,661,495 and rent of $29,393 recorded in the second quarter of 2019.

 

For the six months ended June 30, 2020, general and administrative expenses were $8,680,321 compared to $4,392,935 for the period January 10, 2019 (Inception) to June 30, 2019. Such expenses primarily consisted of payroll and related costs of $4,040,431, business overhead costs of $1,498,897, professional fees of $2,090,216, rent of $483,582 and travel of $118,249 recorded during the first six months of 2020 and payroll and related costs of $327,485, share-based compensation of $352,000 and professional fees of $865,547 recorded during the period January 10, 2019 (Inception) to June 30, 2019.

 

Depreciation and Amortization

 

For the three months ended June 30, 2020, depreciation and amortization were $2,910,423 compared to $2,241,991 for the same period in 2019, which primarily included $2,618,449 and $2,134,768 of amortization on definite-lived intangible assets, respectively, and $291,974 and $107,223 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, respectively. 

 

For the six months ended June 30, 2020, depreciation and amortization were $5,745,063 compared to $2,478,219 for the period January 10, 2019 (Inception) to June 30, 2019, which primarily included $5,226,119 and $2,370,996 of amortization on definite-lived intangible assets, respectively, and $518,944 and $107,223 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, respectively. 

 

Other Income and Expenses

 

For the three months ended June 30, 2020, total other expenses were $1,434,811 compared to total other income of $107,947 for the same period in 2019. This increase primarily consisted of $1,384,809 of interest expense and amortized discounts on our outstanding debt and a $51,030 loss on foreign exchange transactions partially offset by $1,048 of interest income recorded in the second quarter of 2020 and $331,368 of interest expense and amortized discounts on our outstanding debt, which was partially offset by a $242,226 gain on foreign exchange transactions and $197,089 of proceeds from the disposal of property and equipment recorded in the second quarter of 2019.

 

For the six months ended June 30, 2020, total other expenses were $2,316,394 compared to total other income of $76,713 for the period January 10, 2019 (Inception) to June 30, 2019. This increase primarily consisted of $2,356,821 of interest expense and amortized discounts on our outstanding debt and a $24 loss on our investments, which was partially offset by a $39,788 gain on foreign exchange transactions and $663 of proceeds from the disposal of property and equipment recorded during the first six months of 2020 and $362,602 of interest expense and amortized discounts on our outstanding debt, which was partially offset by a $242,226 gain on foreign exchange transactions and $197,089 of proceeds from the disposal of property and equipment recorded during the period January 10, 2019 (Inception) to June 30, 2019.

 

Provision for Income Taxes 

 

For the three months ended June 30, 2020, there was no provision for income taxes due to an increase in the valuation allowance of $1,819,900 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.

 

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Net Loss 

 

For the three months ended June 30, 2020, we had a net loss of $7,565,685 compared to a net loss of $4,287,757 for the same period in 2019, related to the items described above.

 

For the six months ended June 30, 2020, we had net loss of $14,591,223 compared to a net loss of $5,058,434 for the period January 10, 2019 (Inception) to June 30, 2019, 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 June 30, 2020, we generated negative cash flows from operations of $1,432,896 and had an accumulated deficit of $42,136,478 and negative working capital of $16,730,537.

 

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 $15,000,000 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.

 

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 June 30, 2020, we had $368,685 in cash compared to $812,452 at December 31, 2019, a decrease of $443,767. As of June 30, 2020, we had $1,741,018 in accounts receivable compared to $2,168,659 at December 31, 2019, a decrease of $427,641 resulting from increased collections in the first six months of 2020.

 

As of June 30, 2020, we had total current assets of $7,430,226 and total current liabilities of $24,448,860, or negative working capital of $16,730,537, compared to total current assets of $8,665,369 and total current liabilities of $17,018,634, or negative working capital of $6,477,230 at December 31, 2019. This is a decline of more than $10,541,404 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.

 

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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. Since 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 capital expenditures of $34,065 during the six-month period ended June 30, 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.

 

Sources and Uses of Cash 

 

(Amounts in US$’s)  For the Six
Months Ended
June 30,
2020
   January 10,
2019
(Inception) to
June 30,
2019
 
Cash flows (used in) provided by operating activities  $(1,432,896)  $(1,552,370)
Cash flows (used in) provided by investing activities   (537,175)   2,025,914 
Cash flows (used in) provided by financing activities   1,526,304    7,692 
Net increase/(decrease) in cash and cash equivalents  $(443,767)  $481,236 

 

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Operating Activities

 

For the six months ended June 30, 2020, net cash used in operating activities was $1,432,896. Net cash used in operating activities primarily consisted of the net operating loss of $14,591,223 and gain on the sale of fixed assets of $663, which was partially offset by depreciation and amortization of $5,745,063, amortized discounts and debt issuance costs on our outstanding debt of $1,210,047 and right-of-use asset amortization of $267,835. Additionally, working capital changes provided $5,936,045 in cash during the period.

 

For the period January 10, 2019 (Inception) to June 30, 2019, cash used in operating activities was $1,552,370. Net cash provided by operating activities primarily consisted of the net operating loss of $5,058,434, which was partially offset by depreciation and amortization of $2,478,219, right-of-use asset amortization of $27,676 and $352,000 of shares issued for restricted stock awards. Additionally, working capital changes provided $819,682 in cash during the period.

 

Investing Activities

 

For the six months ended June 30, 2020, net cash used in investing activities was $537,175. Investing activities primarily consisted of the acquisition of the net assets of Fast Plastics Parts LLC for a 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, purchase of property and equipment of $34,065 and a note receivable for acquisition of $250,000.

 

For the period January 10, 2019 (Inception) to June 30, 2019, net cash provided by investing activities was $2,025,914. Investing activities primarily consisted of cash from ComSovereign’s acquisitions of VEO, InduraPower, Silver Bullett Technologies, DragonWave-X LLC and Lextrum, Inc.

 

Financing Activities

 

For the six months ended June 30, 2020, financing activities provided cash of $1,526,304. Financing activities primarily consisted of $4,079,548 of proceeds from the issuance of debt, which was offset by the repayment of $2,501,330 of debt and $3,413 principal payment on finance leases.

 

For the period January 10, 2019 (Inception) to June 30, 2019, cash used in financing activities was $7,692. Financing activities primarily consisted of repayment of debt.

 

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.

  

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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 have been no changes in our internal control over financial reporting as of and for the three months ended June 30, 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 29, 2020, in connection with a loan made by an accredited investor to our company, we sold to such investor 91,841 shares of our common stock for a purchase price of $1.00 per share. 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 or about August 4, 2020, we converted the accrued and unpaid interest payable on an outstanding promissory note held by an accredited investor into an aggregate of 11,448 shares of our common stock at a conversion price of $1.50 per share. 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 or about August 4, 2020, an accredited investor converted the principal amount of two outstanding promissory notes held by such investor and all accrued interest thereon into an aggregate of 1,999,332 shares of our common stock at a conversion price of $1.00 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act, 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 or about August 5, 2020, we converted the principal amount of an outstanding promissory note held by an accredited investor and all accrued interest thereon into an aggregate of 55,915 shares of our common stock at a conversion price of $1.50 per share. 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 August 6, 2020, we converted outstanding indebtedness owed to a consultant into an aggregate of 81,939 shares of our common stock at a conversion price of $1.25 per share. 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.

 

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On August 11, 2020, we issued to a consulting firm for services rendered 36,545 shares of our common stock that were valued at $1.174 per share and 34,527 shares of our common stock that were valued at $1.038 per share. 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 21, 2020   /s/ Daniel L. Hodges
    Daniel L. Hodges
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 21, 2020   /s/ Brian Mihelich
    Brian Mihelich
    Chief Financial Officer
    (Principal Financial Officer)

 

 

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