Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, a 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.:
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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
As of June 30, 2020, the last business
day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $57,404,349 (based on the closing price of the common stock as reported on the OTCQB Market
operated by OTC Markets Group of $3.15 per share).
There were 66,308,177 shares of the Registrant’s
Common Stock, $0.0001 par value, outstanding as of March 30, 2021.
Information required by Part III (Items
10, 11, 12, 13 and 14) hereof is incorporated by reference to portions of the Registrant’s Proxy Statement for the 2021 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange Commission no later than 120 days after the end of
the registrant’s fiscal year covered by this report.
This report includes
forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may
cause our actual results, levels of activity, performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by those forward-looking statements.
Some of the statements
under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this report constitute “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. Examples of forward-looking statements include, but are not limited to, statements
about the following:
These statements are
necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations,
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly-available information with respect to the factors upon which our business
strategy is based, or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over
long periods of time.
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. Important factors that may cause actual results, our performance or achievements, or industry
results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed
under the caption “Risk Factors” in this report.
PART I
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 of communications, power and portable infrastructure technologies, capabilities and products
that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and
“next-Generation” (“nG”) networks of the future. We focus on novel capabilities, including signal modulations,
antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic
spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and
integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology,
the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer
base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are
in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications
equipment and services.
We provide the following
categories of product offerings and solutions to our customers:
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Telecom and Network Products and Solutions. We
design, develop, market and sell technologically-advanced products for telecom network operators, mobile device carriers and other
enterprises, including the following:
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Backhaul Telecom Radios. We offer a line of
high-capacity packet microwave solutions that drive next-generation IP networks. Our carrier-grade point-to-point packet microwave
systems transmit broadband voice, video and data. Our solutions enable service providers, government agencies, enterprises and
other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product
portfolio is wireless network transport, including a range of products ideally suited to support the emergence of underlying small
cell networks. Additional solutions include leased-line replacement, last mile fiber extension and enterprise networks.
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In-Band Full-Duplex Technologies. We have developed proprietary wireless transmission technologies that alleviate the performance limitations of the principal transmission technologies used by most networks today. Time Division Duplex (TDD) transmission technology used by many communications systems utilizes a single channel for transmission of data alternating between downlink or uplink, which limits capacity/throughput. Frequency Division Duplex (FDD) technologies in the marketplace today use two independent channels for downlink and uplink but require twice the spectrum. Neither TDD nor FDD can simultaneously transmit and receive on a single channel — a limitation that network advancements and 5G will require for optimal performance. In late 2021, we intend to commence offering products incorporating our proprietary In-Band Full-Duplex technologies that simultaneously transmit and receive data on a single channel, which resolves the limitation of current TDD and FDD transmissions by increasing network performance and doubling spectrum efficiency.
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Edge Compute Capable Small Cell 4G LTE and 5G Access Radios. We offer Citizens Broadband Radio Service (CBRS) frequency and other small cell radios that are designed to connect to other access radios or to connect directly to mobile devices such as mobile phones and other IoT devices. Recently, we developed the world’s first fully-virtualized 5G core network on a microcomputer the size of a credit card, enabling, for the first time, the ability to have the 5G network collocated on the network edge with the small cell communicating with the devices themselves. The small cells support edge-based application hosting and enable third-party service integration.
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Intelligent Batteries and Back-Up Power Solutions. We
are developing for the telecom industry a full line of environmentally-friendly, non-volatile advanced intelligent lithium-ion
batteries and back-up power units that charge quickly, have a life span approximately five times longer than conventional lead-acid
batteries, and can be monitored remotely. We are also currently offering and developing models that provide power for a wide range
of applications, including cellular towers and other radio access network (RAN) infrastructures, automobiles, boats, spacecraft
and other vehicles.
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Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications such as intelligence, surveillance and reconnaissance (“ISR”) and communications. We focus primarily on a suite of tethered aerostats known as the Winch Aerostat Small Platform (“WASP”), which are principally designed for military and security applications and provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high-strength armored tether. Our recently-acquired HoverMast line of quadrotor-tethered drones feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while delivering dramatically-improved situational awareness and communications capabilities to users.
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We are also developing
processes that we believe will significantly advance the state-of-the-art in silicon photonic (SiP) devices for use in advanced
data interconnects, communication networks and computing systems. We believe our novel approach will allow us to overcome the limitations
of current SiP modulators, dramatically increase computing bandwidth and reduce drive power while offering lower operating costs.
Our engineering and
management teams have extensive experience in optical systems and networking, digital signal processing, large-scale application-specific
integrated circuit (ASIC) design and verification, SiP design and integration, system software development, hardware design, high-speed
electronics design and network planning, installation, maintenance and servicing. This broad expertise in a wide range of advanced
technologies, methodologies and processes enhances our innovation, design and development capabilities, and has enabled us, and
we believe will continue to enable us, to develop and introduce future-generation communications and computing technologies. In
the course of our product development cycles, we engage with our customers as they design their current and next-generation network
equipment in order to gauge current and future market needs.
Our more than 700 customers
include a majority of the leading global telecommunication operators, as well as many data center managers and leading multi-system
operators (MSOs), and hundreds of enterprise customers, including many Fortune 500 companies. We have long-standing, direct relationships
with our customers and serve them through a direct sales force and a global network of channel partners.
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. On November 27, 2019, we completed the COMSovereign
Acquisition in a stock-for-stock transaction with a total purchase price of approximately $75 million. COMSovereign had been formed in
January 2019 and, prior to its acquisition by our Company, had completed five acquisitions of companies with unique products in development
for, or then being marketed to, the telecommunications market. As a result of our acquisitions, our Company is comprised of the following
principal operating units, each of which was acquired to address a different opportunity or sector of the North American telecom infrastructure
and service market:
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DragonWave-X LLC. DragonWave-X, LLC and its
operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), are a Dallas-based
manufacturer of high-capacity microwave and millimeter wave point-to-point telecom backhaul radio units. DragonWave and its predecessor
have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in
more than 100 countries worldwide. According to a report of the U.S. Federal Communications Commission, as of December 2019,
DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America. DragonWave was
acquired by COMSovereign in April 2019 prior to the COMSovereign Acquisition.
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Virtual Network Communications Inc. Virtual
Network Communications Inc. (“VNC”) is an edge compute focused wireless telecommunications technology developer and
equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets,
and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators,
and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also
has developed rapidly deployable, tactical systems 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.
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Fastback. Skyline Partners Technology LLC, which
does business under the name Fastback Networks (“Fastback”), is a manufacturer of intelligent backhaul radio (IBR)
systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of
Sight (NLOS) limitations. Fastback’s advanced IBR products allow operators to economically add capacity and density to their
macrocells and expand service coverage density with small cells. These solutions also allow operators to both provide temporary
cellular and data service utilizing mobile/portable radio systems and provide wireless Ethernet connectivity. We acquired Fastback
in January 2021.
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Drone Aviation. Lighter Than Air Systems
Corp., which does business under the name Drone Aviation (“Drone Aviation”), is based in Jacksonville, Florida and
develops and manufactures cost-effective, compact and enhanced tethered unmanned aerial vehicles (UAVs), including lighter-than-air
aerostats and drones that support surveillance sensors and communications networks. We acquired Drone Aviation in June 2014.
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Sky Sapience Ltd. Sky Sapience Ltd. (“SKS”) is
an Israeli-based manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather
Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications.
Its innovative technologies include fiber optic tethers that enable secure, high-capacity communications, including support for
commercial 4G and 5G wireless networks. SKS’s flagship HoverMast line of quadrotor-tethered drones feature uninterruptible
ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while
delivering dramatically-improved situational awareness and communications capabilities to users. We acquired SKS in March
2021.
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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 prior to the COMSovereign Acquisition.
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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 prior to the COMSovereign Acquisition.
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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 prior to the COMSovereign Acquisition.
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VEO Photonics, Inc. VEO Photonics, Inc. (“VEO”), based in San Diego, California, is a research and development company innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment. COMSovereign acquired VEO in January 2019 prior to the COMSovereign Acquisition.
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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 plastic and metal components to third-party manufacturers.
Its ability to rapidly prototype new product offerings and machine moldings, metals and plastic castings has reduced the production
cycle for many of our components from months to days. We acquired the business currently conducted by Sovereign Plastics in March 2020.
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On March 26, 2021,
we entered into a Share Exchange Agreement dated as of March 26, 2021 (the “RVision Exchange Agreement”) among our Company,
RVision, Inc. (“RVision”), Industrial Security Alliance Partners, Inc. and Halls of Valhalla, LLC pursuant to which, subject
to the terms and conditions of the RVision Exchange Agreement, we have agreed to acquire RVision. RVision is a developer of technologically-advanced
video and communications products and physical security solutions designed for government and private sector commercial industries. It
has been serving governments and the military for nearly two decades with sophisticated, environmentally-rugged optical and infrared cameras,
hardened processors, custom tactical video hardware, software solutions, and related communications technologies. It also has developed
nano-defractive optics with integrated, artificial intelligence-driven electro-optical sensors and communication network connectivity
products for smart city/smart campus applications.
Pursuant to the
RVision Exchange Agreement, the aggregate purchase consideration we are obligated to pay for RVision consists of 2,000,000 shares of our
common stock, subject to certain working capital adjustments. The RVision Exchange Agreement contains customary representations, warranties
and covenants of our Company, on one hand, and RVision, on the other hand, including, among others, covenants by RVision with respect
to the operations of RVision during the period between execution of the RVision Exchange Agreement and the closing of the transactions
contemplated thereby, and provides that each party will indemnify the other party following the closing for breaches of the warranties
and covenants of such party. The closing of our acquisition of RVision is subject to the satisfaction of the closing conditions stated
in the RVision Exchange Agreement and there can be no assurance that such conditions will be met or that we will consummate the acquisition
of RVision.
Our Industry
We participate in the
large and growing global market for connectivity and essential communications infrastructure. This market is being driven by the
growth in demand for data-intensive bandwidth and the necessity for reduced latency (the time it takes to send data from one point
to another) associated with the continued demand of smartphones, tablets and machine-to-machine (M2M) communication, as well as
the proliferation of data centers, big data, cloud-based services, streaming media content and IoT. In addition, video and gaming
distribution over the broadband IP network is transforming how content is managed and consumed overall. This increase in data usage
and demand is taxing available broadband of many service providers, which requires far more efficient technologies to meet demand.
For example, in reaction to the COVID-19 pandemic, in certain regions Netflix reduced the quality of videos from high definition
to standard definition in order to free up additional bandwidth required by workers performing online functions from their homes.
Today’s cellular
networks are predominantly based on 4G technologies. These networks constantly undergo expansion of coverage and densification
with additional sites to cater to higher demands for speeds and to make more services available per given area. According to recent
publications and as of the fourth quarter 2019, 33 operators across 18 countries, representing 8% of the global mobile connections
base (excluding cellular IoT), have launched commercial 5G mobile services, and 77 operators have announced plans to launch 5G
services in the coming months. These investments in 5G radio network infrastructure, and consequently, associated wireless data
hauling, are expected to gradually increase during the next several years. In order to allocate spectrum resources for 4G and 5G,
some operators are shutting down their 2G and/or 3G network (a “network sunset”) in order to re-allocate radio access
network frequency bands to 4.5 and 5G services. These market dynamics of network expansion and densification have resulted in higher
demand for wireless hauling capacity at increased density, requiring more sophisticated services over the network at far higher
volumes than were available in recent years. Such services include the many 5G use cases, which among others, include enhanced
mobile broadband, mission critical services, IoT and Industrial IoT, gigabit broadband to homes, multi gigabits services to enterprises
and more.
The term “5G”
is misunderstood by most consumers who believe it is simply another layer of technology over the top of current 4G LTE infrastructures.
However, this is not the case. While 4G LTE Advanced is a part of a large platform upon which 5G rests, according to many industry
studies, significantly more 4G LTE/A will be required before 5G becomes a reality. 5G is an entirely new infrastructure that must
be standardized for widespread adoption and must be agile enough to accommodate wireless devices of all kinds, not just cellular
smartphones. The 5G enhancements specific to “IoT” will enable the connection of the internet to telemedical devices,
gaming, video and television, smart-home devices, such as thermostats, alarms, lighting and garage doors, smartphones, driverless
cars and traffic signals, laptops, desktops, Wi-Fi, logistic reporting devices on semi-tractor trucks and trains and a plethora
of other use cases. It must do so seamlessly and with a fraction of the current “round-trip” response time of data.
This requires that data centers be closer to the network’s “edge” where the devices connect to the wireless small
cells. As a result, data centers and many of the other functions will require virtualization and eventually artificial intelligence
(AI) algorithms and machine learning to route data requests to these virtualized data centers to keep latency to a minimum.
There are several major
trends that we expect to drive network deployments and investment. The GSM Association (“GSMA”), a mobile telecom association
to which most large infrastructure participants and mobile carriers are members, nearly mirrors our findings and impressions in
its report on the state of mobile internet connectivity. Many of these trends and findings follow.
The Challenges of Connectedness
It is said in business
that to remain static is to die. To understand the need for technological advancements and infrastructure growth in the cellular
telecommunications industry, one must first understand the market factors driving these changes. In 2018, nearly 300 million people
connected to mobile internet data for the first time. This increased the total number of internet connected users to more than
3.5 billion people worldwide. This type of connectivity now drives the global economy as more and more diverse commerce is conducted
through wireless data access. However, since lower-income countries and regions have only approximately 40% of their population
connected to the internet compared to 75% in high-income regions, these lower income areas are finding it increasingly difficult
to raise their social and economic status. Getting these deficient regions (and the approximately 4 billion people inhabiting those
regions who are unable to connect to the internet) connected is only one challenge. The other and equally difficult challenge is
the density of urban areas in the higher income areas and the sophistication of the electronic communications and computing devices
in those areas that require increasingly faster data. We plan to target both challenges by providing economical solutions and infrastructure
building blocks to lower-income geographic areas around the world, which we expect we will initially sell through our resellers,
distributors and other partners, while leading the world in innovative new technologies to make the realization of 5G and nG a
reality.
Evolving Network Architecture and
Technology
The pace of change
in networking has increased in recent years as consumers and data-driven businesses utilize more bandwidth with increasingly-complex
mobile and connected devices. Cellular networks are now experiencing exponential growth in network infrastructures, which is revolutionizing
how consumers connect to each other and changing the network architecture needed to support consumer demand. This trend requires
better network coverage, greater broadband access, increased capacity and larger data storage capacity.
Our customers are working to transition their networks to become faster,
more responsive and more efficient. We believe the following findings will continue to impact our Company and the industry during 2021
and beyond.
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(1)
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Coverage Gaps Declining: Less than 10% of
people globally (approximately 750 million) now have no access to a mobile broadband network as compared to approximately 24% only
five years ago.
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Usage Gaps an Issue: Approximately 3.3 billion
people live in areas in which internet coverage exists but do utilize it. In other words, the usage gap is four times greater than
the coverage gap.
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Affordability: Mobile broadband usage is
becoming more affordable across all regions, but its affordability is still short of the desired 2% or less of monthly per capita
income. This cost of usage is keeping some users from participating online. There is also a perception in many low-income regions
that internet usage will not contribute enough to their security, safety and commerce to warrant the expense. In addition, device
cost remains high and thus a barrier to entry.
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(4)
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Prevalence of Use: Social media and instant
messaging account for the majority of mobile usage. Online calls, news links, YouTube and Vimeo videos, and gaming are the other
most prevalent activities.
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(5)
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Macro Level: The mobile industry contributed
$4 trillion dollars to the global gross domestic product (GDP) last year (or almost 5% of the total GDP). A recent study conducted
by Dr. Raul Katz and Fernando Collorda for the International Telecommunication Union, a specialized agency of the United Nations
for information and communication technologies, concluded that a 10% increase in mobile broadband connectivity would lead to an
increase in GDP of roughly 2% in both developed and underdeveloped regions.
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(6)
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Micro Level: Gallup and GSMA polls both found that mobile ownership
and internet connectivity is associated with an improvement in people’s lives, as evidenced by increases in net positive
emotions and average life evaluations (not the same as longevity).
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Transition from Traditional to the
IoT
The IoT wireless dream
is evolving from an industry vision toward a tangible, next-generation wireless technology. Many operators have begun early transitions,
or perhaps more accurately — are beginning to build a framework, to operable 5G networks and have announced trials and
pre-standard deployments of 5G technology. This technology is primarily higher frequency, millimeter wave radios and higher order
(more efficient) modulation methods, such as 4096 QAM. The number of 5G-enabled devices is expected to continue to increase during
2021 and accelerate beyond that. The primary benefits of 5G are expected to include:
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enhanced mobile broadband to support significant improvement in data rates
and user experience in both the uplink and downlink;
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IoT communications to support the expected billions of connections between
machines as well as short bursts of information to other systems; and
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low latency, high-reliability to support applications that are critical or
are needed in real time, like factory machines, virtual reality and augmentation.
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Wireless operators
will need to both acquire and launch new spectrum for 5G, as well as continue their strategy of re-allocation of spectrum from
one generation to another. Some of this spectrum will be at much higher frequencies and will use new technologies to deliver exceptional
amounts of bandwidth to subscribers. 5G also requires significant fiber infrastructure to connect wireless access points to each
other to improve the response time of the network. As wireless operators transition toward 5G, they must also manage the fundamental
network deployment issues of site acquisition, power, backhaul and in-building wireless proliferation.
In addition to investment
required by wireless operators, the transition to 5G could also spark an investment cycle by cable operators as they upgrade their
networks to compete with fixed wireless broadband, which could become a viable alternative to traditional broadband internet access.
Our Growth Strategy
Under the leadership
of our senior management team, we intend to address and exploit the large and growing market for internet connectivity and essential
communications infrastructure as we begin to build our sales, marketing and operations groups to support our planned growth while
focusing on increasing operating margins through cost control measures. While organic growth will be our primary focus in driving
our business forward, we expect acquisitions and select teaming and partnering arrangements with other companies will play a strategic
role in strengthening our existing product and service lines and providing cross-selling opportunities. We are pursuing several
growth strategies, including:
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Continue to Innovate and Extend our Technology Leadership. Mobile broadband infrastructure innovations are required to dramatically improve the commercial viability of both the 4G LTE and 5G buildouts. It is well documented that more 4G infrastructure is required for 5G to be viable. However, with the huge increase in radio access network components required for an IoT/5G buildout, relative capital costs must come down to allow data to remain affordable. This requires doing more with less through “innovation.” We expect our continued investments in research and development will enable us to continue to provide innovative products to the marketplace. For example, early next year we expect to demonstrate our initial products incorporating our patented In-Band Full-Duplex technology, which is expected to up to double the efficiency, and as a result, the data throughput, of wireless spectrum channels. We also continue to pursue VEO’s SiP research, discoveries and developments, which we believe will not only eliminate the current log-jam many internet providers and data centers experience by providing significantly greater data speed and throughput in the switch that converts data bits from voltage modulations in the copper used in radios to light modulations that are used in fiber, and vice versa, but will also form the technological basis for the future of chip-to-chip light computing.
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Enhance Sales Growth. We intend to generate additional
growth opportunities by:
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Growing our customer base and geographic markets. We
intend to drive new customer growth by expanding our direct sales force focused on the mobile infrastructure markets. The initial
focus of our direct sales program will be North America, with foreign sales coming through licensed channel partners and advisory
personnel. In addition, we expect to leverage our existing base of resellers and more than 700 existing customers to help proliferate
the knowledge globally of our technical superiorities and increase our customer base.
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Increasing penetration within existing customers. We
plan to continue to increase our product penetration within our existing customer base by expanding the breadth of our product
and service offerings to provide for continued cross-selling opportunities. For example, while we believe DragonWave is well known
for its microwave backhaul radio products, we have recently added additional millimeter wave frequency designs that can be offered
to existing customers, as well as new customers. Similarly, we will seek to cross-sell the back-up power supply units of our InduraPower
subsidiary and the rapid deployable networks offered by our Drone Aviation and SKS subsidiaries.
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Focus on Innovation to Solve Critical Problems. We
plan to build on our legacy of innovation and on our worldwide portfolio of patents and patent applications by continuing to invest
in research and development. We expect to focus on expanding the functionality of our backhaul and access equipment products, while
investing in capabilities that address new market opportunities. We believe this strategy will enable new high-growth opportunities
and allow us to continue to deliver differentiated high-value products and services to our customers. We also intend to utilize
our deep industry expertise to offer unique perspectives to solve customers’ challenges. We intend to focus our investment
on high-growth markets.
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Become a Preferred Partner to our Customers. We
plan to expand our position within the telecom industry by developing and enhancing value-creating partner relationships with our
customers, suppliers and distributors, as well as our channel and technology partners. We intend to expand these relationships
by innovating, collaborating and selling with our customers. We expect to meet our commitments and maintain our product quality
while collaborating with our customers to ensure we are providing solutions to their key network challenges.
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Pursue Strategic Relationships. We expect
to continue to pursue strategic technology and distribution relationships, alliances and acquisitions that will help us align with
the strategic priorities of our customers. We intend to continue to invest in technologies to ensure interoperability across the
ecosystems that support our customers’ most critical business processes through our partner programs. We continue to work
with current industry partners while exploring a range of new partnerships to expand the products and services we offer.
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Grow Revenues and Market Share through Selective Acquisitions. We
plan to continue to acquire private companies or technologies that will enhance our earnings and offer complementary products and
services or expand our geographic and industry reach. We believe such acquisitions will help us to accelerate our revenue growth,
leverage our existing strengths and capture and retain more work in-house as a prime contractor for our customers, thereby contributing
to our profitability. We also believe that increased scale will enable us to bid and take on larger contracts.
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Increase Operating Margins by Leveraging Operating Efficiencies. We
believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our
newly-acquired businesses, we will be positioned to offer more integrated end-to-end solutions and improve operating margins. We
will also seek to reduce our manufacturing costs to increase our margins. For example, in March 2020, we acquired Sovereign
Plastics, a supply chain company that will allow us to reduce our costs for metal and plastics used in our product manufacturing
by up to 45% for certain products we manufacture, such as battery housings, and allow us to implement a just-in-time supply chain
program that will significantly reduce our overall inventory sizes and hold times for those components.
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Our Products
All of our products
enhance or directly contribute to the overall telecommunication infrastructure, and fall within the following three product groups:
Micro and Millimeter Microwave Technologies
and Products
Through our DragonWave
subsidiary, we design, manufacture and sell best-in-class (as defined by power, signal efficiency and range), microwave packet
radio equipment for telecommunications and data. In addition to certain 3G legacy equipment that we offer under our Horizon-branded
line of backhaul radios, we offer our Harmony-branded line of backhaul radios that are the most data efficient in existence and
offer the most powerful, longest-range solution for backhaul in the industry. The Harmony Enhanced and the Harmony MC (for “Multi-Channel”)
radios have the following characteristics:
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Harmony Enhanced: Our Harmony Enhanced radios are high
capacity, long reach, multi-service radios operating in the 6-42 gigahertz (GHz) spectrum bands. Each is a compact,
all-outdoor radio that allows operators to cost effectively scale their networks with the industry’s leading system
gain, highest spectral efficiency and increased capacity that is enabled through 112-megahertz (MHz) channel support, 4096Q
AM capability, Bandwidth Accelerator+ and multiple-input and multiple-output (MIMO). These capabilities allow our Harmony
Enhanced radios to deliver more than two billion bits per second (Gbps) in a single radio, with scalability to four Gbps via
MIMO in a single channel. Bandwidth Accelerator+ provides more than two times throughput improvements with the inclusion of
header optimization and the industry’s only bulk compression working in tandem. These radios also provide the highest
output power in an all-outdoor microwave system, and leverage generative adversarial networks (GAN) technology to increase
reach by more than 30%. Additionally, integrated ethernet switching with weighted random early detection (WRED) queuing,
E-LINE and E-LAN support and upgradability to MPLS-TP, enables a true all-outdoor installation without the need for an
additional access switch.
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Harmony MC: Our Harmony MC radios are high-capacity packet microwave radios that build upon the Harmony Enhanced family of radios by delivering a multi-carrier channel system and doubling the capacity available in a single microwave outdoor unit. Because the radio and modem are integrated into a single highly-compact outdoor unit, Harmony EnhancedMC is a zero-footprint solution that eliminates rack congestion and minimizes colocation space. The ultra-high power increases the overall system gain and allows for deployment of smaller dishes, higher order modulations or increased link availability. Our Harmony MC radios also achieve the highest degree of spectral efficiency (through 4096 QAM and leading system gain) in the marketplace, delivering more capacity per channel with a longer reach than any other all-outdoor microwave system.
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Engineering efforts
are underway now with two additional enhancements — full-duplex and transpositional modulation waveforms that will be
programmed to significantly enhance the spectral efficiency of our microwave radios, and, we believe, will far exceed our competitor’s
offerings. These enhancements have the following characteristics:
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In-Band Full-Duplex Technology: In late 2021, we expect to demonstrate our first microwave products incorporating our proprietary in-band full-duplex technology that was innovated by our Lextrum subsidiary. This technology, which is useful in almost any wireless communication system, functions by essentially doubling the data throughput on existing antennae by sending and receiving simultaneously on the same frequency. This capability is critical in backhaul networks (tower-to-tower applications) and is a fundamental component of 5G wireless technology if it is to operate most efficiently. Following commercial rollout of this technology in our own products, Lextrum will begin licensing its use to other radio designers and manufacturers, which we believe will generate license and royalty fee revenues commencing in 2021.
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Transpositional Modulation Technology: In the late 2021, we also expect to demonstrate our first microwave products incorporating the transpositional modulation (TM) technology. This technology dramatically increases the capacity of an existing network through unique patented engineering and algorithm solutions while not requiring a new standard for integration. Its performance has been shown to increase waveform speed and capacity, and it can be used simultaneously and transparently with existing telecom waveforms with no appreciable interference with any co-existing modulation type. TM technology is the only known form of modulation that allows a single carrier to transmit two or more independent signals simultaneously in the same wave without destroying the integrity of the individual bit streams, thereby enabling transmission of significantly more data than existing modulations.
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Intelligent Batteries and Back-up
Power Solutions
Through our InduraPower
subsidiary, we offer and are further developing a line of environmentally-friendly, non-volatile advanced intelligent lithium-ion
batteries and back-up power units that charge quickly, have a life span approximately five times longer than conventional lead-acid
batteries, can be monitored remotely and can provide power for a wide range of applications, including cellular towers and other
RAN infrastructures, as well as automotive, aerospace and marine vehicles. Used in conjunction with our microwave radios, our batteries
and back-up power solutions would ensure their seamless operation in the event of a power grid or local electrical failure or interruption.
The use of lithium-ion phosphate chemistry in our batteries provides for an approximate 70% reduction in weight and 30% to 40%
reduction in size over current lead-acid/ absorbent glass mat (AGM)-driven power supplies.
Tethered Drones and Aerostats
Through our Drone Aviation
and SKS subsidiaries, we design, develop, market, sell and provide logistical services for specialized tethered aerial monitoring
and communications platforms serving national defense, security, and commercial customers for use in applications including ISR
and communications. Through Drone Aviation, we focus primarily on the development of a tethered aerostat known as the WASP, which
is principally designed for military and security applications where they provide secure and reliable aerial monitoring for extended
durations while being tethered to the ground via a high strength armored tether. Through SKS, we offer our HoverMast line of quadrotor-tethered
drones that feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate
in GPS-denied environments while delivering dramatically-improved situational awareness and communications capabilities to users.
HoverMast is utilized by the Israeli government for border patrol and coastal applications and is also deployed in several international
markets.
Our core aerostat products are designed to provide real-time, semi-persistent
situational awareness to various military and national security customers such as the U.S. Department of Defense and units of the U.S.
Department of Homeland Security, such as the U.S. Customs and Border Protection, to improve security at the nation’s ports and borders.
The WASP tethered aerostat system provides customers with tactical, highly mobile and cost-effective aerial monitoring and communications
capabilities in remote or austere locations where existing infrastructure is lacking or not accessible. Current WASP products include
the WASP tactical aerostat and WASP Lite, a rapidly deployable, compact aerostat system. WASP aerostats are either self-contained on a
trailer that can be towed by a military all-terrain vehicle (MATV) or mine-resistant ambush-protected vehicle (MRAP) or other standard
vehicle, operated from the bed of a pickup truck, UTV or mounted to a building rooftop. They are designed to provide semi-persistent,
mobile, real-time day/night high-definition video for ISR, detection of improvised explosive devices, border security and other governmental
and civilian uses. The HoverMast 100 model system sold by SKS has been mounted in permanent locations, as well as on mobile platforms
such as certain long-bed pickup trucks and marine vessels. With its imbedded fiber-optic tether system, the HoverMast offers a myriad
of optical sensors, signal collection devices and communication radios and has had a sophisticated mounted airborne radar. We believe
all of our Drone and SKS products also can also be utilized for disaster response missions by supporting two-way and cellular communications
and acting as a repeater or provider of wireless networking.
Both the WASP and WASP Lite aerostat systems employ a tethered envelope
filled with helium gas for lift to carry either a stabilized ISR or communications payload, portable ground control station and a datalink
between the ground station and the envelope. Hovering between 500 and 1,500 feet above the ground, the systems provide surveillance and
communications capabilities with relatively low acquisition and operating costs. The systems require an operational crew of a minimum
of two people, have relatively simple maintenance procedures, and feature quick retrieval and helium top-off for re-inflation. The HoverMast
system can deploy and recover the tethered drone unit at heights ranging from 15 feet to 330 feet in minutes.
Our Services
In addition to our
products, we offer maintenance and support services, as well as a selection of other professional services. We utilize a multi-tiered
support model to deliver services that leverage the capabilities of our own direct resources, channels partners and other third-party
organizations.
Our professional services
are provided primarily by our Silver Bullet subsidiary, which engineers, designs and develops a broad range of next-generation
network systems and system components, including:
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hardware and software design and development, including ISR, embedded designs,
high-speed digital and radio frequency (RF), printed circuit board design, field-programmable gate array (FPGA) and application-specific
integrated circuit (ASIC) designs;
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large-scale network protocol development and software-defined radio systems;
and
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wireless communications designs in tactical communication systems,
automotive telematics, cellular communication systems, municipal/public networks, security systems, seismic detection and consumer
electronics.
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We believe a broad
range of services is essential to the successful customer deployment and ongoing support of our products, and we employ remote
technical support engineers, spare parts planning and logistics staff and professional services consultants with proven network
experience to provide our services.
Customers
We manufacture and sell our portfolio of telecommunications-related
products on a global basis to over 700 customers. Our customers include a large percentage of mobile cellular carriers, large international
corporations, governments and private network users. Some of the relationships with customers, such as within our DragonWave subsidiary,
typically date back many years. We believe our diversified customer base provides us an opportunity to leverage our skills, experience
and varied product lines across markets and reduces our exposure to a single end market. Additionally, we believe the diversity of our
customer base is an important strength of our Company.
We believe there has
been a trend on the part of customers to consolidate their lists of qualified suppliers to companies that have the ability to meet
certain technical, quality, delivery and other standards while maintaining competitive prices. We believe we have positioned our
offerings and resources to compete effectively in this environment. As an industry participant in the telecommunications microwave
backhaul segment, we have established close working relationships with many of our customers on a global basis. These relationships
allow us to better anticipate and respond to the needs of these customer when designing new products and technical solutions. By
working with customers in developing new products and technologies, we are able to identify and act on trends and leverage knowledge
about next-generation technology across our portfolio of products. In addition, we have concentrated our efforts on service, procurement
and manufacturing improvements designed to increase product quality and performance and lower product lead-time and cost.
Manufacturing, Suppliers and Vendors
The manufacturing of
our microwave radios and other network communications products is outsourced to principally one third-party contract manufacturer,
Benchmark Electronics, Inc. (“Benchmark”), a well-established contract manufacturer with expertise in the telecom equipment
industry. This approach allows us to reduce our costs as it reduces our manufacturing overhead and inventory and also allows us
to adjust quickly to changing customer demand. Benchmark assembles our products using design specifications, quality assurance
programs and standards that we establish, and it procures components and assembles our products based on our demand forecasts.
These forecasts represent our estimates of future demand for our products based upon historical trends and analysis from our sales
and product management functions as adjusted for overall market conditions.
The manufacturing agreement
we entered into with Benchmark does not provide for any minimum purchase commitments and had an initial term of two years, which
now automatically renews for one-year terms, unless either party gives written notice to the other party not less than 90 days
prior to the last day of the applicable term. Additionally, this agreement may be terminated by either party (i) with advance
written notice provided to the other party, subject to certain notice period limitations, or (ii) with written notice, subject
to applicable cure periods, if the other party has materially breached its obligations under the agreement.
We believe that this
contract manufacturing relationship allows us to operate our business efficiently by focusing our internal efforts on the development
of our technologies and products, and provides us with substantial scale-up capacity. We regularly test quality on-site at Benchmark’s
facility, and we obtain full quality inspection reports. We also maintain a non-disclosure agreement with Benchmark.
We and our contract
manufacturing partner purchase a wide variety of raw materials for the manufacture of our network communications products, including
(i) precious metals such as gold, silver and palladium, (ii) aluminum, steel, copper, titanium and metal alloy products
and (iii) plastic materials. We also purchase a wide variety of mechanical and electronic components for the manufacturing
of such products. Such raw materials and components are generally available throughout the world and are purchased domestically
when possible from a variety of suppliers. We are generally not dependent upon any one source for raw materials or components.
We do not anticipate any difficulties in obtaining raw materials or components necessary for the production of our network communications
products.
However, certain materials
and equipment for our Drone Aviation and SKS products are custom made for those products and are available only from a limited
number of suppliers. Failure of a supplier could cause delays in delivery of the products if another supplier cannot promptly be
found or if the quality of such replacement supplier’s components is inferior or unacceptable. For a discussion of certain
risks related to raw materials and components, see “Risk Factors” in this report.
Competition
The telecommunications
and mobile broadband markets are highly competitive and rapidly evolving. We compete with domestic and international companies,
many of which have substantially greater financial and other resources than we do. We encounter substantial competition in most
of our markets, although we believe we have few competitors that compete with us in performance capabilities across all our product
lines and markets. Our principal competitors in one or more of our product lines or markets include Ericsson, Nokia, Cambium, Ceragon,
Aviat and Huawei. We also compete with internally developed network solutions of certain network equipment manufacturers, including
Facebook, Google, AT&T, Verizon and T-Mobile. Finally, we face competition from working groups and associations that are the
result of joint developments among certain of the competitors listed above. Consolidation in the telecommunications and mobile
broadband industry has increased in recent years, and future consolidation could further intensify the competitive pressures that
we face.
The principal competitive
factors upon which we compete include performance, power consumption, rapid innovation, breadth of product line, availability,
product reliability, reputation, level of integration and cost, multi-sourcing and selling price. We believe that we compete effectively
by offering higher levels of customer value through high speed, high density, low power consumption, broad integration of wireless
radio functions, software intelligence for configuration, control and monitoring, cost-efficiency, ease of deployment and collaborative
product design. We cannot be certain we will continue to compete effectively.
We may also face competition
from companies that may expand into our industry and introduce additional competitive products. The same standardization that allows
for the integration of our products into wireless infrastructure systems carries the side effect of lowing the competitive threshold
for new market entrants. Existing and potential customers and strategic partners are also potential competitors. These customers
may internally develop or acquire additional competitive products or technologies, selectively, or through consolidation of the
companies in our industry, which may cause them to reduce or cease their purchases from us.
Research and Development
We generally implement our product development strategy through product
design teams and collaborative initiatives with customers, which can also result in our Company obtaining approved vendor status for our
customers’ new products and programs. We focus our research and development efforts primarily on those product areas that we believe
have the potential for broad market applications and significant sales within a one–to–three–year period. We seek to
have our products become widely accepted within the industry for similar applications and products manufactured by other potential customers,
which we believe will provide additional sources of future revenue. By developing application-specific products, we are able to decrease
our exposure to standard products, which are more likely to experience greater pricing pressure. At March 15, 2021, our research, development
and engineering efforts, which relate to the creation of new and improved products and processes, were supported by approximately 60 employees
and consultants, of which 80% were engineers with advanced degrees. Our research and development activities are generally performed by
individual operating units of our Company focused on specific markets and product technologies.
Intellectual Property
Our success and ability
to compete depend substantially upon our core technology and intellectual property rights. We generally rely on patent, trademark
and copyright laws, trade secret protection and confidentiality agreements to protect our intellectual property rights. In addition,
we generally require employees and consultants to execute appropriate nondisclosure and proprietary rights agreements. These agreements
acknowledge our exclusive ownership of intellectual property developed for us and require that all proprietary information remain
confidential.
We maintain a program
designed to identify technology that is appropriate for patent and trade secret protection, and we file patent applications in
the United States and, when appropriate, certain other countries for inventions that we consider significant. As of March
15, 2021, we had 87 patents granted in the United States and foreign jurisdictions that expire between 2021 and 2040. As of
such date, we also had 22 patent applications pending in the United States and foreign jurisdictions. We also continue to
acquire patents through acquisitions or direct prosecution efforts and engage in licensing transactions to secure the right to
use third parties’ patents. Although our business is not materially dependent upon any one patent, our patent rights and
the products made and sold under our patents, taken as a whole, are a significant element of our business.
In addition to patents,
we also possess other intellectual property, including trademarks, know-how, trade secrets, design rights and copyrights. We control
access to and use of our software, technology and other proprietary information through internal and external controls, including
contractual protections with employees, contractors, customers and partners. Our software is protected by U.S. and international
copyright, patent and trade secret laws. Despite our efforts to protect our software, technology and other proprietary information,
unauthorized parties may still copy or otherwise obtain and use our software, technology and other proprietary information. In
addition, we have expanded our international operations, and effective patent, copyright, trademark and trade secret protection
may not be available or may be limited in foreign countries.
Companies in the industry
in which we operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual
property rights. We may receive such claims from companies, including from competitors and customers, some of which have substantially
more resources and have been developing relevant technology similar to ours. As and if we become more successful, we believe that
competitors will be more likely to try to develop products that are similar to ours and that may infringe on our proprietary rights.
It may also be more likely that competitors or other third parties will claim that our products infringe their proprietary rights.
Successful claims of infringement by a third-party, if any, could result in significant penalties or injunctions that could prevent
us from selling some of our products in certain markets, result in settlements or judgments that require payment of significant
royalties or damages or require us to expend time and money to develop non-infringing products. We cannot assure you that we do
not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights, but
will not and have never done so intentionally.
Regulation
As our customers operate
around the world and, to a limited degree, we rely upon non-U.S. manufacturers to make our products, our business and ability to
successfully compete for business in our industry may become dependent upon global, supply, manufacturing and customer relationships
that are affected by the trade and tariff policies of each country in which we operate. Increased tariffs on parts and components
imposed by the countries in which our product components may be sourced can increase our production costs, and increased tariffs
imposed by the countries in which our products are sold can increase the cost of our products to our customers.
Certain of our products
and services are subject to export controls, including the Export Administration Regulations of the U.S. Department of Commerce
and economic and trade sanctions regulations administered by the Office of Foreign Assets Controls of the U.S. Treasury Department,
and similar laws and regulations that apply in other jurisdictions in which we distribute or sell our products and services. Export
control and economic sanctions laws and regulations include restrictions and prohibitions on the sale or supply of certain products
and services and on the transfer of parts, components and related technical information and know-how to certain countries, regions,
governments, persons and entities. U.S. regulators may also impose new restrictions on previously non-controlled emerging or foundational
items and technologies for which exports to countries such as China are deemed to present undesirable national security risks.
Even without such legislative or regulatory action, we would be prohibited from exporting our products to any foreign recipient
if we have knowledge that a violation of U.S. export regulations has occurred, is about to occur or is intended to occur in connection
with the item. Different countries may implement their own export control regulatory systems, which can affect the flow of parts,
components, finished products and related technologies throughout the supply chain to and from suppliers, manufacturers, distributors
and customers.
In addition, various
countries regulate imports of certain products through permitting, licensing and transaction review procedures, and may enact laws
that could limit our ability to produce or distribute our products or the ability of our customers to produce or distribute products
into which our products are incorporated. The exportation, re-exportation, transfers within foreign countries and importation of
our products and the parts, components and technologies necessary to manufacture our products, including by our partners, must
comply with these laws and regulations. Among these regulations are rules in the United States and other countries that prohibit
companies such as Huawei from supplying products and services for national 5G telecommunications networks. Pursuant to an executive
order issued in May 2019, the U.S. government is developing a new regulatory mechanism through which it may block imports
into the United States of certain information and communications products and services designed, developed, manufactured or
supplied by entities owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary where the transaction
presents an undue risk to U.S. information and communications technology or services, critical infrastructure or the digital economy
of the United States, or other unacceptable risks to the national security of the United States or the security and safety
of United States persons. U.S. government procurement supply chain risk management regulations prohibit U.S. government agencies
from directly or indirectly contracting to obtain certain telecommunications and video surveillance equipment, systems or services
produced or performed by certain designated Chinese companies, and this prohibition is expected to be extended to prohibit U.S.
government agencies from contracting with entities that use such equipment, systems or services, and to prohibit the use of U.S.
government grant or loan proceeds to acquire such equipment, systems or services.
We are also subject
to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery
and anti-kickback laws and regulations in other places where we do business. These laws and regulations generally prohibit companies
and their intermediaries from offering or making improper payments to governmental, political and certain international organization
officials for the purpose of obtaining, retaining or directing business. Our exposure for violating these laws and regulations
increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.
In addition, we are
subject to, or are expected to facilitate our customers’ compliance with, environmental, health and safety laws and regulations
in each of the jurisdictions in which we operate or sell our products. These laws and regulations govern, among other things, the
handling and disposal of hazardous substances and wastes, employee health and safety and the use of hazardous materials in, and
the recycling of, our products.
Employees
As of December 31,
2020, we employed 109 full-time employees, consisting of 17 employees in research and development, 54 employees in operations,
which includes manufacturing, supply chain, quality control and assurance, and 38 employees in executive, sales, general and administrative
positions. At such date, we had six part-time employees, consisting of one employee in research and development, four employees
in operations, and one employee in executive, sales, general and administrative. We have never had a work stoppage, and none of
our employees is represented by a labor organization or under any collective bargaining arrangements. We consider our employee
relations to be good. All employees are subject to contractual agreements that specify requirements on confidentiality and restrictions
on working for competitors, as well as other standard matters.
An investment in
our securities involves a high degree of risk. These risks should be considered carefully with the uncertainties described below,
and all other information included in this report, before deciding whether to purchase our securities. Additional risks and uncertainties
not currently known to management or that management currently deems immaterial and therefore not referenced herein, may also become
material and may harm our business, financial condition or results of operations. The occurrence of any of the following risks
could harm our business, financial condition and results of operations. The trading price of our securities could decline due to
any of these risks and uncertainties and you may lose part or all of your investment.
Risks Related to Our Business and Industry
Since our recent acquisition of COMSovereign
in November 2019, we lack an established operating history on which to evaluate our consolidated business and determine if
we will be able to execute our business plan, and we can give no assurance that our operations will result in profits.
While we have conducted our Drone Aviation business operations since
2014, we consummated the acquisition of our COMSovereign subsidiary and its various lines of business, which are diverse and involve a
number of different proposed and existing product offerings, in November 2019, and two other operating subsidiaries since that time.
As a result, we have a limited operating history as a consolidated company upon which you may evaluate our business and prospects. Our
business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. You
should consider an investment in our Company in light of these risks, uncertainties, expenses and difficulties. Such risks include:
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the absence of an operating history in our current business and at our current
scale;
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our ability to raise capital to develop our business and fund our operations;
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expected continual losses for the foreseeable future;
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our ability to anticipate and adapt to developing markets;
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acceptance by customers;
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limited marketing experience;
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competition from competitors with substantially greater financial resources
and assets;
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the ability to identify, attract and retain qualified personnel;
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our ability to provide superior customer service; and
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reliance on key personnel.
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Because we are subject to these risks, and the other risks discussed
below, you may have a difficult time evaluating our business and your investment in our Company.
We incurred net losses in our 2020
and 2019 fiscal years with negative cash flows, and we cannot assure you as to when, or if, we will become profitable and generate
positive cash flows.
We experienced net
losses from operations in our fiscal years ended December 31, 2020 and 2019, and we may continue to incur net losses from operations
in the future. On the basis of our audited financial statements included in this report and without giving effect to the operations
of our Drone Aviation subsidiary prior to the consummation of the COMSovereign Acquisition on November 27, 2019, as of December
31, 2020, we had a cumulative net loss of approximately $64.6 million since our inception (which included non-cash accounting charges
of approximately $32.2 million resulting from stock-based expenses, amortization of our debt discount related to our convertible
notes, the change in our right-of-use operating lease asset, depreciation, amortization and income taxes). Such losses have historically
required us to seek additional funding through the issuance of debt or equity securities. Our long-term success is dependent upon,
among other things, achieving positive cash flows from operations and, if necessary, augmenting such cash flows using external
resources to satisfy our cash needs. There can be no assurance that we will be able to obtain additional funding, if needed, on
commercially reasonable terms, or of all.
We expect to continue to incur losses
from operations and negative cash flows, which raise substantial doubt about our ability to continue as a going concern.
We anticipate incurring
additional losses until such time, if ever, as we can generate significant sales of our DragonWave microwave radios and related
products. We will require substantial additional financing to fund our DragonWave operations and to develop and commercialize the
technologies of our other operating subsidiaries. These factors raise substantial doubt about our ability to continue as a going
concern.
We will seek to obtain
additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be
no assurance that we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may
dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding
shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions
to stockholders. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued.
Due to the uncertainty in our ability to raise capital, we believe that there is substantial doubt in our ability to continue as
a going concern.
We may not generate sufficient cash
flows to cover our operating expenses.
As noted above, we
have incurred recurring losses since inception. Until we can generate significant sales of our DragonWave product lines, we expect
to continue to incur losses primarily as a result of costs and expenses related to research and continued development of the technologies
of our other operating subsidiaries and our corporate general and administrative expenses. Our operations to date have been funded
primarily through sales of our debt and equity securities. As of December 31, 2020, we had negative working capital of approximately
$26.6 million and limited available cash. Since December 31, 2020, we have raised net proceeds of approximately $39.7 million from
the sale of equity securities and used a portion of such net proceeds to repay $17.1 million of outstanding short-term indebtedness,
payables and payroll, including $17.0 million of indebtedness, payables and payroll outstanding at December 31, 2020, and have
converted to equity approximately $13.0 million of additional indebtedness and interest, including $12.8 million of indebtedness
and interest outstanding at December 31, 2020. After giving effect to such debt conversions and repayments, we believe that our
existing cash as of December 31, 2020, and cash generated from operations and from the sale of debt or equity securities since
December 31, 2020 will be sufficient to meet our anticipated cash requirements through at least March 31, 2022. This estimate is
based upon assumptions that may prove to be incorrect, and we could exhaust our available cash resources sooner as than we currently
expect. In the event that we are unable to generate sufficient cash from our operating activities or raise additional funds, we
may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could
have a material adverse effect on our business, operating results, financial condition and long-term prospects.
We have significant debt and if we
are unable to repay our debt when it becomes due, our business, financial condition and results of operations could be materially
harmed.
As of December 31,
2020, we had total undiscounted debt obligations of approximately $19.5 million, excluding accrued interest and forgivable debt
under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Since December 31, 2020, we paid or converted
approximately $18.3 million principal amount of indebtedness and we incurred an additional $18.0 million of indebtedness. Our outstanding
indebtedness could have significant effects on our business, such as:
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limiting our ability to borrow additional amounts to fund working capital,
capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;
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requiring us to dedicate a portion of our cash flows from operations to pay
interest on our debt, which would reduce availability of our cash flows to fund working capital, capital expenditures, potential
acquisitions, execution of our growth strategy and other general corporate purposes;
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making us more vulnerable to adverse changes in general economic, industry
and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing
conditions; and
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placing us at a competitive disadvantage compared with our competitors that
have less debt.
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We may not be able
to generate sufficient cash flows from our operations to repay our indebtedness when it becomes due and to meet our other cash
needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies,
such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not
be able to refinance our debt, sell additional debt or equity securities or sell our assets on favorable terms, if at all, and
if we must sell our assets, we may negatively affect our ability to generate revenue.
If we are unable to obtain additional
funding when needed, our business operations will be harmed, and if we do obtain additional financing, our then-existing shareholders
may suffer substantial dilution.
As we take steps in
the commercialization and marketing of our technologies, or respond to potential opportunities and/or adverse events, our working
capital needs may change. We anticipate that if our cash and cash equivalents are insufficient to satisfy our liquidity requirements,
we will require additional funding to sustain our ongoing operations and to continue our research and development activities. We
do not have any contracts or commitments for additional funding, and there can be no assurance that financing will be available
in amounts or on terms acceptable to us, if at all, if needed. The inability to obtain additional capital will restrict our ability
to grow and may reduce our ability to conduct business operations. If we are unable to obtain additional financing to finance a
revised growth plan, we will likely be required to curtail such plans or cease our business operations. Any additional equity financing
may involve substantial dilution to our then existing shareholders.
Raising capital in the future could
cause dilution to our existing shareholders and may restrict our operations or require us to relinquish rights.
In the future, we may
seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic
and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities,
your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your
rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements
that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures
or declaring dividends. If we raise additional funds through collaboration or strategic alliance arrangements with third parties,
we may have to relinquish valuable rights to our future revenue streams or product candidates on terms that are not favorable to
us.
The occurrence of the COVID-19 pandemic
may negatively affect our operations depending on the severity and longevity of the pandemic.
The COVID-19 pandemic
is currently impacting countries, communities, supply chains and markets as well as the global financial markets. A pandemic typically
results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support
staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for
our goods and services but our overall ability to react timely to mitigate the impact of this event. In addition, it may hamper
our efforts to comply with our filing obligations with the SEC. At this time, we cannot predict the impact of COVID-19 on our ability
to obtain financing necessary to fund our working capital and other requirements. Depending on the severity and longevity of the
COVID-19 pandemic, our business, customers and stockholders may experience a significant negative impact.
Rapid technological change in our
market and/or changes in customer requirements could cause our products to become obsolete or require us to redesign our products,
which would have a material adverse effect on our business, operating results and financial condition.
The market for our
products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product
life cycles, changing customer demands and evolving industry standards, any of which can render existing products obsolete. We
believe that our future success will depend in large part on our ability to develop new and effective products in a timely manner
and on a cost-effective basis. As a result of the complexities inherent in our products, major new products and product enhancements
can require long development and testing periods, which may result in significant delays in the general availability of new releases
or significant problems in the implementation of new releases. In addition, if we or our competitors announce or introduce new
products our current or future customers may defer or cancel purchases of our products, which could materially adversely affect
our business, operating results and financial condition. Our failure to develop successfully, on a timely and cost-effective basis,
new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements
would have a material adverse effect on our business, operating results and financial condition.
Product development is a long, expensive
and uncertain process, and our failure to develop marketable products in our various markets could adversely affect our business,
prospects and financial condition.
The development of
our technologies and products, particularly for our proposed full-duplex wireless microwave products and our SiP technologies product
lines, is a costly, complex and time-consuming process, and the investment in product development often involves a long wait until
a return, if any, is achieved on such investment. We continue to make significant investments in research and development relating
to our technologies and products. Investments in new technology and processes are inherently speculative. Technical obstacles and
challenges we encounter in our research and development process may result in delays in or abandonment of product commercialization,
substantially increase the costs of development and negatively affect our results of operations.
We compete with companies that have
significantly more resources for their research and development efforts than we have or have received government contracts for
the development of new products.
A number of our competitors
have received considerable funding from government or government-related sources to develop various technologies or products. Most
of these organizations and many of our other competitors have greater financial, technical, manufacturing, marketing and sales
resources and capabilities than we do. In addition, with respect to products we are developing for certain markets, we anticipate
increasing competition as a result of industry consolidation, which has enabled companies to enhance their competitive position
and ability to compete against us. These organizations also compete with us to:
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attract parties for acquisitions, joint ventures or other collaborations;
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license proprietary technology that is competitive with the technology we
are developing;
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attract and hire talented and other qualified personal.
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Our competitors may
succeed in developing and commercializing products earlier than we do. Our competitors may also develop products or technologies
that are superior to those we are developing and render our technology candidates or technologies obsolete or non-competitive.
If we cannot successfully compete with new or existing products and technologies, our marketing and sales will suffer and our financial
condition would be adversely affected.
Successful technical development
of our products does not guarantee successful commercialization.
Even if we successfully
complete the technical development for one or all of our product development programs, we may still fail to develop a commercially
successful product for a number of reasons, including, among others, the following:
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failure to obtain the required regulatory approvals for their use;
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prohibitive production costs;
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lack of innovation of the product;
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continuing technological changes in the market rendering the product obsolete;
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failure to scale-up our operations sufficiently to satisfy demand for our
products;
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ineffective distribution and marketing;
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lack of sufficient cooperation from our partners; and
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demonstrations of the products not aligning with or meeting customer needs.
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Although we have sold
our DragonWave and VNC radios and our WASP aerostat systems and various other aerostat ISR systems and components, our success
in the market for the products we develop will depend largely on our ability to prove our products’ capabilities. Upon demonstration,
our products may not have the capabilities they were designed to have or that we believed they would have. Furthermore, even if
we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with
a larger, more established, more proven company than ours. Moreover, competing products may prevent us from gaining wide market
acceptance of our products. We may not achieve significant revenue from new product investments for a number of years, if at all.
Product quality problems, defects,
errors or vulnerabilities in our products could harm our reputation and adversely affect our business, financial condition, results
of operations and prospects.
We may experience quality
control problems in our manufacturing operations or the manufacturing operations of our contract manufacturers. We produce highly-complex
products that incorporate advanced technologies and that we believe to be state-of-the-art for our industry. Despite our testing
prior to their release, our products may contain undetected defects or errors, including design, contract manufacturing or supplier
quality issues, especially when first introduced or when new versions are released. Product defects or errors in the future could
affect the performance of our products and could delay the development or release of new products or new versions of products.
In addition, undetected quality problems may prompt unexpected product returns and adversely affect warranty costs. Allegations
of unsatisfactory performance could cause us to lose revenue or market share, damage our reputation in the market and with customers,
and increase our warranty costs and related returns, which could negatively impact our gross margins, cause us to incur substantial
costs in redesigning the products, cause us to lose significant customers, subject us to liability for damages or divert our resources
from other tasks, any one of which could materially adversely affect our business, financial condition, results of operations and
prospects.
If we lose our rights to use software
we currently license from third parties, we could be forced to seek alternative technology, which could increase our operating
expenses and could adversely affect our ability to compete.
We license certain
software used in our products from third parties, generally on a non-exclusive basis. The termination of any of these licenses,
or the failure of the licensors to adequately maintain or update their software, could delay our ability to ship our products while
we seek to implement alternative technology offered by other sources and could require significant unplanned investments on our
part if we are forced to develop alternative technology internally. In addition, alternative technology may not be available to
us on commercially reasonable terms from other sources. In the future, it may be necessary or desirable to obtain other third-party
licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings.
There is a risk that we will not be able to obtain licensing rights to the needed technology on commercially reasonable terms,
or at all.
If sufficient radio spectrum is not
allocated for use by our products or if we fail to obtain regulatory approval for our products, our ability to market our products
may be restricted.
Radio communications
are subject to significant regulation in North America, Europe, India and other jurisdictions in which we sell our products. Generally,
our products must conform to a variety of national and international standards and requirements established to avoid interference
among users of radio frequencies and to permit the interconnections of telecommunications equipment. In addition, our products
are affected by the allocation and licensing (by auction or other means) of radio spectrum by governmental authorities. Such governmental
authorities may not allocate or license sufficient radio spectrum for use by prospective customers of our products. Historically,
in many developed countries, the lack of availability of commercial radio spectrum or the failure by governments to license that
spectrum has inhibited the growth of wireless telecommunications networks.
In order to sell our
products in any given jurisdiction, we must obtain regulatory approval for our products. Each jurisdiction in which we market our
products has its own rules relating to such approval. Products that support emerging wireless telecommunications services can be
marketed in a jurisdiction only if permitted by suitable radio spectrum allocations and regulations, and the process of establishing
new regulations is complex and lengthy.
Any failure by regulatory
authorities to allocate suitable and sufficient radio spectrum to potential customers in a timely manner could adversely and materially
impact demand for our products and may result in the delay or loss of potential orders for our products. In addition, any failure
by us to obtain or maintain the proper regulatory approvals for our products could have a material adverse effect on our business,
financial condition and results of operations.
We are dependent upon our resellers
in certain jurisdictions to provide localized support and other local services which assist us in avoiding certain costs and investments.
By selling our products
in certain markets through resellers, we are able to avoid certain costs relating to operating in those markets, including but
not limited to local support costs, costs of maintaining a local legal entity, administration costs and logistics. If we choose
or are required to sell direct in these markets (due to customer preference, termination of a reseller relationship or other reasons),
the cost advantages described will no longer be available to us, which could result in an increase in our operating costs.
If critical components or raw materials
used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products,
which could damage our business.
We and the contract
manufacturers of our products rely on a limited number of suppliers for the raw materials and hardware components necessary to
manufacture our products. We do not have any long-term agreements with any of our suppliers that obligate them to continue to sell
their materials or products to us. Our reliance on these suppliers involves significant risks and uncertainties as to whether our
suppliers will provide an adequate supply of required raw materials, component parts, and products. Lead-times for limited-source
materials and components can be as long as six months, vary significantly and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. From time to time, shortages in allocations of components have resulted
in delays in filling orders. Shortages and delays in obtaining components in the future could impede our ability to meet customer
orders. In addition, as the demand for these components and other products increases, it is likely that the price for these components
will increase. If we or our contract manufacturers are unable to obtain the raw materials, including certain electrical components
used in our telecom products or the helium gas used in our aerostat products to provide lift, and component parts in the quantities
and the quality we require on a timely basis and at acceptable prices, we may not be able to deliver our products on a timely or
cost-effective basis, which could cause our customers to terminate their contracts with us, increase our costs and materially harm
our business, results of operations, and financial condition. Furthermore, if our suppliers or the suppliers of our contract manufacturers
are unable or unwilling to supply the raw materials or components, we or our contract manufacturers require, we will be forced
to locate alternative suppliers and possibly redesign our products to accommodate components from alternative suppliers. This would
likely cause significant delays in manufacturing and shipping our products to customers and could materially harm our business.
Our dependence and
exposure on component suppliers are heightened when we introduce new products. New products frequently include components that
we do not use in other product lines. When we introduce new products, we must secure reliable sources of supply for those products
at volumes that will be dictated by end-customer demand. Demand is often difficult to predict until the new product is better established.
Constraints in our supply chain can slow the progress of new product rollouts, adversely affecting our business, results of operations
and financial condition.
Our future profitability may depend
on achieving cost reductions from increasing manufacturing quantities of our products. Failing to achieve such reductions in manufacturing
costs could materially affect our business.
We have limited experience
manufacturing certain of our products, particularly our tethered aerostat and drone products and our DragonWave and VNC microwave
radio products, in high volumes and do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities
and processes that will enable us to manufacture our products in large quantities while maintaining our quality, speed, price,
engineering and design standards. Our inability to develop such manufacturing processes and capabilities could have a material
adverse effect on our business, financial condition, and results of operations. We expect our suppliers to experience an increase
in demand for their products, and we may not have reliable access to supplies that we require and may not be able to purchase such
materials or components at cost effective prices. There is no assurance that we will obtain any material labor and machinery cost
reductions associated with higher production levels, and failure to achieve these cost reductions could adversely impact our business
and financial results.
We rely primarily upon one outsourced
manufacturer for manufacturing our DragonWave microwave radios and related components and we are exposed to the risk that this
manufacturer will not be able to satisfy our manufacturing needs on a timely basis.
We do not have any
internal manufacturing capabilities to produce our DragonWave microwave radios and related components and we rely upon a single
outsourced manufacturer to manufacture such products. Substantially all of our microwave radio products are currently manufactured
by Benchmark Electronics, Inc. See “Description of the Business — Manufacturing, Suppliers and Vendors.” Our
ability to ship DragonWave’s products to our customers could be delayed or interrupted as a result of a variety of factors
relating to our outsourced manufacturer, including:
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our outsourced manufacturer not being obligated to manufacture our products
on a long-term basis in any specific quantity or at any specific price;
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early termination of, or failure to renew, contractual arrangements;
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our failure to effectively manage our outsourced manufacturer relationship;
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our outsourced manufacturer experiencing delays, disruptions or quality control
problems in its manufacturing operations;
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lead-times for required materials and components varying significantly and
being dependent on factors such as the specific supplier, contract terms and the demand for each component at a given time;
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underestimating our requirements, resulting in our outsourced manufacturer
having inadequate materials and components required to produce our products, or overestimating our requirements, resulting in charges
assessed by the outsourced manufacturers or liabilities for excess inventory, each of which could negatively affect our gross margins;
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the possible absence of adequate capacity and reduced control over component
availability, quality assurances, delivery schedules, manufacturing yields and costs; and
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our outsourced manufacturer experiencing financial instability which could
affect its ability to manufacture or deliver our products.
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Although we believe
that our outsourced manufacturer has sufficient economic incentive to perform our manufacturing, the resources devoted to these
activities by it are not within our control, and there can be no assurance that manufacturing problems will not occur in the future.
Insufficient supply or an interruption or stoppage of supply from our outsourced manufacturer or our inability to obtain additional
manufacturers when and if needed, could have a material adverse effect on our business, results of operations and financial condition.
If any of our outsourced
manufacturers are unable or unwilling to continue manufacturing our products in required volumes and quality levels, we will have
to identify, qualify, select and implement acceptable alternative manufacturers, which would likely be time consuming and costly.
In addition, an alternate source may not be available to us or may not be in a position to satisfy our production requirements
at commercially reasonable prices and quality. Therefore, any significant interruption in manufacturing would result in us being
unable to deliver the affected products to meet our customer orders, which could have a material adverse effect on our business,
results of operations and financial condition.
Our potential customers for our DragonWave
radios and our Drone Aviation aerostat and drone products are likely to include U.S. Government or Government-related entities
that are subject to appropriations by Congress. Reduced funding for defense procurement and research and development programs would
likely adversely impact our ability to generate revenues.
We anticipate that
the majority of our revenue to be derived from our aerostats products and a substantial percentage of our revenue to be derived
from our DragonWave radio product sales, at least in the foreseeable future, will come from U.S. Government and Government-related
entities, including the U.S. Department of Defense and other departments and agencies. Government programs in which we may seek
to participate, and contracts for tethered aerostats and drones or microwave radios, must compete with other programs for consideration
during Congress’ budget and appropriations hearings, and may be affected by changes not only in political power and appointments
but also general economic conditions and other factors beyond our control. A government closure based on a failure of Congress
to agree on federal appropriations or the uncertainty surrounding a continuing resolution may result in termination or delay of
federal funding opportunities we are pursuing. Reductions, extensions or terminations in a program in which we are seeking to participate
or overall defense or other spending could adversely affect our ability to generate revenues and realize any profits. We cannot
predict whether potential changes in security, defense, communications and intelligence priorities will afford opportunities for
our business in terms of research and development or product contracts, but any reduction in government spending on such programs
could negatively impact our ability to generate revenues. In addition, our ability to participate in U.S. Government programs may
be affected by the adoption of new laws or regulations relating to government contracting or changes in existing laws or regulations,
changes in political or public support for security and defense programs, and uncertainties associated with the current global
threat environment and other geo-political matters.
Opportunities for expanded uses of
our drone products in the United States are limited by federal laws and rulemaking.
The drone products
we design and manufacture for use within the United States are limited by federal laws and rulemaking, including the commercial
drone regulations (Part 107) adopted by the U.S. Federal Aviation Administration (the “FAA”) at the end of August 2016.
Our ability to design, manufacture and release new products for use in the United States will be limited by federal law and
regulations, which can be slow and subject to delays based on political turnover and disruptions in federal funding, among other
reasons. The Part 107 rules limit the altitude, available airspace and weight of a drone and also the certification of remote pilots
that can operate a drone for commercial purposes in the United States. We, or our customers, may seek waivers from the Part
107 rules for expanded operations; however, the processing of waivers is lengthy and uncertain. Political limits on the ability
to issue new regulations could slow the growth of the aerostat and tethered drone market.
Some of our products may be subject
to governmental regulations pertaining to exportation, which may limit the markets in which we can sell some of our products.
International sales
of certain of our products, including our tethered aerostat and drone products, may be subject to U.S. laws, regulations and policies
like the International Traffic in Arms Regulations (“ITAR”) and other export laws and regulations and may be subject
to first obtaining licenses, clearances or authorizations from various regulatory entities. If we are not allowed to export our
products or the clearance process is burdensome, our ability to generate revenue would be adversely affected. The failure to comply
with any of these regulations could adversely affect our ability to conduct our business and generate revenues, as well as increase
our operating costs.
Economic conditions in the U.S. and
worldwide could adversely affect our revenues.
Our revenues and operating
results depend on the overall demand for our technologies and services. If the U.S. and worldwide economies weaken, either alone
or in tandem with other factors beyond our control (including war, political unrest, pandemic, shifts in market demand for our
services, actions by competitors or other causes), we may not be able to maintain or expand the growth of our revenue.
Sales to customers outside the United States
or with international operations expose us to risks inherent in international sales.
During the year ended
December 31, 2020 and fiscal 2019, on a pro forma basis giving effect to the COMSovereign Acquisition as if such acquisition had
occurred on January 10, 2019, approximately 18% and 15%, respectively, of our revenues were derived from sales outside of the United States.
While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy
is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers,
distributors and other partners that can market and sell our products in foreign jurisdictions. Supporting our distributors operating
in international markets may require significant resources and management attention and may subject us to regulatory, economic
and political risks that are different from those in the United States. While our DragonWave subsidiary has limited operating
experience in some international markets, we cannot assure you that our expansion efforts into other international markets will
be successful. Our experience in the United States and other international markets in which we already have a presence may
not be relevant to our ability to expand in other international markets. Our international expansion efforts may not be successful
in creating further demand for our products outside of the United States or in effectively selling our products in the international
markets we enter. In addition, we face risks in doing business internationally that could adversely affect our business, including:
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the need and expense to localize and adapt our products for specific countries,
including translation into foreign languages, and ensuring that our products enable our customers to comply with local telecommunications
industry laws and regulations, some of which are frequently changing;
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data privacy laws which require that customer data be stored and processed
in a designated territory;
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difficulties in staffing and managing foreign operations, including employee
laws and regulations;
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different pricing environments, longer sales cycles and longer accounts receivable
payment cycles, and collections issues;
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new and different sources of competition;
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weaker protection for intellectual property and other legal rights than in
the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;
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laws and business practices favoring local competitors;
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compliance challenges related to the complexity of multiple, conflicting
and changing governmental laws and regulations, including employment, tax, privacy and data protection, and anti-bribery laws and
regulations;
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increased financial accounting and reporting burdens and complexities;
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restrictions on the transfer of funds;
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our ability to repatriate funds from abroad without adverse tax consequences;
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adverse tax consequences, including the potential for required withholding
taxes;
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fluctuations in the exchange rates of foreign currency in which our foreign
revenues or expenses may be denominated;
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changes in trade relations and trade policy, including the status of trade
relations between the United States and China, and the implementation of or changes to trade sanctions, tariffs, and embargoes;
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public health crises, such as epidemics and pandemics, including COVID-19;
and
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unstable regional and economic political conditions in the markets in which
we operate.
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Any of the foregoing
factors could have a material adverse effect on our business, results of operations, and financial condition. Some of our business
partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage
the risks of international operations, our business may be adversely affected if our business partners are not able to successfully
manage these risks, which could adversely affect our business.
We intend to pursue strategic transactions
in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.
We intend to continue
to pursue potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments
in businesses, products or technologies that expand, complement or otherwise relate to our current or future business. We also
intend to consider, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties
to address particular market segments. However, we may be unable to find suitable acquisition candidates or other suitable partners
or products or may be unable to complete acquisitions or strategic transactions on favorable terms, if at all. For example, while
the historical financial and operating performance or an acquisition or joint venture partner are among the criteria we evaluate
in determining which acquisition or joint venture targets to pursue, there can be no assurance that any business or assets we acquire
or contract with will continue to perform in accordance with past practices or will achieve financial or operating results that
are consistent with or exceed past results. Any such failure could adversely affect our business, financial condition or results
of operations.
In addition, any completed
acquisition or other transaction may not result in the intended benefits for other reasons and any completed acquisition or other
transaction will create or involve a number of other risks such as, among others:
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the need to integrate and manage the businesses and products acquired with
our own business and products;
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additional demands on our resources, systems, procedures and controls;
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disruption of our ongoing business; and
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diversion of management’s attention from other business concerns.
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Moreover, these transactions could involve:
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substantial investment of funds or financings by issuance of debt or equity
securities that could result in dilution to our stockholders, impact our ability to service our debt within scheduled repayment
terms or include covenants or other restrictions that would impede our ability to manage our operations;
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substantial investment with respect to technology transfers and operational
integration; and
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the acquisition or disposition of product lines or businesses.
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Also, such activities
could result in one-time charges and expenses and have the potential to either dilute the interests of existing stockholders or
result in the issuance of or assumption of debt.
Such acquisitions, investments, joint ventures or other business collaborations
may involve significant commitments of financial and other resources of our Company. Any such activity may not be successful in generating
revenue, income or other returns to us, and the resources committed to such activities will not be available to us for other purposes.
Moreover, if we are unable to access capital markets on acceptable terms or at all, we may not be able to consummate acquisitions or may
have to do so on the basis of a less than optimal capital structure. Our inability to (i) take advantage of growth opportunities
for our business or for our products or (ii) address risks associated with acquisitions or investments in businesses may negatively
affect our operating results. Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an
investment or charges to earnings associated with any acquisition or investment activity may materially reduce our earnings. These future
acquisitions or joint ventures may not result in their anticipated benefits, and we may not be able to properly integrate acquired products,
technologies or businesses with our existing products and operations or combine personnel and cultures. Failure to do so could deprive
us of the intended benefits of those acquisitions.
We may be unable to successfully
integrate our recent and future acquisitions, which could adversely affect our business, financial condition, results of operations
and prospects.
In November 2019,
we acquired the business and operations of COMSovereign, which itself had acquired five companies in 2019, including VEO and InduraPower
in January 2019 and DragonWave, Lextrum and Silver Bullet in March 2019. In addition, we completed the acquisition of
the business and operations of Fast Plastic Parts, LLC in March 2020, the acquisition of VNC in July 2020, the acquisition
of Fastback in January 2021, and the acquisition of SKS in February 2021. The operation and management of recent acquisitions,
or any of our future acquisitions, may adversely affect our existing results of operations or we may not be able to effectively
manage any growth resulting from these transactions. Before we acquired them, these companies operated independently of one another.
Until we establish centralized financial, management information and other administrative systems, we will rely on the separate
systems of these companies, including their financial reporting systems.
Our success will depend,
in part, on the extent to which we are able to merge these functions, eliminate the unnecessary duplication of other functions
and otherwise integrate these companies (and any additional businesses with which we may combine in the future) into a cohesive,
efficient enterprise. This integration process may entail significant costs and delays could occur. Our failure to integrate the
operations of these companies successfully could adversely affect our business, financial condition, results of operations and
prospects. To the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might
adversely affect our business, financial condition, results of operations and prospects, as well as our credit and bonding capacity.
If we fail to protect our intellectual
property rights, we could lose our ability to compete in the marketplace.
Our intellectual property
and proprietary rights are important to our ability to remain competitive and for the success of our products and our business.
Patent protection can be limited and not all intellectual property is or can be patented. We rely on a combination of patent, trademark,
copyright, and trade secret laws as well as confidentiality agreements and procedures, non-competition agreements and other contractual
provisions to protect our intellectual property, other proprietary rights and our brand. We have little protection when we must
rely on trade secrets and nondisclosure agreements. Our intellectual property rights may be challenged, invalidated or circumvented
by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets
by employees or competitors. Furthermore, our competitors may independently develop technologies and products that are substantially
equivalent or superior to our technologies and/or products, which could result in decreased revenues for us. Moreover, the laws
of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may
be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion
of management’s attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance
their products. Our inability to adequately protect our intellectual property rights could adversely affect our business and financial
condition and the value of our brand and other intangible assets.
If we fail to protect our intellectual
property rights, our ability to pursue the development of our technologies and products would be negatively affected.
Our success will depend
in part on our ability to obtain patents and maintain adequate protection of our intellectual property and technologies. Some foreign
countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent
as the United States. We have numerous issued patents, and have filed several additional patent applications, outside the
United States, and many companies have had difficulty protecting their proprietary rights in foreign countries. We may not
be able to prevent misappropriation of our proprietary rights.
The patent process
is subject to numerous risks and uncertainties and there can be no assurance that we will be successful in protecting our technologies
by obtaining and enforcing patents. These risks and uncertainties include the following:
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patents that may be issued or licensed may be challenged, invalidated, or
circumvented, or otherwise may not provide any competitive advantage;
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our competitors, many of which have substantially greater resources than
us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents
that will limit, interfere with, or eliminate our ability to make, use, and license our technologies either in the United States
or in international markets;
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there may be significant pressure on the United States government and
other international governmental bodies to limit the scope of patent protection both inside and outside the United States
for technologies that prove successful as a matter of public policy regarding security concerns;
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countries other than the United States may have less restrictive patent
laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create,
develop, and market competing products.
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Moreover, any patents
issued to us may not provide us with meaningful protection, or others may challenge, circumvent or narrow our patents. Third parties
may also independently develop technologies similar to ours or design around any patents on our technologies.
In addition, the United States
Patent and Trademark Office and patent offices in other jurisdictions have often required that patent applications concerning software
inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby
limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents,
the patents may be substantially narrower than anticipated.
Our success depends
on our patents, patent applications, patents that may be licensed exclusively to us, and other patents to which we may obtain assignment
or licenses. We may not be aware, however, of all patents, published applications, or published literature that may affect our
business by blocking our ability to commercialize our products, preventing the patentability of products or services by us or our
licensors, or covering the same or similar technologies that may invalidate our patents, limit the scope of our future patent claims
or adversely affect our ability to market our products and services.
In addition to patents,
we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures
to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary
information. If they do not adequately protect our rights, third parties could use our technology, and we could lose any competitive
advantage we may have. In addition, others may independently develop similar proprietary information or techniques or otherwise
gain access to our trade secrets, which could impair any competitive advantage we may have.
Patent protection and
other intellectual property protection are crucial to the success of our business and prospects, and there is a substantial risk
that such protections will prove inadequate.
Other companies may claim that we
infringe their intellectual property, which could materially increase our costs and harm our ability to generate future revenue
and profit.
We do not believe our
product technologies infringe the proprietary rights of any third-party, but claims of infringement are becoming increasingly common
and third parties may assert infringement claims against us. It may be difficult or impossible to identify, prior to receipt of
notice from a third-party, the trade secrets, patent position or other intellectual property rights of a third-party, either in
the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license
for or otherwise restrict our use of the intellectual property rights of third parties. If we are required to obtain licenses to
use any third-party technology, we would have to pay royalties, which may significantly reduce any profit on our products. In addition,
any such litigation could be expensive and disruptive to our ability to generate revenue or enter into new market opportunities.
If any of our products are found to infringe other parties’ proprietary rights and we are unable to come to terms regarding
a license with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such
products altogether.
Security breaches, including cybersecurity
incidents and other disruptions could compromise our information, expose us to liability and harm our reputation and business.
In the ordinary course
of our business, we collect and store sensitive data, including intellectual property, personal information, our proprietary business
information and that of our customers, suppliers and business partners, and personally identifiable information of our customers
and employees in our data centers and on our networks. The secure maintenance and transmission of this information is critical
to our operations and business strategy. We rely on commercially available systems, software, tools and monitoring to provide security
for processing, transmission and storage of confidential information. Computer hackers may attempt to penetrate our computer systems
and, if successful, misappropriate personal or confidential business information. In addition, an associate, contractor, or other
third-party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may
purposefully or inadvertently cause a breach involving such information. Despite the security measures we have in place and any
additional measures we may implement in the future to safeguard our systems and to mitigate potential security risks, our facilities
and systems, and those of our third-party service providers, could be vulnerable to security breaches. Any such compromise of our
data security and access, public disclosure, or loss of personal or confidential business information could result in legal claims
or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our
operations, damage to our reputation, loss of our customers’ willingness to transact business with us, and subject us to
additional costs and liabilities which could materially adversely affect our business.
We do not carry insurance against
all potential risks and losses, and our insurance might be inadequate to cover all of our losses or liabilities or may not be available
on commercially reasonable terms.
We have limited, and
potentially insufficient, insurance coverage for expenses and losses that may arise in connection with the quality of our products,
property damage, work-related accidents and occupational illnesses, natural disasters and environmental contamination. In addition,
we have no insurance coverage for loss of profits or other losses caused by the death or incapacitation of our senior management.
As a result, losses or liabilities arising from these or other such events could increase our costs and could have a material adverse
effect on our business, financial condition, results of operations and prospects.
We intend to reevaluate
the purchase of insurance, policy limits and terms annually or when circumstances warrant from time to time. Future insurance coverage
for our industry could increase in cost and may include higher deductibles or retentions than we could obtain now. In addition,
some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable.
No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable, and we
may elect to continue to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding
that might be required by new governmental regulations. This may cause us to restrict our operations in certain jurisdictions,
which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have
a material adverse effect on our financial condition and results of operations.
The nature of our business involves
significant risks and uncertainties that may not be covered by insurance or indemnity.
We develop and sell
products where insurance or indemnification may not be available, including:
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designing and developing products using advanced and unproven technologies
and tethered aerostats and drones in intelligence and homeland security applications that are intended to operate in high demand,
high risk situations; and
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designing and developing products to collect, distribute and analyze various
types of information.
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Failure of certain
of our products could result in loss of life or property damage. Certain products may raise questions with respect to issues of
civil liberties, intellectual property, trespass, conversion and similar concepts, which may raise new legal issues. Indemnification
to cover potential claims or liabilities resulting from a failure of technologies developed or deployed may be available in certain
circumstances, but not in others. We are not able to maintain insurance to protect against all operational risks and uncertainties.
Substantial claims resulting from an accident, failure of our product, or liability arising from our products in excess of any
indemnity or insurance coverage (or for which indemnity or insurance is not available or was not obtained) could harm our financial
condition, cash flows, and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation
among our customers and the public, and make it more difficult for us to compete effectively.
There may be health and safety risks
relating to wireless products.
Our wireless communications
products emit electromagnetic radiation. In recent years, there has been publicity regarding, and increased public attention with
respect to, the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones
and other wireless equipment sources, including allegations that these emissions may cause cancer. Health and safety issues related
to our products may arise that could lead to litigation or other actions against us or to additional regulation of our products.
We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce
our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative
publicity could affect our ability to market our products and, in turn, could harm our business and results of operations.
If a successful product liability
claim were made against us, our business could be seriously harmed.
Our agreements with
our customers typically, although not always, contain provisions designed to limit our exposure to potential product liability
claims. Despite this, it is possible that these limitations of liability provisions may not be effective as a result of existing
or future laws or unfavorable judicial decisions. We have not experienced a material product liability claim to date; however,
the sale and support of our products may entail the risk of those claims, which are likely to be substantial in light of the use
of our products in critical applications. A successful product liability claim could result in significant monetary liability to
us and could seriously harm our business.
Misuse of our drone products or unmanned
products manufactured by other companies could result in injury, damage and/or negative press that could depress the market for
unmanned systems.
If any of our drone
products are misused by our customers or their designees, or by the operators of other unmanned systems, in violation of the new
commercial drone regulations (Part 107) adopted by the FAA or other federal, state or local regulations, such misuse could result
in injuries to the operators or bystanders, damage to property and/or negative press that could result in a reduction in the market
for aerostats or tethered drones in the future. The FAA, the press and the public have been closely monitoring the growth of unmanned
systems in the United States. For instance, the FAA regularly publishes reports of drone sightings and reported drone strikes
of manned aircraft. One or more incidents involving unmanned systems that results in injury or death of individuals, or damaged
property could result in negative press that could put at risk current and future growth.
Our tethered aerostat and drone business
and operations are subject to the risks of hurricanes, tropical storms, and other natural disasters.
The corporate headquarters
and manufacturing operations of our tethered aerostat and drone business operations are located in Jacksonville, Florida, where
major hurricanes, tropical storms, and other severe weather conditions have occurred. A significant natural disaster, such as a
hurricane, tropical storm, or other severe weather storm could severely affect our ability to conduct normal business operations
for that product line, and as a result, our future operating results could be materially and adversely affected.
If we are unable to recruit and retain
key management, technical and sales personnel, our business would be negatively affected.
For our business to
be successful, we need to attract and retain highly-qualified technical, management and sales personnel. The failure to recruit
additional key personnel when needed with specific qualifications and on acceptable terms or to retain good relationships with
our partners might impede our ability to continue to develop, commercialize and sell our products. To the extent the demand for
skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain
such employees. The loss of any members of our management team may also delay or impair achievement of our business objectives
and result in business disruptions due to the time needed for their replacements to be recruited and become familiar with our business.
We face competition for qualified personnel from other companies with significantly more resources available to them and thus may
not be able to attract the level of personnel needed for our business to succeed.
If we are required to reclassify
independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial
condition, results of operations and prospects.
We engage a significant
number of independent contractors in our operations, particularly in our research and development efforts, for whom we do not pay
or withhold any federal, state or provincial employment tax. There are a number of different tests used in determining whether
an individual is an employee or an independent contractor and such tests generally take into account multiple factors. There can
be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert
interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent
contractors. Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or
other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified
our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to
impose fines and penalties. If we are required to pay employer taxes or pay federal withholding with respect to prior periods with
respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business,
financial condition, results of operations and prospects.
We have identified material weaknesses
in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies
will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not
effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence
in our reported financial information and may lead to a decline in our stock price.
We have historically
had a small internal accounting and finance staff with limited financial accounting systems. This lack of adequate accounting resources
has resulted in the identification of material weaknesses in our internal controls over financial reporting. A “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely
basis. In connection with the audit of our financial statements for the fiscal year ended December 31, 2020, our management team
identified material weaknesses relating to, among other matters:
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While improvements were made in the segregation of duties and controls over cash and accounts payable, we did not effectively segregate certain accounting duties due to the small size of our accounting staff;
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a lack of timely reconciliations of the account balances affected by the improperly recorded or omitted transactions; and
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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.
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We have taken steps,
and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting
systems and to implement new policies, procedures and controls. If we do not successfully remediate the material weaknesses described
above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial
results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement
which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.
Risks Relating to our Common Stock
Our stock price may be volatile,
which could result in substantial losses to investors and litigation.
In addition to changes
to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section,
the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related
to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common
stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute
to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:
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the results of operating and financial performance and prospects of other
companies in our industry;
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strategic actions by us or our competitors, such as acquisitions or restructurings;
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announcements of innovations, increased service capabilities, new or terminated
customers or new, amended or terminated contracts by our competitors;
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the public’s reaction to our press releases, other public announcements,
and filings with the SEC;
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lack of securities analyst coverage or speculation in the press or investment
community about us or market opportunities in the telecommunications services and staffing industry;
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changes in government policies in the United States and, as our international
business increases, in other foreign countries;
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changes in earnings estimates or recommendations by securities or research
analysts who track our common stock or failure of our actual results of operations to meet those expectations;
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market and industry perception of our success, or lack thereof, in pursuing
our growth strategy;
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changes in accounting standards, policies, guidance, interpretations or principles;
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any lawsuit involving us, our services or our products;
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arrival and departure of key personnel;
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sales of common stock by us, our investors or members of our management team;
and
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changes in general market, economic and political conditions in the United States
and global economies or financial markets, including those resulting from natural or man-made disasters.
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Any of these factors,
as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock
and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent you from
being able to sell your shares at or above the price you paid for your shares of our common stock, if at all. In addition, following
periods of volatility in the market price of a company’s securities, stockholders often institute securities class action
litigation against that company. Our involvement in any class action suit or other legal proceeding could divert our senior
management’s attention and could adversely affect our business, financial condition, results of operations and prospects.
We have never declared or paid cash
dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We currently intend
to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay cash dividends
will be dependent upon our financial condition, operating results, capital requirements, applicable contractual restrictions and
other such factors as our board of directors may deem relevant.
The sale or availability for sale
of substantial amounts of our common stock could adversely affect the market price of our common stock.
Sales of substantial
amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price
of our common stock and could impair our future ability to raise capital through common stock offerings. Our executive officers
and directors beneficially own, collectively, a substantial percentage of our outstanding common stock. If one or more of them
were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. In addition, as of March
15, 2021, we had outstanding options and warrants to purchase an aggregate of 11,989,318 shares of our common stock at a weighted-average
exercise price of $3.46 per share and convertible notes totaling $11.2 million with a conversion price of $5.22 per share of common
stock. The sale in the public markets of shares issuable upon exercise of options or warrants or upon conversion of convertible
debt could adversely affect the price of shares of our common stock. Any issuance of our common stock that is not made solely to
then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result
in dilution to each stockholder.
At March 15,
2021, our directors and executive officers owned or controlled approximately 33% of our outstanding common stock, which may limit
your ability to propose new management or influence the overall direction of the business; this concentration of control may also
discourage potential takeovers that could otherwise provide a premium to you.
At March 15, 2021,
our executive officers and directors beneficially owned or controlled approximately 33% of our outstanding common stock. These
persons will have the ability to substantially influence all matters submitted to our stockholders for approval and to substantially
influence or control our management and affairs, including extraordinary transactions such as mergers and other changes of corporate
control, and going private transactions.
We cannot assure you that we will
be able to continue to comply with Nasdaq’s listing standards.
Our common stock commenced
trading on Nasdaq on January 22, 2021. To be so listed, we were required to meet the current Nasdaq listing standards, including
the minimum bid price requirement, which we met by implementing a 1-for-3 reverse stock split of our outstanding common stock on
January 21, 2021. There can be no assurance that the market price of our common stock will remain at the level required for continuing
compliance with the minimum bid price requirement of Nasdaq. It is not uncommon for the market price of a company’s common
stock to decline in the period following a reverse stock split. If the market price of our common stock declines, given our recent
reverse stock split, the percentage decline may be greater than would occur in the absence of such reverse stock split. In addition,
other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results,
could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain Nasdaq’s minimum
bid price requirement. If we fail to comply with the minimum bid price requirement, our securities could be delisted.
We may need to raise additional capital
in the future. Additional capital may not be available to us on reasonable terms, if at all, when or as we require. If we issue
additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our
common stock, our existing stockholders would experience further dilution and could trigger anti-dilution provisions in outstanding
warrants.
Assuming we meet our
current operating budget, we do not expect to need capital in the short-term. However, we may need to raise additional capital
in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or
exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we
require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected
and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional
working capital when required would have a material adverse effect on our business and financial condition and may result in a
decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are
convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest
of our existing stockholders.
Our officers and directors are entitled
to indemnification from us for liabilities under our articles of incorporation, which could be costly to us and may discourage
the exercise of stockholder rights.
Our articles of incorporation provide that we possess and may exercise
all powers of indemnification of our officers, directors, employees, agents and other persons and our bylaws also require us to indemnify
our officers and directors as permitted under the provisions of the Nevada Revised Statutes (“NRS”). We also have contractual
indemnification obligations under our agreements with our directors and officers. The foregoing indemnification obligations could result
in our Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers. These
provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors, officers and employees for breaches
of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors,
officers and employees even though such actions, if successful, might otherwise benefit our Company and stockholders.
Our bylaws and Nevada law may discourage,
delay or prevent a change of control of our Company or changes in our management, which could have the result of depressing the trading
price of our common stock.
Certain anti-takeover
provisions of Nevada law could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition
arguably could benefit our stockholders.
Nevada’s “combinations
with interested stockholders” statutes, NRS 78.411 through 78.444, inclusive, prohibit specified types of business “combinations”
between certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such
person first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination,
or the transaction by which such person becomes an “interested stockholder”, in advance, or unless the combination
is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested
stockholder, its affiliates and associates. Further, in the absence of prior approval certain restrictions may apply even after
such two-year period. However, these statutes do not apply to any combination of a corporation and an interested stockholder after
the expiration of four years after the person first became an interested stockholder. For purposes of these statutes, an “interested
stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting
power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the corporation and at any
time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power
of the then outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to
cover most significant transactions between a corporation and an “interested stockholder.” These statutes generally
apply to Nevada corporations with 200 or more stockholders of record. However, a Nevada corporation may elect in its articles of
incorporation not to be governed by these particular laws, but if such election is not made in the corporation’s original
articles of incorporation, the amendment (1) must be approved by the affirmative vote of the holders of stock representing
a majority of the outstanding voting power of the corporation not beneficially owned by interested stockholders or their affiliates
and associates, and (2) is not effective until 18 months after the vote approving the amendment and does not apply to any
combination with a person who first became an interested stockholder on or before the effective date of the amendment. We did not
make such an election in our original articles of incorporation and have not amended our articles of incorporation to so elect.
Nevada’s “acquisition
of controlling interest” statutes, NRS 78.378 through 78.3793, inclusive, contain provisions governing the acquisition of
a controlling interest in certain Nevada corporations. These “control share” laws provide generally that any person
that acquires a “controlling interest” in certain Nevada corporations may be denied voting rights, unless a majority
of the disinterested stockholders of the corporation elects to restore such voting rights. Our bylaws provide that these statutes
do not apply to us or any acquisition of our common stock. Absent such provision in our bylaws, these laws would apply to us as
of a particular date if we were to have 200 or more stockholders of record (at least 100 of whom have addresses in Nevada appearing
on our stock ledger at all times during the 90 days immediately preceding that date) and do business in the State of Nevada
directly or through an affiliated corporation, unless our articles of incorporation or bylaws in effect on the tenth day after
the acquisition of a controlling interest provide otherwise. These laws provide that a person acquires a “controlling interest”
whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would
enable that person to exercise (1) one fifth or more, but less than one third, (2) one third or more, but less than a
majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer
crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days
immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control
shares” to which the voting restrictions described above apply.
Various provisions
of our bylaws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder might consider in his or
her best interest. Our bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority
of our outstanding shares of capital stock entitled to vote for the election of directors, and except as provided by Nevada law,
our board of directors shall have the power to adopt, amend or repeal the bylaws by a vote of not less than a majority of our directors.
The interests of these stockholders and directors may not be consistent with your interests, and they may make changes to the bylaws
that are not in line with your concerns.
Nevada law also provides that directors may resist a change or potential
change in control if the directors determine that the change is opposed to, or not in the best interests of, the corporation. The existence
of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in
the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that
you could receive a premium for your common stock in an acquisition.
If equity research analysts do not
publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market
price of our common stock will likely decline.
The trading market for our common stock will rely in part on the research
and reports that equity research analysts, over whom we have no control, publish about us and our business. We may never obtain research
coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the market price
for our common stock could decline. In the event we obtain securities or industry analyst coverage, the market price of our common stock
could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it
is inaccurate, or cease publishing reports about us or our business.
Our articles of incorporation allow
for our board of directors to create new series of preferred stock without further approval by our stockholders, which could adversely
affect the rights of the holders of our common stock.
Our board of directors
has the authority to fix and determine the relative rights and preferences of our preferred stock. Currently our board of directors
has the authority to designate and issue up to 100,000,000 shares of our “blank check” preferred stock without further
stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would
grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the
redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock
that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative
voting power of our common stock or result in dilution to our existing stockholders.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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As a Smaller Reporting
Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information requested by this Item 1B.
Our principal executive
offices are located in Dallas, Texas in segregated offices comprising an aggregate of approximately 15,289 square feet. We occupy
our executive offices under a 63-month lease that expires in July 2025. In addition, our subsidiaries lease property in Jacksonville,
Florida (Drone Aviation Executive Offices), Holly Hill, Florida (Drone Aviation Manufacturing Facility), Ottawa, Ontario, Canada
(DragonWave), Tucson, Arizona (InduraPower), Chantilly, Virginia (VNC), San Diego, California (VEO), Boulder, Colorado (Fastback),
Colorado Springs, Colorado (Sovereign Plastics) and Yokneam, Israel (SKS). We believe our existing facilities are adequate to
meet our current requirements.
On January 29, 2021,
we completed the acquisition of a 140,000-square-foot building on 12.7 acres in Tucson, Arizona for a purchase price of approximately
$6.125 million, of which approximately $2.2 million was paid in cash and the balance was paid with the net proceeds of a $5.3 million
term loan that matures in January 2022. We intend to use this facility for manufacturing and office space for our DragonWave, VNC,
Drone Aviation, InduraPower and Lextrum subsidiaries.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
From time to time, we may become involved in various lawsuits and legal
proceedings that arise in the ordinary course of business. Neither our Company nor any of our subsidiaries currently is a party to any
legal proceeding that, individually or in the aggregate, is material to our Company as a whole, except as follows.
On May 22, 2020, Michael Powell, a former employee of DragonWave Corp.,
filed suit against DragonWave-X, LLC, DragonWave-X, Inc., Transform-X, Inc., COMSovereign Corp., and our Company in the Pima County Arizona
Superior Court, Case No. C20202216. On December 7, 2020, Mr. Powell filed his first amended complaint against DragonWave Corp., Transform-X,
Inc., and our Company. Mr. Powell has alleged that he entered into an employment agreement with DragonWave in July 2018, was terminated
without cause in May 2019, and claims he is owed approximately $182,000 in wages and $50,000 in bonuses. Mr. Powell is seeking approximately
$697,000 in treble damages, punitive damages, consequential damages, interest and attorneys’ fees and costs. On January 4, 2021,
we filed an answer and counterclaim. We dispute Mr. Powell’s allegations and we intend to vigorously defend the lawsuit.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2020
and the Period from January 10, 2019 (Inception) to December 31, 2019
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
COMSovereign Holding
Corp. (“the “Company”), formerly known as Drone Aviation Holding Corp., is a provider of 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 portable infrastructure technologies, capabilities and products that enable
the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation”
(“nG”) networks of the future. The Company focuses on novel 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. 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. In addition, 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.
Acquisition of COMSovereign Corp.
The Company was incorporated
under the laws of the State of Nevada on April 17, 2014. On November 27, 2019, the Company entered into an Agreement and Plan
of Merger dated as of November 27, 2019 (the “Merger Agreement”) with COMSovereign Corp., a Delaware corporation (“COMSovereign”),
and DACS Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”). The
Merger Agreement provided for the merger of Merger Sub with and into COMSovereign (hereafter referred to as the “COMSovereign
Acquisition”). As a result of the COMSovereign Acquisition, Merger Sub ceased to exist, and COMSovereign became the surviving
corporation and a direct wholly-owned subsidiary of the Company. Additionally, the former stockholders of COMSovereign (the “COMSovereign
Stockholders”) received a direct equity ownership and controlling equity interest in the Company. For each share of COMSovereign
common stock, the stockholder received 5.6706 shares of the Company’s common stock. The COMSovereign Acquisition was completed
on November 27, 2019. On December 10, 2019, the Company changed its name from Drone Aviation Holding Corp. to COMSovereign Holding
Corp.
The COMSovereign Acquisition
was accounted for as a reverse merger with COMSovereign acquiring the assets of the Company, and the net assets, including other
intangible assets, of the Company prior to the COMSovereign Acquisition being recorded at fair value with the excess purchase
price allocated to goodwill. As a result of the completion of the COMSovereign Acquisition, these consolidated financial statements
include (1) the assets and liabilities of the Company and its consolidated subsidiaries, including COMSovereign and its subsidiaries,
as of December 31, 2020 and 2019, (2) the historical operations of COMSovereign from inception (January 10, 2019) to the date
of consummation of the COMSovereign Acquisition, and (3) and the operations of the Company and its subsidiaries from the date
of completion of the COMSovereign Acquisition (November 27, 2019) forward.
Corporate History of COMSovereign
COMSovereign was incorporated
in the state of Delaware on January 10, 2019. From the date of incorporation until the date of its first acquisition, as described
below, COMSovereign had no business operations.
On January 12, 2019,
two founding members of COMSovereign each acquired 2,000,000 shares of common stock at a value of $0.0001 per share of common
stock with no cash paid to COMSovereign and no services required.
On January 20, 2019,
the same two founding members of COMSovereign each acquired an additional 2,000,000 shares of common stock at a value of $0.0001
per share of common stock with no cash paid to COMSovereign and no services required.
On January 22, 2019,
an additional 11 founding members of COMSovereign acquired an aggregate of 1,096,667 shares of common stock at a value of $0.0001
per share of common stock with no cash paid to COMSovereign and no services required.
On January 23, 2019,
one of the additional 11 founding members acquired an additional 166,667 shares of common stock at a value of $0.0001 per share
of common stock with no cash paid to COMSovereign and no services required.
On January 29, 2019,
an additional founding member of COMSovereign acquired 33,334 shares of common stock at a value of $0.0001 per share of common
stock with no cash paid to COMSovereign and no services required.
On January 31, 2019,
COMSovereign acquired the capital stock of VEO, a California corporation (“VEO”). VEO is a research and development
company innovating silicon photonic (“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. In connection with
the purchase of VEO, COMSovereign issued 500,000 unregistered shares of Series A Redeemable Convertible Preferred stock (“Preferred
Series A”) to Dr. Chen K. Sun, who is also a founding member of COMSovereign.
On January 31, 2019,
COMSovereign acquired the capital stock of InduraPower Inc. (“InduraPower”). InduraPower is a manufacturer of intelligent
batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for aerospace,
marine and automotive industries. In connection with the purchase of InduraPower, COMSovereign issued an aggregate of 266,667
unregistered Preferred Series A shares. Of those 266,667 shares, 229,600 Preferred Series A shares were issued to Sergei Begliarov,
who is a founding member of COMSovereign and who became the Chief Executive Officer of InduraPower, and the balance was distributed
to four other shareholders.
On March 4, 2019,
COMSovereign acquired the capital stock of Silver Bullet Technology, Inc. (“Silver Bullet”). Silver Bullet is an 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. In connection with the purchase of Silver Bullet, COMSovereign issued
100,000 unregistered Preferred Series A shares to Dr. Dustin McIntire, who is a founding member of COMSovereign and who became
the Company’s Chief Technology Officer.
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 wave
point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012
and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide. According to a report
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 in band
full-duplex wireless technologies and components, including multi-reconfigurable RF antennae and software programs. Lextrum’s
duplexing technology enables capacity doubling in a given spectrum band by allowing simultaneous transmission and receipt of radio
signals on the same frequencies.
In connection with
the purchase of DragonWave and Lextrum, COMSovereign issued an aggregate of 13,237,149 shares of common stock to the shareholders
of the parent company of DragonWave and Lextrum. Included in those shareholders were Daniel L. Hodges, the Chairman of the parent
company, and John E. Howell, the Director and Chief Executive Officer of the parent company. In accordance with the subsections
of ASC 805-50, Business Combinations, Transactions Between Entities Under Common Control, the Company noted common control did
not exist based on either voting interests or qualitative factors; therefore, the Company concluded that the transaction was considered
at arms-length and accounted for the transaction based on ASC 805, Business Combinations.
On November 15, 2019,
the 866,667 outstanding shares of Preferred Series A were exchanged for an aggregate of 866,667 shares of COMSovereign’s
common stock.
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 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. 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.
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. In connection with the VNC
Acquisition, the final adjusted total purchase price consideration amounted to $18,832,383, representing (i) cash paid on the closing
date of $2,892,727, (ii) 3,912,737 shares of the Company’s common stock with a fair value of $11,855,592 or $3.03 per share,
of which an aggregate of 1,333,334 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, (iii) options to purchase an aggregate 841,837 shares of
the Company’s common stock with a fair value of $2,239,950, (iv) warrants to purchase an aggregate 578,763 shares of the
Company’s common stock with a fair value of $1,592,867, and (v) settlement of a note receivable and related interest receivable
pre-existing relationship in the amount of $251,247. VNC is an edge compute focused wireless telecommunications technology developer
and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets,
and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators,
and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC
is reinventing how wireless networks service mission-critical communications for Public Safety, Homeland Security, Department of
Defense and commercial Private Network users. We envision the future of virtualized micro networks blanketing the globe without
expensive terrestrial based radio towers and building installation. VNC’s patented technology virtualizes entire LTE Advanced
and 5G core and radio solutions. VNC’s products eliminate much of the costly backbone equipment of telecom networks. VNC
also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones, including
from COMSovereign’s Drone Aviation subsidiary, enabling operating in nearly any location in the world.
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 financial
statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S.
GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The historical information is not necessarily indicative of the Company’s future
results of operations, financial position or cash flows.
As described in Note
13 – Shareholders’ Equity, effective January 21, 2021, the Company enacted a 1-for-3 reverse stock split (the
“Split”) of the Company’s common stock. The consolidated financial statements and accompanying notes give effect
to the Split as if it occurred at the beginning of the first period presented.
Principle of Consolidation
The consolidated financial
statements as of, and for the year ended December 31, 2020 and as of, and for the period from January 10, 2019 (inception) to
December 31, 2019 (“fiscal 2019”) include the accounts of the Company and its subsidiaries: Drone AFS Corp., Lighter
Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics and VNC. All intercompany transactions
and accounts have been eliminated.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 December 31, 2020 and 2019.
Accounts Receivable and Credit Policies
Trade accounts receivable
consist of amounts due from the sale of the Company’s products and services. 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. As of December 31, 2020 and 2019, the Company characterized $1,686,731
and $690,830, respectively, as uncollectible.
Concentration of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist of cash and trade accounts receivables. The Company
places its cash with high-credit-quality financial institutions. At times, such cash may be in excess of the Federal Deposit Insurance
Corporation (“FDIC”) insurance coverage limit of $250,000 per depositor. As a result, there could be a concentration
of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company has not experienced any losses due
to these excess deposits and believes the risk is not significant. With respect to trade receivables, management routinely assesses
the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.
Related Parties
The Company accounts
for related party transactions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 850, Related Party Disclosures. A party is considered to be related to the Company if
the party directly or indirectly or through one or more intermediaries’ controls, is controlled by, or is under common control
with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families
of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or
operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
Inventory
Inventory is valued
at the lower of cost or 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, when necessary, 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.
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
|
Shop machinery and equipment
|
|
3-5 years
|
Computers and electronics
|
|
2 years
|
Office furniture and fixtures
|
|
3 – 5 years
|
Leasehold improvements
|
|
Shorter
of remaining lease term or 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.
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. Goodwill represents
the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC
350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis
if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth
quarter of 2020, the Company adopted ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which
a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The adoption of
this standard had no material impact on the Consolidated Financial Statements. During fiscal 2020 and 2019, the Company recorded
no impairments. At December 31, 2020, one reporting unit was identified with a zero or negative carrying value of net assets.
Goodwill allocated to that reporting unit totaled $47,926 at December 31, 2020.
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 first allocates the value of the proceeds received from a convertible debt transaction between the convertible debt
instrument and any other detachable instruments included in the transaction (such as warrants) on a relative fair value basis.
A BCF is then measured as the intrinsic value of the conversion option at the commitment date, representing the difference between
the effective conversion price and the Company’s stock price on the commitment date multiplied by the number of shares into
which the debt instrument is convertible. The allocated value of the BCF and warrants are recorded as a debt discount and accreted
over the expected term of the convertible debt as interest expense. If the intrinsic value of the BCF is greater than the proceeds
allocated to the convertible debt instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds
allocated to the convertible debt instrument.
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). ASC 820 established a fair value hierarchy that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement)
as follows:
Level 1 –
Observable inputs that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting
date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide
pricing information on an ongoing basis.
Level 2 –
Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated
inputs.
Level 3 –
Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs
may be used with standard pricing models or other valuation or internally-developed methodologies that result in management’s
best estimate of fair value.
The Company utilizes
fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination.
In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance
with applicable GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are
measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized.
As of December 31, 2020 and 2019, the Company had not recorded any impairment related to such assets and had no other material
nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.
As allowed by applicable
FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently
eligible financial assets or liabilities. The Company’s financial instruments consist of cash, accounts receivable, accounts
payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of December
31, 2020 and 2019, approximated their fair value due to their short-term nature.
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. See Note 10 – Debt Agreements and Note 14 – Share-Based Compensation.
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.
As described above
under Beneficial Conversion Features and Warrants, the Company first allocates the value of the proceeds received
from a convertible debt transaction between the convertible debt instrument and any other detachable instruments included in the
transaction (such as warrants) on a relative fair value basis. A BCF is then measured as the intrinsic value of the conversion
option at the commitment date, representing the difference between the effective conversion price and the Company’s stock
price on the commitment date multiplied by the number of shares into which the debt instrument is convertible. The allocated value
of the BCF and warrants are recorded as a debt discount and accreted over the expected term of the convertible debt as interest
expense. If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible debt instrument, the amount
of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible debt instrument.
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.
Foreign Currency Translation
The Company’s
operations and balances denominated in foreign currencies, including those of its foreign Canadian subsidiary, DragonWave, that
are primarily a direct and integral component or extension of the Company’s operations, are translated into U.S. dollars
(“USD”) using the following: monetary assets and liabilities are translated at the period end exchange rate; non-monetary
assets are translated at the historical exchange rate; and revenue and expense items are translated at the average exchange rate
and records the translation adjustments in accumulated other comprehensive income (loss) on the Consolidated Balance Sheet. Foreign
currency transaction gains and losses are included in foreign currency transaction gain (loss) in the Consolidated Statement of
Operations.
Revenue Recognition
Starting at January
10, 2019 (date of inception), the Company accounts for revenue from contracts with customers in accordance with ASU No. 2017-09,
Revenue from Contracts with Customers and a series of related accounting standard updates (collectively referred to as
“Topic 606”). This guidance sets forth a five-step revenue recognition model which replaced the prior revenue recognition
guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance and to
require more detailed disclosures. The five steps of the revenue recognition model are: (1) identify the contract(s) with a customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price
to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
At contract inception,
the Company assesses the goods and services promised in the contract with customers and identifies a performance obligation for
each. To determine the performance obligation, the Company considers 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. The Company measures revenue as the amount of consideration expected to be
received in exchange for transferring goods and services. Revenue is recognized net of any taxes collected from customers that
are subsequently remitted to governmental authorities.
Management has determined
that it has the following performance obligations related to its products and services: equipment, software license, extended
warranty, training, installation and consulting service. Revenue from equipment, software license, training and installation are
all recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment
or delivery dependent upon the terms of the underlying contract, or services is completed. Revenue from extended warranties is
recognized over time using an input method that results in a straight-line basis recognition over the warranty period, as the
contract usually provides the customer equal benefit throughout the warranty period. Revenue from consulting services is recognized
over time using an input method of labor hours expensed, as it directly measures the efforts toward satisfying the performance
obligation.
For contracts with
customers that contain multiple performance obligations, the Company accounts for the promised performance obligations separately
as individual performance obligations if they are distinct. In determining whether performance obligations meet the criteria for
being distinct, the Company considers a number of factors, including the degree of interrelation and interdependence between obligations
and whether or not the good or service significantly modifies or transforms another good or service in the contract. After identifying
the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative
standalone selling price basis. The Company generally determines the standalone selling prices based on the prices charged to
customers. Judgment may be used to determine the standalone selling prices for items that are not sold separately, including taking
into consideration either historical pricing practices or an adjusted market assessment. Unsatisfied and partially unsatisfied
performance obligations as of the end of the reporting period primarily consist of products and services for which customer purchase
orders have been accepted and that are in the process of being delivered.
Transaction price
is calculated as the selling price less any variable consideration, consisting of rebates and discounts. Discounts provided to
customers are known at contract inception. Rebates are calculated on the “expected value” method where the Company
(1) estimates the probability of each rebate amount which could be earned by the distributor, (2) multiplies each estimated amount
by its assigned probability factor, and (3) calculates a final sum of each of the probability-weighted amounts calculated in step
(2). The sum calculated in step (3) is the rebate amount, which along with discounts reduces the amount of revenue recognized.
The Company has elected
to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment
cost rather than as an additional promised service. As a result, the Company accrues the costs of shipping and handling when
the related revenue is recognized. Costs incurred for shipping and handling are included in costs of goods sold on the Consolidated
Statement of Operations. Amounts billed to a customer for shipping and handling are reported as revenue on the Consolidated Statement
of Operations.
The Company provides
limited warranties for products sold to customers, typically for 13 months, covering product defects. Such limited warranties
are not sold separately and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications.
Accordingly, these types of limited warranties are not considered to be separate performance obligations. In accordance with applicable
guidance, the expected cost of the limited warranties is recorded as accrued warranty liability on the Consolidated Balance Sheet.
Optional extended warranties are sold to customers and include additional support services.
The Company records
contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration.
The Company records contract liabilities when cash payments are received (or unconditional rights to receive cash) in advance
of fulfilling its performance obligations. When the services have been performed or the goods delivered, revenue will be recognized,
and contract liabilities will be reduced.
The Company does not
disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
The majority of the Company’s performance obligations in its contracts with customers relate to contracts with durations
of less than one year. The transaction price allocated to unsatisfied performance obligations included in contracts with durations
of more than 12 months is reflected in contract liabilities on the Consolidated Balance Sheet.
Applying a practical
expedient, the Company recognizes the incremental costs of obtaining contracts, which primarily consist of sales commissions,
as expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less.
If the service period, inclusive of any anticipated renewal, is longer than a year, the incremental direct costs are capitalized
and amortized over the period of benefit. As of December 31, 2020 and 2019, there were no such capitalized costs.
The Company also applies
the practical expedient not to adjust the promised amount of consideration for the effects of a financing component if the Company
expects, at contract inception, that the period between when the Company transfers a good or service to the customer and when
the customer pays for the good or service will be one year or less. During fiscal 2020 and 2019, there were no such financing
components.
Research and Development
Research costs are
expensed as incurred. Development costs are expensed as incurred unless they meet generally accepted accounting criteria for deferral
and amortization. Development costs incurred prior to establishment of technological feasibility do not meet these criteria and
are expensed as incurred.
Share-Based Compensation
The Company accounts
for share-based compensation costs in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires
companies to measure the cost of awards of equity instruments, including stock options and restricted stock awards, based on the
grant-date fair value of the award and to recognize it as compensation expense over the employee’s requisite service period
or the non-employee’s vesting period. An employee’s requisite service period is the period of time over which an employee
must provide service in exchange for an award under a share-based payment arrangement and generally is presumed to be the vesting
period.
Beginning in 2020,
for employee awards, the Company elected to utilize the simplified method of estimating the expected life of options as allowed
by U.S. Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 107. The Company believes
this to be a better estimate of the expected life given the lack of historical information. For nonemployee awards, the Company
will utilize the stated term of the award. Forfeitures will be accounted for as they occur for both employee and nonemployee awards.
Upon exercise or conversion of any share-based payment transaction, the Company will issue shares, generally as new issuances.
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.
Leases
Effective in the first
quarter of 2019, the Company adopted ASU No. 2016-02, Leases and a series of related Accounting Standards Updates that
followed (collectively referred to as “Topic 842”). Topic 842 requires organizations to recognize right-of-use (“ROU”)
lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The classification
criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria
for distinguishing between capital leases and operating leases in the previous lease guidance. The FASB retained the distinction
between finance leases and operating leases, leaving the effect of leases in the statement of comprehensive income and the statement
of cash flows largely unchanged from previous U.S. GAAP. The Company utilized the transition method allowed under ASU 2018-11
in which an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption, if any.
The Company determines,
at contract inception, whether or not an arrangement contains a lease and evaluates the contract for classification as an operating
or finance lease. For all leases, ROU assets and lease liabilities are recognized based on the present value of lease payments,
including annual rent increases, over the lease term at commencement date. If the Company’s lease does not provide an implicit
rate in the contract, the Company uses its incremental, secured borrowing rate based on lease term information available as of
the adoption date or lease commencement date in determining the present value of lease payments. Any renewal periods are considered
in the analysis of each lease to the extent that the Company considers them to be reasonably certain of being exercised.
Costs associated with
operating leases are recorded as a single lease cost on a straight-line basis over the life of the lease. The single lease cost
includes the cost of amortizing the operating lease ROU asset and accretion expense related to the operating lease liability and
is included in general and administrative expenses on the consolidated statement of operations. Costs associated with finance
leases are recorded by amortizing the finance lease ROU asset, which is recorded as amortization on the consolidated statement
of operations, and the accretion of the finance lease liability, recognized as interest expense on the Consolidated Statement
of Operations.
For all leases with
a term of 12 months or less, the Company has elected the practical expedient to not recognize ROU assets and lease liabilities.
See Note 16 —
Leases for more information related to the Company’s leases.
Income Taxes
The Company accounts
for income taxes utilizing ASC 740, Income Taxes. ASC 740 requires the measurement of deferred tax assets for deductible
temporary differences and operating loss carry forwards and of deferred tax liabilities for taxable temporary differences. Measurement
of current and deferred tax liabilities and assets is based on provisions of enacted tax law. The effects of future changes in
tax laws or rates are not included in the measurement. The Company recognizes the amount of taxes payable or refundable for the
current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions
that have been recognized in the Company’s financial statements or tax returns. At December 31, 2020 and 2019, the Company
has recorded a 100% valuation allowance against net deferred tax assets due to the uncertainty of their ultimate realization.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company also follows
the guidance for accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes
the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized
in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of December 31,
2020 and 2019. If the Company has to recognize any interest or penalties associated with its tax positions or returns, any interest
or penalties will be recorded as income tax expense in the Consolidated Statement of Operations.
Earnings or Loss per Share
The Company accounts
for earnings or loss per share pursuant to ASC 260, Earnings Per Share, which requires disclosure on the financial statements
of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share
is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents
(if dilutive) related to stock options, restricted stock awards and warrants for each period.
There were no adjustments
to net loss, the numerator, for purposes of computing basic earnings per share. The following table sets out the computation of
basic and diluted income (loss) per share:
|
|
Year Ended
December 31,
|
|
|
January 10,
2019
(Inception) to
December 31,
|
|
(Amounts in US$’s, except share data)
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(37,081,464
|
)
|
|
$
|
(27,545,255
|
)
|
Numerator for basic earnings per share – loss available
to common shareholders
|
|
$
|
(37,081,464
|
)
|
|
$
|
(27,545,255
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average common
shares outstanding
|
|
|
45,293,697
|
|
|
|
16,238,036
|
|
Dilutive effect of warrants and
options
|
|
|
—
|
|
|
|
—
|
|
Denominator for diluted earnings per
share – weighted average common shares outstanding and assumed conversions
|
|
|
45,293,697
|
|
|
|
16,238,036
|
|
Basic loss per common share
|
|
$
|
(0.82
|
)
|
|
$
|
(1.70
|
)
|
Diluted loss per common share
|
|
$
|
(0.82
|
)
|
|
$
|
(1.70
|
)
|
Potential common shares
issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of
diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are dilutive in periods
of net loss available to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments
is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of
whether the Company is in a period of net loss available to common shareholders. The following weighted-average potential common
shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of December 31, 2020 and 2019,
respectively: stock options of 2,967,762 and 279,160, unvested restricted stock units of 349,997 and 52,031, and warrants of 477,160
and 16,166.
Subsequent to December
31, 2020, the Company completed two public offerings, during which the Company issued a total of 9,832,296 shares of common stock
and warrants to purchase an aggregate of 4,913,832 shares of common stock. In February 2021, the Company completed an acquisition
and issued 2,555,209 shares of common stock as partial consideration. Additionally, in January and February 2021, the Company
compensated vendors with shares of common stock totaling 219,000 shares issued and issued restricted awards to a member of the
Board of Directors totaling 66,667 restricted shares. See Note 19 – Subsequent Events for details regarding the subsequent
public offerings. In addition, and also subsequent to December 31, 2020, the Company converted or exchanged certain debt resulting
in an issuance of 3,331,755 shares of the Company’s common stock and warrants to purchase 2,751,556 shares of common stock.
See Note 10 – Debt Agreements for details regarding the subsequent conversions and exchanges.
Reportable Segments
U.S. GAAP establishes
standards for reporting financial and descriptive information about a company’s reportable segments. Operating segments
are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The chief operating decision maker is the Company’s Chief Executive Officer, who currently reviews the financial performance
and the results of operations of our operating subsidiaries on a consolidated basis when making decisions about allocating resources
and assessing performance of the Company. Accordingly, the Company currently considers itself to be in a single reporting segment
for reporting purposes focused on the North American development, manufacturing and production of products and services for the
telecom infrastructure market.
As it is still in
the early stages of development, the Company historically managed its subsidiaries within this single operating segment and do
not assess the performance of our product lines or geographic regions or other measures of income or expense, such as product
expense, operating income or net income. Each of the subsidiaries is operated under the same senior management of the Company,
and the Company views the operations of its subsidiaries as a whole for making business decisions. Employees of one subsidiary,
particularly mechanical engineers, are often called upon to assist in the operations of another subsidiary. As the development
of the Company matures and it move toward full scale production with increased marketing efforts, the Company will continue to
evaluate additional segment disclosure requirements.
Accounting Standards Not Yet Adopted
In August 2020, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance simplifies the
accounting for certain convertible instruments and contracts in an entity’s own equity. As a smaller reporting entity, this
standard will become effective for fiscal years beginning after December 15, 2023, including interim periods within those years.
The Company is currently evaluating the potential impact ASU 2020-06 will have on the Consolidated Financial Statements.
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 upon issuance through December 31, 2022. The Company has performed a preliminary
evaluation of the potential impact of this ASU and it is not expected to have a material effect on the 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, 2020 and for interim periods within fiscal years beginning after
December 15, 2021. The Company is currently evaluating the potential impact that adopting this ASU will have on the 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, ASU 2019-05 and ASU
2019-11 (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 currently evaluating the potential impact the adoption of this ASU will have on the Consolidated
Financial Statements.
3. BUSINESS ACQUISITIONS
The Company’s
acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date
fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired
recorded as goodwill.
For fiscal 2020 and
2019, the Company recorded the following acquisitions:
VEO
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 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 $26.43 per share (non-marketable basis).
VEO Purchase Price
(Amounts in US$’s, except share
data)
|
|
Consideration
|
|
Number of Preferred Series A paid
|
|
|
500.000
|
|
Per share value
|
|
$
|
26.43
|
|
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 estimated
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 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 266.667 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 $26.43 per share (non-marketable basis).
InduraPower Purchase Price
(Amounts in US$’s, except share
data)
|
|
Consideration
|
|
Number of Preferred Series A shares paid
|
|
|
266.667
|
|
Per share value
|
|
$
|
26.43
|
|
Purchase price
|
|
$
|
7,048,000
|
*
|
|
*
|
- difference due
to rounding related to the Split
|
The allocation of
the total purchase price to the tangible and intangible assets acquired and liabilities assumed by COMSovereign based on the estimated
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 Consideration
|
|
$
|
7,048,000
|
|
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 100,000 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 $26.43 per share (non-marketable basis).
Silver Bullet Purchase Price
(Amounts in US$’s, except share
data)
|
|
Consideration
|
|
Number of Preferred Series A shares paid
|
|
|
100,000
|
|
Per share value
|
|
$
|
26.43
|
|
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 estimated
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 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 4,412,383 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 $13.20 per share (non-marketable basis).
DragonWave and Lextrum Purchase Price
(Amounts in US$’s, except share
data)
|
|
Consideration
|
|
Number of common stock shares paid
|
|
|
4,412,383
|
|
Per share value
|
|
$
|
13.20
|
|
Purchase price
|
|
$
|
58,243,456
|
|
DragonWave
|
|
$
|
42,081,392
|
|
Lextrum
|
|
$
|
16,162,064
|
|
DragonWave
The allocation of
the total purchase price to the tangible and intangible assets acquired and liabilities assumed by COMSovereign based on the estimated
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 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 estimated 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 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 Drone Aviation Holding Corp’s acquired tangible and intangible assets and assumed liabilities
based on the estimated 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 Consideration
|
|
$
|
28,257,491
|
|
Fast Plastic Parts, LLC and Spring
Creek Manufacturing, Inc. Acquisition
On March 6, 2020, Sovereign Plastics 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. 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 matured on November 30, 2020 and issued 16,667 shares of common stock. See Note
10 for further discussion of the promissory note. The Company expensed acquisition-related costs of $35,254 in the year ended December
31, 2020, which is included in general and administrative expenses on the Company’s Consolidated Statement of Operations.
The Company has accounted
for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase
price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of
the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The acquired
assets and assumed liabilities were subject to adjustment during a measurement period subsequent to the acquisition date, not
to exceed one-year as permitted under U.S. GAAP. During the fourth quarter, the Company finalized the determination of the fair
values of the assets acquired and liabilities assumed as of the acquisition date, as set forth below.
(Amounts in US$’s)
|
|
Amounts Recognized as of Acquisition Date
|
|
|
Measurement Period Adjustments (1)
|
|
|
Fair Value
|
|
Inventory
|
|
$
|
168,106
|
|
|
$
|
(76,069
|
)
|
|
$
|
92,037
|
|
Prepaid expenses
|
|
|
66,575
|
|
|
|
(51,575
|
)
|
|
|
15,000
|
|
Property & equipment
|
|
|
1,365,319
|
|
|
|
393,744
|
|
|
|
1,759,063
|
|
Operating lease right-of-use-assets
|
|
|
1,048,058
|
|
|
|
—
|
|
|
|
1,048,058
|
|
Finance lease right-of-use assets
|
|
|
18,009
|
|
|
|
—
|
|
|
|
18,009
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
500,226
|
|
|
|
(290,226
|
)
|
|
|
210,000
|
|
Trade name
|
|
|
—
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Goodwill
|
|
|
—
|
|
|
|
47,926
|
|
|
|
47,926
|
|
Total assets
|
|
|
3,166,293
|
|
|
|
33,800
|
|
|
|
3,200,093
|
|
Current portion of long-term debt
|
|
|
1,270,879
|
|
|
|
—
|
|
|
|
1,270,879
|
|
Operating lease liabilities, current
|
|
|
166,919
|
|
|
|
—
|
|
|
|
166,919
|
|
Finance lease liabilities, current
|
|
|
6,578
|
|
|
|
—
|
|
|
|
6,578
|
|
Operating lease liabilities, net of current portion
|
|
|
881,139
|
|
|
|
—
|
|
|
|
881,139
|
|
Finance lease liabilities, net of current portion
|
|
|
11,431
|
|
|
|
—
|
|
|
|
11,431
|
|
Deferred tax liability - noncurrent
|
|
|
—
|
|
|
|
33,800
|
|
|
|
33,800
|
|
Total purchase consideration
|
|
$
|
829,347
|
|
|
$
|
—
|
|
|
$
|
829,347
|
|
|
(1)
|
The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, related to the finalization of the third-party valuation analysis, working capital, and deferred income taxes. The change to the provisional amount of property & equipment resulted in an increase in depreciation expense and accumulated depreciation of $99,350, of which $66,703 relates to a previous reporting period. In addition, the change to the provisional amount of intangible assets resulted in a decrease in amortization expense and accumulated amortization of $52,045, of which $36,617 relates to a previous reporting period. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the acquisition date and did not result from intervening events subsequent to the acquisition date.
|
Virtual Network Communications, Inc.
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 centric wireless
telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment.
VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual
network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce
capital and operating expenses.
In connection with the VNC Acquisition, the final adjusted total
purchase price consideration amounted to $18,832,383, representing (i) cash paid on the closing date of $2,892,727, (ii) 3,912,737
shares of the Company’s common stock with a fair value of $11,855,592 or $3.03 per share, of which an aggregate of 1,333,334
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, (iii) options to purchase an aggregate 841,837 shares of the Company’s common stock with
a fair value of $2,239,950, (iv) warrants to purchase an aggregate 578,763 shares of the Company’s common stock with a fair
value of $1,592,867, and (v) settlement of a note receivable and related interest receivable pre-existing relationship in the amount
of $251,247. The Company expensed acquisition-related costs of $156,605 in the year ended December 31, 2020 and $9,244 in the year
ended December 31, 2019, which is included in general and administrative expenses on the Company’s Consolidated Statement
of Operations.
The Company has accounted
for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase
price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of
the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The acquired
assets and assumed liabilities were subject to adjustment during a measurement period subsequent to the acquisition date, not
to exceed one-year as permitted under U.S. GAAP. During the fourth quarter, the Company finalized the determination of the fair
values of the assets acquired and liabilities assumed as of the acquisition date, as set forth below.
(Amounts in US$’s)
|
|
Amounts Recognized as of Acquisition Date
|
|
|
Measurement Period Adjustments (1)
|
|
|
Fair Value
|
|
Inventory
|
|
$
|
157,727
|
|
|
$
|
—
|
|
|
$
|
157,727
|
|
Prepaid expenses
|
|
|
15,000
|
|
|
|
(2,181
|
)
|
|
|
12,819
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
23,992
|
|
|
|
6,526,008
|
|
|
|
6,550,000
|
|
Customer relationships
|
|
|
—
|
|
|
|
5,880,000
|
|
|
|
5,880,000
|
|
Trade name
|
|
|
—
|
|
|
|
320,000
|
|
|
|
320,000
|
|
Licenses
|
|
|
410,000
|
|
|
|
(60,000
|
)
|
|
|
350,000
|
|
Goodwill
|
|
|
19,151,331
|
|
|
|
(10,687,831
|
)
|
|
|
8,463,500
|
|
Total assets
|
|
|
19,758,050
|
|
|
|
1,975,996
|
|
|
|
21,734,046
|
|
Accounts payable
|
|
|
5,000
|
|
|
|
—
|
|
|
|
5,000
|
|
Accrued interest
|
|
|
35
|
|
|
|
—
|
|
|
|
35
|
|
Long-term debt
|
|
|
24,028
|
|
|
|
—
|
|
|
|
24,028
|
|
Deferred tax liability - noncurrent
|
|
|
—
|
|
|
|
2,872,600
|
|
|
|
2,872,600
|
|
Total purchase consideration
|
|
$
|
19,728,987
|
|
|
$
|
(896,604
|
)
|
|
$
|
18,832,383
|
|
|
(1)
|
The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, related to the finalization of the third-party valuation analysis and deferred income taxes, which analysis also included the valuation of the non-cash purchase consideration resulting in a decrease in the total purchase consideration of $896,604. The change to the provisional amount of intangible assets resulted in an increase in amortization expense and accumulated amortization of $993,064, of which $479,981 relates to a previous reporting period. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the acquisition date and did not result from intervening events subsequent to the acquisition date.
|
4. GOING CONCERN
U.S. GAAP requires
management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance
and to provide related note disclosures in certain circumstances.
The accompanying consolidated
financial statements and notes have been prepared assuming the Company will continue as a going concern. For the year ended December
31, 2020, the Company generated negative cash flows from operations of $6,020,305 and had an accumulated deficit of $64,626,719
and negative working capital of $26,581,053.
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, issuance of debt, and/or securing lines of credit. The Company
has completed two public offerings subsequent to December 31, 2020 and has received gross proceeds of approximately $45.0 million,
before deducting underwriting discounts and commissions and offering expenses. See Note 19 – Subsequent Events for
further information.
The Company’s
fiscal operating results, accumulated deficit and negative working capital, among other factors, raise substantial doubt about
the Company’s ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as
well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can
be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the
Company to raise additional capital could adversely affect its future operations and viability.
5. INVENTORY
Inventory consisted
of the following as of December 31, 2020 and 2019:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
1,765,398
|
|
|
$
|
1,041,256
|
|
Work in progress
|
|
|
461,188
|
|
|
|
1,566,147
|
|
Finished goods
|
|
|
3,305,020
|
|
|
|
3,060,518
|
|
Total inventory
|
|
|
5,531,606
|
|
|
|
5,667,921
|
|
Reserve
|
|
|
(993,174
|
)
|
|
|
(996,525
|
)
|
Total inventory, net
|
|
$
|
4,538,432
|
|
|
$
|
4,671,396
|
|
6. PREPAID AND DEFERRED EXPENSES
Prepaid expenses consisted
of the following as of December 31, 2020 and 2019:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Prepaid rent and security deposit
|
|
$
|
732,270
|
|
|
$
|
873,617
|
|
Deferred offering expenses
|
|
|
569,281
|
|
|
|
—
|
|
Prepaid products and services
|
|
|
171,560
|
|
|
|
43,112
|
|
|
|
$
|
1,473,111
|
|
|
$
|
916,729
|
|
Prepaids and deferred
expenses includes cash paid in advance for rent and security deposits, products and services and certain deferred expenses to be
deferred in accordance with Staff Accounting Bulletin Topic 5.A, as codified in ASC 340. These deferred expenses are specific incremental
costs directly attributable to a proposed or actual offering of securities which are properly be deferred and charged against the
gross proceeds of the offering. See Note 19 – Subsequent Events for details regarding the subsequent public offerings.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment,
net consisted of the following as of December 31, 2020 and 2019:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Shop machinery and equipment
|
|
$
|
9,960,626
|
|
|
$
|
8,100,667
|
|
Computers and electronics
|
|
|
575,452
|
|
|
|
558,561
|
|
Office furniture and fixtures
|
|
|
348,142
|
|
|
|
341,214
|
|
Leasehold improvements
|
|
|
274,314
|
|
|
|
222,332
|
|
|
|
|
11,158,534
|
|
|
|
9,222,774
|
|
Less – accumulated depreciation
|
|
|
(8,872,068
|
)
|
|
|
(7,764,668
|
)
|
|
|
$
|
2,286,466
|
|
|
$
|
1,458,106
|
|
For the year ended
December 31, 2020 and the period from Inception through December 31, 2019, the Company invested $176,697 and $87,038, respectively,
in capital expenditures.
The Company recognized $1,107,400 and $623,884, respectively,
of depreciation expense for the year ended December 31, 2020 and fiscal 2019.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The
following table sets forth the changes in the carrying amount of goodwill for fiscal 2020 and 2019:
(Amounts in US$’s)
|
|
Total
|
|
Balance at January 10, 2019 (inception)
|
|
$
|
—
|
|
2019 Acquisitions
|
|
|
56,386,796
|
|
Balance at December 31, 2019
|
|
$
|
56,386,796
|
|
2020 Acquisitions
|
|
|
8,511,426
|
|
Balance at December 31, 2020
|
|
$
|
64,898,222
|
|
The
following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as
of December 31, 2020 and 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
|
|
Licenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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
|
|
$
|
5,973,204
|
|
|
$
|
(1,349,698
|
)
|
|
$
|
4,623,506
|
|
Licenses
|
|
|
350,000
|
|
|
|
(33,871
|
)
|
|
|
316,129
|
|
Technology
|
|
|
39,350,000
|
|
|
|
(10,303,516
|
)
|
|
|
29,046,484
|
|
Customer relationships
|
|
|
21,200,792
|
|
|
|
(5,484,917
|
)
|
|
|
15,715,875
|
|
Intellectual property
|
|
|
3,729,537
|
|
|
|
(673,389
|
)
|
|
|
3,056,148
|
|
Noncompete
|
|
|
937,249
|
|
|
|
(507,677
|
)
|
|
|
429,572
|
|
Total definite-lived intangible assets at December 31, 2020
|
|
$
|
71,540,782
|
|
|
$
|
(18,353,068
|
)
|
|
$
|
53,187,714
|
|
Amortization
expense of intangible assets was $11,409,768 and $6,943,300, respectively, for the year ended December 31, 2020 and fiscal 2019.
The Company’s amortization is based on no residual value using the straight-line amortization method as it best represents
the benefit of the intangible assets. The following table sets forth the weighted-average amortization period, in total and by
major intangible asset class:
Asset Class
|
|
Weighted-Average Amortization period
|
Trade names
|
|
|
6.8 years
|
Licenses
|
|
|
5.0 years
|
Technology
|
|
|
6.0 years
|
Customer relationships
|
|
|
5.7 years
|
Intellectual property
|
|
|
6.0 years
|
Noncompete
|
|
|
2.0 years
|
|
|
|
|
All Intangible assets
|
|
|
5.9 years
|
As
of December 31, 2020, assuming no additional amortizable intangible assets, the expected amortization expense for the unamortized
acquired intangible assets for the next five years and thereafter was as follows:
(Amounts in US$’s)
|
|
Estimated
|
|
2021
|
|
|
12,436,826
|
|
2022
|
|
|
12,007,253
|
|
2023
|
|
|
11,952,916
|
|
2024
|
|
|
9,842,359
|
|
2025
|
|
|
4,481,091
|
|
2026
|
|
|
1,670,789
|
|
2027
|
|
|
784,000
|
|
2028
|
|
|
12,480
|
|
9. REVOLVING LINE OF CREDIT AND NOTE PAYABLE
Revolving
Line of Credit
In
2017, the Company issued a promissory note (the “CNB Note”) to City National Bank of Florida (“CNB”) in
the principal amount of $2,000,000, with a maturity date of August 2, 2018. In 2018, the maturity date of the CNB Note was extended
to August 2, 2019. On August 29, 2019, the maturity date of the CNB Note was extended to August 2, 2020. The August 2019 modification
was evaluated and it was determined that it did not qualify as an extinguishment of debt. The CNB Note allows for a CNB line of
credit with advances that may be requested by the Company until the maturity date of August 2, 2020 so long as no event of default
exists under the CNB Note or certain other events.
The
CNB Note bears an interest rate equal to the average of the interest rates per annum at which U.S. Dollars are offered in the
London Interbank Borrowing Market (“LIBOR”) for a 30-day period (the “Index”) plus 2.9% over the Index.
The Company will pay to CNB a late charge of 5.0% of any monthly payment not received by CNB within 10 calendar days after its
due date. The Company may prepay the CNB Note at any time without penalty. In the event of a default, the interest rate will increase
to the highest lawful rate. As of December 31, 2019, the interest rate on the CNB Note is 4.6% per annum.
Under
the terms of the CNB Note, the Company is obligated to maintain its primary operating account with CNB with a minimum average annual
balance of $1,600,000. In the event the Company does not maintain this account balance, CNB may charge the Company a fee equal
to 2% of the deficiency as additional interest under the CNB Note. Management believes that it was in compliance at all times during
2020 and 2019 with this covenant and was never charged the 2% deficiency fee. The CNB Note is personally guaranteed by the Company’s
former Chief Executive Officer, Mr. Jay H. Nussbaum and his estate (“Guarantors”). The Company and the Guarantors are
obligated to maintain aggregate unencumbered liquidity of no less than $6,000,000 in accounts with recognized financial institutions
or licensed brokerage firms during the term of the CNB Note. Management believes that it was in compliance at all times during
2020 and 2019 with this covenant. In addition, the CNB Note is secured by all of the Company’s accounts, inventory and equipment,
along with an assignment of a $120,000 bank account the Company maintains at CNB. The Company maintained the $120,000 bank account
as of December 31, 2019. As of December 31, 2019, $2,000,000 had been drawn against the CNB line of credit. On March 19, 2020,
the Company entered into a secured loan agreement with an unrelated party, the proceeds of which were used to pay off the CNB Note.
See Note 10 – Debt Agreements for further information.
Indemnification
Agreement
On
August 3, 2017, the Company entered into an Indemnification Agreement with Mr. Nussbaum in order to indemnify and defend him to
the fullest extent permitted by law for any claim, expense or obligation which might arise as a result of his guarantee of the
CNB Note.
10. DEBT AGREEMENTS
Long-term debt consisted of the following
as of December 31, 2020 and 2019:
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
(Amounts in US$’s)
|
|
Maturity
Date
|
|
Amount
Outstanding
|
|
|
Interest
Rate
|
|
|
Amount
Outstanding
|
|
|
Interest
Rate
|
|
Secured Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable*
|
|
February 28, 2020
|
|
$
|
788,709
|
|
|
|
12.5
|
%
|
|
$
|
788,709
|
|
|
|
8.5
|
%
|
Secured note payable*
|
|
March 1, 2022
|
|
|
150,710
|
|
|
|
9.0
|
%
|
|
|
224,288
|
|
|
|
9.0
|
%
|
Secured note payable*
|
|
September 1, 2021
|
|
|
10,790
|
|
|
|
7.9
|
%
|
|
|
21,571
|
|
|
|
7.9
|
%
|
Secured note payable*
|
|
November 26, 2021
|
|
|
2,000,000
|
|
|
|
15.0
|
%
|
|
|
2,000,000
|
|
|
|
9.0
|
%
|
Secured note payable*
|
|
December 26, 2020
|
|
|
75,219
|
|
|
|
78.99
|
%
|
|
|
—
|
|
|
|
—
|
|
Secured note payable*
|
|
September 15, 2020
|
|
|
855,120
|
|
|
|
36.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Secured note payable*
|
|
October 15, 2020
|
|
|
2,007,971
|
|
|
|
18.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Equipment financing loan*
|
|
November 9, 2023
|
|
|
57,146
|
|
|
|
8.5
|
%
|
|
|
—
|
|
|
|
—
|
|
Equipment financing loan*
|
|
December 19, 2023
|
|
|
83,851
|
|
|
|
6.7
|
%
|
|
|
—
|
|
|
|
—
|
|
Equipment financing loan*
|
|
January 17, 2024
|
|
|
38,732
|
|
|
|
6.7
|
%
|
|
|
—
|
|
|
|
—
|
|
Secured note payable
|
|
January 6, 2021
|
|
|
1,100,000
|
|
|
|
10.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Total secured notes payable
|
|
|
|
|
7,168,248
|
|
|
|
|
|
|
|
3,034,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment financing loan
|
|
September 15, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
3,828
|
|
|
|
8.8
|
%
|
Note payable
|
|
July 9, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
18.0
|
%
|
Note payable
|
|
September 1, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
18.0
|
%
|
Note payable*
|
|
September 30, 2020
|
|
|
500,000
|
|
|
|
15.0
|
%
|
|
|
500,000
|
|
|
|
10.0
|
%
|
Note payable*
|
|
September 30, 2020
|
|
|
175,000
|
|
|
|
15.0
|
%
|
|
|
175,000
|
|
|
|
10.0
|
%
|
Note payable*
|
|
August 31, 2020
|
|
|
3,500,000
|
|
|
|
18.0
|
%
|
|
|
5,000,000
|
|
|
|
10.0
|
%
|
Note payable
|
|
July 9, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
18.0
|
%
|
Notes payable*
|
|
December 6, 2019
|
|
|
66,700
|
|
|
|
18.0
|
%
|
|
|
450,100
|
|
|
|
18.0
|
%
|
Note payable*
|
|
November 30, 2020
|
|
|
500,000
|
|
|
|
15.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Notes payable*
|
|
June 30, 2020
|
|
|
379,588
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Notes payable*
|
|
June 30, 2020
|
|
|
165,986
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Note payable*
|
|
February 16, 2023
|
|
|
83,309
|
|
|
|
3.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Note payable*
|
|
September 30, 2020
|
|
|
290,000
|
|
|
|
12.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Notes Payable*
|
|
October 13, 2020 through November 30, 2020
|
|
|
1,200,000
|
|
|
|
18.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Notes Payable*
|
|
January 31, 2021 through February 23, 2021
|
|
|
550,000
|
|
|
|
18.0
|
%
|
|
|
—
|
|
|
|
—
|
|
PPP loans
|
|
April 30, 2022 through
May 26, 2022
|
|
|
455,184
|
|
|
|
1.0
|
%
|
|
|
—
|
|
|
|
—
|
|
PPP loan
|
|
May 14, 2022
|
|
|
24,028
|
|
|
|
1.0
|
%
|
|
|
—
|
|
|
|
—
|
|
PPP loan
|
|
August 11, 2025
|
|
|
103,659
|
|
|
|
1.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Total notes payable
|
|
|
|
|
7,993,454
|
|
|
|
|
|
|
|
6,728,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debenture*
|
|
December 31, 2019
|
|
|
84,000
|
|
|
|
15.0
|
%
|
|
|
100,000
|
|
|
|
15.0
|
%
|
Total senior debentures
|
|
|
|
|
84,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable*
|
|
January 29, 2021
|
|
|
374,137
|
|
|
|
24.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Convertible note payable*
|
|
November 20, 2020
|
|
|
2,238,239
|
|
|
|
24.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Total convertible notes payable
|
|
|
|
|
2,612,376
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible debenture
|
|
December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
15.0
|
%
|
Senior convertible debenture
|
|
December 31, 2021
|
|
|
250,000
|
|
|
|
15.0
|
%
|
|
|
250,000
|
|
|
|
10.0
|
%
|
Senior convertible debenture
|
|
November 30, 2020
|
|
|
1,000,000
|
|
|
|
15.0
|
%
|
|
|
—
|
|
|
|
—
|
|
Total senior convertible debentures
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
19,108,078
|
|
|
|
|
|
|
|
10,138,496
|
|
|
|
|
|
Less unamortized discounts and debt issuance costs
|
|
|
|
|
(61,079
|
)
|
|
|
|
|
|
|
(4,749,004
|
)
|
|
|
|
|
Total long-term debt, less discounts and debt issuance costs
|
|
|
|
|
19,046,999
|
|
|
|
|
|
|
|
5,389,492
|
|
|
|
|
|
Less current portion of long-term debt
|
|
|
|
|
(18,340,706
|
)
|
|
|
|
|
|
|
(5,389,492
|
)
|
|
|
|
|
Debt classified as long-term debt
|
|
|
|
$
|
706,293
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
*
|
Note
is in default. Refer to further discussion below.
|
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 December 31, 2020
and 2019, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note was past due and accruing
interest at an increased default rate of 12.5% per annum. This promissory note is secured by substantially all of the assets of
InduraPower. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal 2021.
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. Interest-only payments were due monthly beginning October 1, 2016 through March 1, 2017. Monthly
payments of $9,341 for interest and principal were due on this note for the following 60 consecutive months. This promissory note
is currently past due. As of December 31, 2020 and 2019, an aggregate principal amount of $150,710 and $224,288, respectively,
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 fulfill 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 for 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 December 31, 2020 and 2019. 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 7.9% 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 December 31, 2020 and 2019, an
aggregate principal amount of $10,790 and $21,571, respectively, 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 for 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 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 bearing interest at the rate of 9.0% per annum
and matures on November 26, 2021. Upon an event of default, the interest rate shall automatically increase to 15% per annum on
any unpaid principal and interest, compounded monthly, and all unpaid principal and accrued interest become due on-demand. A late
charge of 5% will be charged for any balance overdue by more than 10 days. 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. The debt issuance
costs were the result of the issuance of 350,000 shares of common stock of the Company and a cash payment of $80,000. The Company
defaulted on this loan during the current fiscal year, causing the interest rate to increase to a monthly compounded rate of 15%
per annum, a late charge of 5% to be incurred, and the loan and accrued interest to become due on-demand. Amounts recorded as debt
discounts and issuance costs were fully amortized and recognized in interest expense during the current fiscal year, as a result
of the loan becoming due on-demand from the default event. For the fiscal years ended December 31, 2020 and 2019, $4,523,333 and
$196,667 of these costs were amortized and recognized in interest expense in the Consolidated Statements of Operations, respectively.
As of December 31, 2020 and 2019, there were $0 and $4,523,333 of debt discounts and issuance costs remaining, respectively. As
of December 31, 2020 and 2019, an aggregate principal amount of $2,000,000 was outstanding under this loan. On January 26,
2021, $1,000,000 of the principal amount of this loan and all accrued interest with a combined total of $1,227,043, was fully extinguished
at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 19- Subsequent Events, resulting
in the issuance of 295,674 shares of issued common stock of the Company, along with warrants to purchase up to 295,674 shares of
common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.
On February 26, 2020,
the Company entered into a $600,000 secured business loan bearing interest at 78.99% per annum which matured on December 26, 2020.
Principal and interest payments of $19,429 were due weekly. The loan was secured by the assets of the Company. As of December 31,
2020, an aggregate principal amount of $75,219 was outstanding and past due under this loan. The aggregate principal amount of
this loan was fully repaid during the first quarter of fiscal 2021.
In connection with
the acquisition of the business by Sovereign Plastics 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. 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. The loan was secured by certain assets of Sovereign Plastics. This loan was subjected to covenants, whereby Sovereign Plastics
was required to meet certain financial and non-financial covenants at the end of each fiscal year. As of December 31, 2020, an
aggregate principal amount of $855,120 was outstanding and past due under this loan. The aggregate principal amount of this loan
was fully repaid during the first quarter of fiscal 2021.
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. On August 5, 2020, the maturity
date of this loan was extended to October 15, 2020. Upon maturity, the interest rate automatically increased to 18% per annum,
and a late charge of 5% was charged for any balance overdue by more than 10 days. Interest payments of $8,428 were due monthly,
with the full principal amount due at maturity. The loan was secured by certain intellectual property assets of the Company. The
proceeds of the loan were used to repay the balance of the CNB Note (revolving line of credit) that was entered into in 2017. As
of December 31, 2020, an aggregate principal amount of $2,007,971 was outstanding and past due under this loan. On January 26,
2021, the aggregate principal amount of this loan and accrued interest with a combined total of $2,250,255, was fully extinguished
at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 19- Subsequent Events, plus a 10,000
unit conversion bonus, resulting in the issuance of 552,231 shares of issued common stock of the Company, along with warrants to
purchase up to 552,231 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior
to January 26, 2026.
In connection with
the acquisition of the business by Sovereign Plastics on March 6, 2020, the Company:
|
●
|
assumed an equipment financing loan with an aggregate principal balance of $64,865, which is secured by the related equipment, bearing interest at 8.5% per annum. Monthly principal and interest payments of approximately $1,680 are due over the term. As of December 31, 2020, an aggregate amount of principal of $57,146 was outstanding and past due under this loan. However, there are no penalties associated with this default. The aggregate principal amount of this loan was fully repaid during the first quarter of fiscal 2021.
|
|
●
|
assumed an equipment financing loan with an aggregate principal balance of $95,810, which is secured by the related equipment, bearing interest at 6.7% per annum. Monthly principal and interest payments of approximately $2,361 are due over the term. As of December 31, 2020, an aggregate amount of principal of $83,851 was outstanding and past due under this loan. However, there are no penalties associated with this default. The aggregate principal amount of this loan was fully repaid during the first quarter of fiscal 2021.
|
|
●
|
assumed an equipment financing loan with an aggregate principal balance of $43,957, which is secured by the related equipment, bearing interest at 6.7% per annum. Monthly principal and interest payments of approximately $1,063 are due over the term. As of December 31, 2020, an aggregate amount of principal of $38,732 was outstanding and past due under this loan. However, there are no penalties associated with this default. The aggregate principal amount of this loan was fully repaid during the first quarter of fiscal 2021.
|
On December 8, 2020, the Company entered into a secured loan
agreement in the aggregate principal amount of $1,100,000 with an original issue discount of $100,000, that bears interest at the
rate of 10% per annum and matures on January 6, 2021. Upon an event of default, the interest rate shall automatically increase
to 36% per annum on any unpaid principal, or the maximum amount permitted by applicable law, compounded monthly, and all unpaid
principal and accrued interest may become due on-demand. Accrued interest and principal are due in full on the maturity date. A
late charge of 10% may be charged for any balance not paid when due. The loan is guaranteed by VNC and is secured by the Company’s
equity interest in VNC, all of the assets of VNC and certain intellectual property assets of the Company. Daniel L. Hodges, the
Company’s Chief Executive Officer, transferred a total of 23,334 shares of his personally owned, issued and outstanding common
stock of the Company to the lender and brokers, as part of this transaction. The shares had a total fair value of $142,800. The
Company accounted for this as a contribution from Mr. Hodges, with $102,000 assigned as debt discounts for additional consideration
to the lender, and $40,800 assigned as debt issuance costs to the brokers. The Company incurred debt issuance costs to the placement
agent of this transaction in the amount of $50,000. For the fiscal year ended December 31, 2020, $232,221 of the debt discounts
and issuance costs were amortized and recognized in interest expense in the Consolidated Statement of Operations. As of December
31, 2020, there were $60,579 of debt discounts and issuance costs remaining. As of December 31, 2020, an aggregate principal amount
of $1,100,000 was outstanding under this loan. On January 26, 2021, $350,000 of the principal amount of this loan and accrued
interest with a combined total of $495,584, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering
and disclosed in Note 19- Subsequent Events, resulting in the issuance of 119,418 shares of issued common stock of the Company,
along with warrants to purchase up to 119,418 shares of common stock that are exercisable for a purchase price of $4.50 per share
at any time on or prior to January 26, 2026. The remaining $750,000 principal amount of this loan was fully repaid during the first
quarter of 2021.
Notes Payable
InduraPower had a financing
loan for certain of its equipment that bore interest at 8.775% per annum and was due on September 15, 2020. Principal and interest
payments of $1,872 were due quarterly. As of December 31, 2019, an aggregate principal amount of $3,828 was outstanding under
this loan. The aggregate principal amount of this loan was fully repaid during the third quarter of fiscal 2020.
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 year 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 upon maturity, subsequent interest was accrued
at an increased 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 was not repaid upon maturity, subsequent interest was
accrued at an increased rate of 18% per annum. As of December 31, 2019, an aggregate principal amount of $400,000 was outstanding
under these notes. On August 5, 2020, the aggregate principal amount of these note and accrued interest in the amount of $488,520
was fully extinguished in exchange for 108,560 shares of issued common stock of the Company with a fair value of $4.53 per share.
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 50,000 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 4,832 shares of issued common stock of the Company. Accrued interest
and the full principal balance were due at maturity. Upon maturity, the interest rate increased to 15% per annum for any balance
overdue by more than 5 days. As of December 31, 2020 and 2019, an aggregate principal amount of $500,000 was outstanding under
this note, and was past due at December 31, 2020. On January 26, 2021, the aggregate principal amount of this note and accrued
interest with a combined total of $561,592, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering
and disclosed in Note 19- Subsequent Events, resulting in the issuance of 135,324 shares of issued common stock of the Company,
along with warrants to purchase up to 135,324 shares of common stock that are exercisable for a purchase price of $4.50 per share
at any time on or prior to January 26, 2026.
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 bearing 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 3,334 shares of common stock of COMSovereign, valued at $44,000.
Accrued interest and principal were due and payable at maturity. Upon maturity, the interest rate increased to 15% per annum for
any balance overdue by more than 5 days. As of December 31, 2020 and 2019, an aggregate principal amount of $175,000 was outstanding
under this note, and was past due at December 31, 2020. The aggregate principal amount of this note was fully repaid during the
first quarter of fiscal 2021.
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 were due and payable monthly. 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 33,334 fully paid and non-assessable shares
of its common stock that have been treated as debt issuance costs. On August 5, 2020, $1,500,000 principal amount of this note
was extinguished in exchange for 333,334 shares of common stock of the Company with a fair value of $4.53 per share. This loan
was past due at December 31, 2020. However, there are no penalties associated with this default. As of December 31, 2020 and 2019,
an aggregate principal amount of $3,500,000 and $5,000,000, respectively, was outstanding under this note. On January 26,
2021, the aggregate principal amount of this note and accrued interest with a combined total of $4,211,069, was fully extinguished
at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 19- Subsequent Events, resulting
in the issuance of 1,014,716 shares of issued common stock of the Company, along with warrants to purchase up to 1,014,716 shares
of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.
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
was past due, interest was being accrued at an increased rate of 18% per annum. As of December 31, 2019, an aggregate principal
amount of $200,000 was outstanding under this note. On August 5, 2020, the aggregate principal amount of this note and accrued
interest in the amount of $245,172 was fully extinguished in exchange for 54,483 shares of issued common stock of the Company with
a fair value of $4.53 per share.
In
September 2019, DragonWave entered into a $5,250,000 promissory note that was not fully funded and was guaranteed by COMSovereign.
DragonWave received $3,485,000 in proceeds. As incentive to enter into the promissory note, the noteholder was issued 166,667 shares
of COMSovereign’s common stock for the total purchase price of $13.20 per share, or $2,200,000, of which only $5,000 was
paid in cash. The noteholder was later granted detachable warrants to purchase an aggregate of 814,167 shares of COMSovereign’s
common stock at a price of $0.03 per share. As of December 31, 2019, DragonWave had repaid the principal amount in full along with
all accrued interest, and the warrants had been converted into 814,167 shares of COMSovereign’s common stock at an exercise
price of $0.03 per share or noncash proceeds $24,425.
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 2020. An additional $133,400 of the aggregate principal amount of this promissory note, along with accrued
interest and associated late fee penalties of $51,516, was fully extinguished on August 5, 2020 in exchange for 41,093 shares of
issued common stock of the Company with a fair value of $4.53 per share. As of December 31, 2020 and 2019, the aggregate principal
amount of $66,700 and $450,100, respectively, was outstanding and past due under these notes. The aggregate principal amount of
these notes was fully repaid during the first quarter of fiscal 2021.
On March 5, 2020, the Company sold a promissory note in the
principal amount of $500,000 that matured on November 30, 2020 for a purchase price of $446,000. Additionally, in lieu of interest,
the Company issued to the lender 16,667 shares of its common stock with a fair value of $57,000, which was recognized as a debt
discount and amortized to interest expense over the term of the note. Any principal balance remaining unpaid past the maturity
date accrued interest at a rate of 15% per annum. As of December 31, 2020, an aggregate principal amount of $500,000 was outstanding
and past due under this note. On January 26, 2021, the aggregate principal amount of this note and accrued interest with a
combined total of $511,712, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed
in Note 19- Subsequent Events, resulting in the issuance of 123,305 shares of issued common stock of the Company, along
with warrants to purchase up to 123,305 shares of common stock that are exercisable for a purchase price of $4.50 per share at
any time on or prior to January 26, 2026.
In connection with
the acquisition of the business by Sovereign Plastics on March 6, 2020, the Company:
|
●
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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. As of December 31, 2020, the aggregate amount of $379,588 was outstanding and past due under these notes. However, there are no penalties associated with this default. The aggregate principal amount of these notes was fully repaid during the first quarter of fiscal 2021.
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|
●
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agreed to pay an aggregate of $165,987 to the sellers on or before June 30, 2020. The agreement was not interest bearing. As of December 31, 2020, an aggregate amount of $165,986 was outstanding and past due under these notes. However, there are no penalties associated with this default. The aggregate principal amount of these notes was fully repaid during the first quarter of fiscal 2021.
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●
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assumed a note payable in the amount of $86,866 bearing interest at 3% per annum and with a maturity date of February 16, 2023. Monthly payments in the amount of $3,773 for principal and interest are due over the term. As of December 31, 2020, an aggregate principal amount of $83,309 was outstanding and past due under this note. However, there are no penalties associated with this default and amounts due were current as of the filing date of this Form 10-K.
|
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 was 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 December 31, 2020, an aggregate principal amount of $290,000 was outstanding and past due under this
note. On January 26, 2021, the aggregate principal amount of this note, a 10% principal bonus, and accrued interest with a
combined total of $330,250, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed
in Note 19- Subsequent Events, resulting in the issuance of 79,579 shares of issued common stock of the Company, along with
warrants to purchase up to 79,579 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time
on or prior to January 26, 2026.
Between July 2, 2020 and August 21, 2020, the Company borrowed
an aggregate of $1,200,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal
amounts of the notes were between $50,000 and $200,000. The notes had maturity dates between October 13, 2020 and November 30,
2020 bearing interest at a rate of 15% per annum, with interest accruing at an annually compounded rate of 18% per annum for any
principal balance remaining unpaid past the maturity date. Daniel L. Hodges, the Company’s Chief Executive Officer, transferred
a total of 96,634 shares of his personally owned, issued and outstanding common stock of the Company to the accredited investors
and brokers, as part of this transaction. The shares had a total fair value of $478,726. The Company accounted for this as a contribution
from Mr. Hodges, with $398,540 assigned as debt discounts for additional consideration to the accredited investors, and $80,186
assigned as debt issuance costs to the brokers. The Company incurred additional debt issuance costs to the brokers of this transaction
in the amount of $21,000. The amounts recorded as debt discounts and issuance costs were fully amortized and recognized in interest
expense during the current fiscal year. As of December 31, 2020, an aggregate principal amount of $1,200,000 was outstanding and
past due under these notes. On January 26, 2021, $750,000 of the aggregate principal amount of these notes, a 10% principal
bonus, and accrued interest with a combined total of $885,995, was fully extinguished at the rate of $4.15 per unit, as defined
in our public offering and disclosed in Note 19- Subsequent Events, resulting in the issuance of 213,496 shares of issued
common stock of the Company, along with warrants to purchase up to 213,496 shares of common stock that are exercisable for a purchase
price of $4.50 per share at any time on or prior to January 26, 2026. The remaining $450,000 aggregate principal amount of these
notes was fully repaid during the first quarter of fiscal 2021.
Between November 4,
2020 and November 24, 2020, the Company borrowed an aggregate of $550,000 from accredited investors and issued to such investors
promissory notes evidencing such loans. The principal amounts of the notes were between $50,000 and $100,000. The notes have maturity
dates between January 31, 2021 and February 23, 2021 bearing interest at a rate of 15% per annum, with interest accruing at an
annually compounded rate of 18% per annum for any principal balance remaining unpaid past the maturity date. Daniel L. Hodges,
the Company’s Chief Executive Officer, transferred a total of 38,334 shares of his personally owned, issued and outstanding
common stock of the Company to the accredited investors, as part of this transaction. The Company accounted for this as a contribution
from Mr. Hodges, with the total fair value of the shares of $259,600 assigned as debt discounts for additional consideration to
the accredited investors. The Company defaulted on these notes during the 2020 fiscal year, causing the interest rate to increase
to an annually compounded rate of 18% per annum, and the note and accrued interest to become due on-demand. The amounts recorded
as debt discounts were fully amortized and recognized in interest expense during the 2020 fiscal year, as a result of the notes
becoming due on-demand from the default event. As of December 31, 2020, an aggregate principal amount of $550,000 was outstanding
under these notes. On January 26, 2021, $500,000 of the aggregate principal amount of these notes, a 10% principal bonus,
and accrued interest with a combined total of $565,740, was fully extinguished at the rate of $4.15 per unit, as defined in our
public offering and disclosed in Note 19- Subsequent Events, resulting in the issuance of 136,324 shares of issued common
stock of the Company, along with warrants to purchase up to 136,324 shares of common stock that are exercisable for a purchase
price of $4.50 per share at any time on or prior to January 26, 2026. The remaining $50,000 aggregate principal amount of these
notes was fully repaid during the first quarter of fiscal 2021.
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 December 31, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans.
In connection with
the VNC acquisition on July 6, 2020, the Company assumed a PPP loan in the principal amount of $24,028 bearing interest at 1% per
annum and with a maturity date of May 14, 2022. Terms are consistent with the Company’s other PPP loans. As of December 31,
2020, an aggregate amount of principal amount of $24,028 was outstanding under this loan.
On August 11, 2020,
one of the Company’s subsidiaries received loan proceeds in the aggregate amount of $103,659 under the PPP. The PPP loan
has a maturity of 5 years and an interest rate of 1% per annum. Terms are consistent with the Company’s other PPP loans.
As of December 31, 2020, an aggregate principal amount of $103,659 was outstanding under this loan.
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) $24.00 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. These debentures are past due and interest accrues at a rate of 15% per annum. As of December 31, 2020 and
2019, an aggregate principal amount of $84,000 and $100,000, respectively, was outstanding under these debentures. The aggregate
principal amount of this debenture was fully repaid during the first quarter of fiscal 2021.
Convertible Notes Payable
On
April, 29, 2020, the Company sold a convertible promissory note in the principal amount of $285,714 with an original issue discount
of $35,714 that bore 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 would have automatically increased 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 52,910 shares
of common stock that are exercisable for a purchase price of $2.97 per share at any time on or prior to April 29, 2025. Warrants
to purchase up to 9,260 shares of common stock, at an exercise price of 110% of the initial conversion price of the notes (i.e.,
an exercise price of $2.97), 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 $114,904, a debt discount of $44,944 associated
with the issuance of warrants to the note holder, and debt issuance costs of $39,333, which were all recorded as debt discounts.
On July 28, 2020, the Company defaulted on this note under the related Registration Rights Agreement by not filing a registration
statement within 90 days of the note origination date. As a result, the aggregate principal balance increased by $97,322, which
was composed of an $88,393 penalty payment-in-kind and an $8,929 interest payment-in-kind, representing 130% of the outstanding
principal and accrued interest balance on the default date. In addition, the interest rate was increased to 24% per annum, and
the note and accrued interest was due on-demand. On September 29, 2020, the note holder converted the full principal of $383,306
and all accrued interest of $16,087 into 147,824 shares of common stock of the Company. During the year ending December 31, 2020,
all amounts recorded as debt discounts totaling $234,895 were amortized and recognized in interest expense in the consolidated
statement of operations.
On July 7, 2020, the Company sold to the same investor as the
April 29, 2020 note an additional convertible promissory note in the principal amount of $285,714 with an original issue discount
of $35,714 that bears interest at a rate of 12.5% per annum, and warrants to purchase an additional 52,910 shares of common stock.
Warrants to purchase up to 9,260 shares of common stock, were also issued to an unrelated third-party as a placement fee for the
transaction. Terms and maturities are similar to the April 29, 2020 note and warrants. In connection with this note, the Company
recognized a BCF of $139,810, a debt discount of $50,128 associated with the issuance of warrants to the note holder, and debt
issuance costs of $35,539, which were all recorded as debt discounts. On July 28, 2020, the Company defaulted on this note under
the related Registration Rights Agreement by not filing a registration statement within 90 days of the initial April 29, 2020 note
origination date. As a result, the aggregate principal balance increased by $88,423, which was composed of an $86,339 penalty payment-in-kind
and a $2,084 interest payment-in-kind, representing 130% of the outstanding principal and accrued interest balance on the default
date. In addition, the interest rate was increased to 24% per annum, and the note and accrued interest is due on-demand. During
the year ended December 31, 2020, all amounts recorded as debt discounts totaling $261,191 were amortized and recognized in interest
expense in the consolidated statement of operations. As of December 31, 2020, there were $0 of debt discounts remaining as a result
of the note becoming due on-demand from the default event, and an aggregate principal amount of $374,137 was outstanding under
this note. On January 22, 2021, the note holder converted the full principal of $374,137 and all accrued interest of $44,398 into
155,013 shares of common stock of the Company.
On August 21, 2020,
the Company sold a convertible promissory note in the principal amount of $1,700,000 with an original issue discount of $200,000
that bears interest at a rate of 5.0% per annum and matured on November 20, 2020. Accrued interest and principal are due on the
maturity date. Upon maturity, the interest rate shall automatically increase to the lesser of 18% per annum or the maximum amount
permitted by applicable law on any unpaid principal and accrued interest. Upon a default event, a penalty will be incurred of 130%
of the outstanding principal and accrued interest balance on the default date, the interest rate will increase to 24% per annum,
and the note and accrued interest will become due on-demand. Following the maturity date, the note is convertible into shares of
common stock at a conversion price equal to 65% of the lowest volume weighted average price of the common stock during the 20 consecutive
trading days immediately preceding the conversion date, which the Company recognized as a BCF of $160,000. As additional consideration
for the loan, the Company issued to the lender 133,334 shares of common stock at a fair value of $10.05 per share. Warrants to
purchase up to 17,857 shares of common stock that are exercisable for a purchase price of $8.40 per share at any time on or prior
to August 20, 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 debt discount of $1,340,000 associated with the issuance of shares to the note holder, and debt
issuance costs of $231,149, which were all recorded as debt discounts. On November 21, 2020, the Company defaulted on this note
by not repaying the principal and accrued interest by the maturity date, which resulted in the aggregate principal balance increasing
by $538,239, which was composed of an $516,517 penalty payment-in-kind and a $21,722 interest payment-in-kind, representing 130%
of the outstanding principal and accrued interest balance on the default date. In addition, the interest rate was increased to
24% per annum. During the year ended December 31, 2020, all amounts recorded as debt discounts totaling $1,931,149 were amortized
and recognized in interest expense in the consolidated statement of operations. As of December 31, 2020, an aggregate principal
amount of $2,238,239 was outstanding and past due under this note. The aggregate principal amount of this note was fully repaid
during the first quarter of fiscal 2021.
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) $24.00 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 fiscal 2020.
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 is equal to the lesser of (1) $7.50 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 2,234 shares of issued common stock of the Company. Also on April 21, 2020, all the outstanding warrants
were exercised at $0.03 per share into 94,510 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 $7.50 per share to $2.268
per share. The Company defaulted on these debentures during the current fiscal year, causing the interest rate to increase to 15%
per annum, and the debentures and accrued interest to become due on-demand. Amounts recorded as debt discounts were fully amortized
and recognized in interest expense during the current fiscal year, as a result of the debentures becoming due on-demand from the
default event. As of December 31, 2020 and 2019, there were $0 and $225,000 of debt discounts remaining, respectively. As of December
31, 2020 and 2019, an aggregate principal amount of $250,000 was outstanding under these debentures. On January 26, 2021,
the holder of these debentures converted the full principal of $250,000 and all accrued interest of $33,921 into 125,186 shares
of common stock of the Company.
On
July 2, 2020, the Company sold $1,000,000 aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor
bearing interest at a rate of 9% per annum and a maturity date of September 30, 2020. During the third quarter of the current fiscal
year, the maturity date of these debentures was extended to November 30, 2020. Accrued interest and principal were due on the maturity
date, with interest paid in cash or, at the Company’s option, in shares of common stock at the conversion price of $3.00
per share. Upon an event of default, the interest rate shall automatically increase to 15% per annum. The debentures are convertible
into shares of the Company’s common stock at a conversion price of $3.00 per share. The Company also issued warrants to purchase
33,334 shares of common stock that are exercisable for a purchase price of $3.00 per share, at any time on or prior to the earlier
of December 31, 2022 or the second anniversary of the Company’s consummation of a public offering of its common stock
in connection with an up-listing of the common stock to a national securities exchange. In connection with these debentures, the
Company recognized a BCF of $131,477 and a debt discount of $31,477 associated with the issuance of warrants, both of which were
recorded as debt discounts. During year ended December 31, 2020, the entire $162,954 of the costs recorded as debt discounts were
fully amortized and recognized in interest expense in the consolidated statement of operations. As of December 31, 2020, an aggregate
principal amount of $1,000,000 was outstanding and past due under these debentures. On January 26, 2021, the holder of these debentures
converted the principal amount of $900,000 into 300,000 shares of common stock of the Company. The remaining principal amount $100,000
and accrued interest with a combined total of $160,568, was fully extinguished on January 26, 2021 at the rate of $4.15 per unit,
as defined in our public offering and disclosed in Note 19- Subsequent Events, resulting in the issuance of, along with
warrants to purchase up to 38,713 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time
on or prior to January 26, 2026.
Certain
agreements governing the secured notes payable, notes payable, senior debentures, convertible notes payable, and senior convertible
debentures contain customary covenants, such as debt service coverage ratios, limitations on liens, dispositions, mergers, entry
into other lines of business, investments and the incurrence of additional indebtedness.
All
debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and
is continuing, the lenders may accelerate the applicable amounts due. The Company is in default on several debt agreements, and
has accrued the proper penalties or disclosed any additional contingencies that resulted from the default.
Future maturities contractually required
by the Company under long-term debt obligations are as follows for the years ending December 31:
(Amounts in US$’s)
|
|
Total
|
|
2021
|
|
$
|
18,401,785
|
|
2022
|
|
|
544,305
|
|
2023
|
|
|
57,272
|
|
2024
|
|
|
1,057
|
|
2025
|
|
|
103,659
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
19,108,078
|
|
See Note 19 – Subsequent Events
for details regarding additional debt incurred after December 31, 2020.
11. RELATED PARTY TRANSACTIONS
Throughout 2020, the
Executive Officers and the members of the Board of Directors elected to not receive salaries and Board fees to which they are entitled
through the Company’s compensation program until such time the cash position of the Company improved. Amounts outstanding
at December 31, 2020 totaled approximately $1.4 million. Subsequent to December 31, 2020, the Company completed two public offerings
and approximately $1.2 million of this amount was paid. See Note 19 – Subsequent Events for details regarding the
subsequent public offerings.
Receivable
– Related Party
As
of 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 December 31, 2020 and 2019, the accrued liabilities – related party balance was $30,000 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
amount was recorded in accrued liabilities – related party and $153,761 was outstanding as of December 31, 2019. These transactions
are not considered related party activity during 2020.
During
2019, Sergei Begliarov paid $71,199 of expenses on behalf of InduraPower. During 2019, Mr. Hodges, paid $6,588 of expenses on behalf
of InduraPower. These amounts were recorded in accrued liabilities – related party and had balances outstanding aggregating
to $77,787 as of December 31, 2019. These transactions are not considered related party activity during 2020.
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. In addition, Mr. Kevin Sherlock,
the Company’s General Counsel, is also a director of TM. Additionally, in 2019, TM paid $29,300 of expenses on behalf of
InduraPower and this amount was recorded in accrued liabilities – related party as of December 31, 2019. These transactions
are not considered related party activity during 2020.
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 December 2019. These transactions are not considered related party activity during 2020.
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 $30,000 and $23,036 for normal monthly retainers and expenses incurred as of December 31, 2020 and 2019,
respectively. These amounts were recorded in accrued liabilities – related party as of December 31, 2020 and 2019, respectively.
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, and employee of the Company, who is married to Kevin Hess, is the President and
a director of CCC. Amounts outstanding and payable to CCC in accrued liabilities – related party totaled $148,250 as of December
31, 2019. These transactions are not considered related party activity during 2020.
Notes Payable – Related Party
As of October 2019, TM had advanced amounts to the Company totaling
$1,292,953 for general expenses and to simulate and test emplacement of the modulation technology within one of DragonWave’s
Harmony line radios. As of October 31, 2019, this amount was formalized into a note with a stated interest payment of $54,000.
Interest and principal was due at initial maturity, August 31, 2020. No payment was made as of maturity and a default penalty was
accrued in other liabilities totaling $67,348 in accordance with the agreement. Effective September 30, 2020, this note was
amended to extend the maturity date to December 31, 2020. As of December 31, 2019, $1,292,953 plus accrued interest and penalty
was outstanding under this loan. On October 1, 2020, the Company entered into an agreement with TM to exchange the aggregate
principal, interest and penalties outstanding with a combined total of $1,414,301, in full for 188,574 common shares of the Company
with a fair value of $7.50 per share.
On
August 5, 2019, Mr. Hodges and his wife, loaned DragonWave $200,000 at an interest rate of 5.0% per annum and an 18.0% default
interest rate with a maturity date of December 31, 2020. Interest was payable monthly while the full principal balance was due
at maturity. This loan is currently past due and is accruing interest at an increased default rate of 18.0% per annum. As of December
31, 2020 and 2019, $200,000 plus accrued interest was outstanding under the loan. The aggregate principal amount of this note was
fully repaid during the subsequent first quarter of fiscal year 2021.
On
July 1, 2020, Mr. Brent Davies, who is on the Company’s Board of Directors and Audit Committee, loaned the Company $50,000
at an interest rate of 4.80% per annum with an original maturity date of August 31, 2020. This note was amended to extend the maturity
date to November 30, 2020. Interest and the full principal balance are due at maturity. This loan is currently past due and is
accruing interest at an increased default rate of 18.0% per annum. As of December 31, 2020, $50,000 plus accrued interest was outstanding
under the loan. The aggregate principal amount of this note was fully repaid during the subsequent first quarter of fiscal year
2021.
On July 2, 2020, the Company
sold $1,900,000 aggregate principal amount of 9% Convertible Debentures to Dr. Dustin McIntire, the Company’s Chief Technology Officer,
that bore interest at a rate of 9% per annum and matured on September 30, 2020. Dr. McIntire was also granted warrants to purchase an
aggregate of 63,334 shares of the Company’s common stock at a price of $3.00 per share. The Company recorded the warrants as a discount
to the debt in the amount of $59,806. The Company also recorded $249,806 for the BCF associated with the debentures. On August 19, 2020,
Dr. McIntire converted the full principal amount of such debentures and accrued interest into 640,360 shares of the Company’s common
stock.
Between October 15,
2020 and December 28, 2020, we borrowed an aggregate of $600,000 from Dr. McIntire and issued promissory notes evidencing such
loans. The principal amounts of the notes are between $100,000 and $350,000, and such notes bear interest at 10% per annum and
are due between January 14, 2021 and March 28, 2021. The aggregate principal amount of these notes was fully repaid during the
subsequent first quarter of fiscal year 2021.
Between November 13, 2020 and December 24, 2020, we borrowed
an aggregate of $160,000 from Richard J. Berman, a member of the Board of Directors, and issued promissory notes evidencing such
loans. The principal amounts of the notes were between $40,000 and $120,000, and such notes bore interest at 8% per annum and were
due between February 12, 2021 and March 23, 2021. On January 14, 2021, we and Mr. Berman agreed to convert such promissory notes,
and all accrued interest thereon, into 42,776 shares of common stock and warrants to purchase 42,776 shares of common stock at
an exercise price of $4.50 per share. On January 26, 2021, the aggregate principal amount of this note, a 10% principal bonus,
and all accrued interest with a combined total of $177,517, was fully extinguished at the rate of $4.15 per unit, as defined in
our public offering and disclosed in Note 19- Subsequent Events, resulting in the issuance of 42,776 shares of issued common
stock of the Company, along with warrants to purchase up to 42,776 shares of common stock that are exercisable for a purchase price
of $4.50 per share at any time on or prior to January 26, 2026.
12. REVENUE
The following table
is a summary of the Company’s timing of revenue recognition for the year ended December 31, 2020 and the period January 10,
2019 (Inception) to December 31, 2019:
|
|
Year Ended
December 31,
|
|
|
January 10,
2019
(Inception) to
December 31,
|
|
(Amounts in US$’s)
|
|
2020
|
|
|
2019
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
Services and products transferred at a point in time
|
|
$
|
8,815,731
|
|
|
$
|
2,803,026
|
|
Services and products transferred over time
|
|
|
611,105
|
|
|
|
1,909,186
|
|
Total revenue
|
|
$
|
9,426,836
|
|
|
$
|
4,712,212
|
|
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 year ended
December 31, 2020 and the period January 10, 2019 (Inception) to December 31, 2019:
|
|
Year Ended
December 31,
|
|
|
January 10,
2019
(Inception) to
December 31,
|
|
(Amounts in US$’s)
|
|
2020
|
|
|
2019
|
|
Revenue by products and services:
|
|
|
|
|
|
|
Products
|
|
$
|
7,562,251
|
|
|
$
|
2,702,410
|
|
Services
|
|
|
1,864,585
|
|
|
|
2,009,802
|
|
Total revenue
|
|
$
|
9,426,836
|
|
|
$
|
4,712,212
|
|
Revenue by geographic
destination consisted of the following for the year ended December 31, 2020 and the period January 10, 2019 (Inception) to December
31, 2019:
|
|
Year Ended
December 31,
|
|
|
January 10,
2019
(Inception) to
December 31,
|
|
(Amounts in US$’s)
|
|
2020
|
|
|
2019
|
|
Revenue by geography:
|
|
|
|
|
|
|
North America
|
|
$
|
8,577,006
|
|
|
$
|
3,476,977
|
|
International
|
|
|
849,830
|
|
|
|
1,235,235
|
|
Total revenue
|
|
$
|
9,426,836
|
|
|
$
|
4,712,212
|
|
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 December 31, 2020 and
2019, the Company did not have a material contract assets balance.
The following table
is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.
(Amounts in US$’s)
|
|
Total
|
|
Balance at January 10, 2019 (Inception)
|
|
$
|
—
|
|
Increase
|
|
|
302,815
|
|
Balance at December 31, 2019
|
|
$
|
302,815
|
|
Increase
|
|
|
561,487
|
|
Balance at December 31, 2020
|
|
$
|
864,302
|
|
The increase in contract liabilities during the year ended December
31, 2020 and the period January 10, 2019 (Inception) to December 31, 2019 was primarily due to invoiced amounts that did not yet
meet the revenue recognition criteria, which for the year ended December 31, 2020, was partially offset by the revenue recognition
criteria being met for previously deferred revenue. The amount of revenue recognized for the year ended December 31, 2020 and the
period January 10, 2019 (Inception) to December 31, 2019 that was included in the prior period contract liability balance was approximately
$149,923 and $0, respectively. This revenue consisted of services provided to customers who had been invoiced prior to the year
ended December 31, 2020.
See Note 2 – Summary of Significant
Accounting Policies for the Company’s policies on revenue recognition.
13. SHAREHOLDERS’ EQUITY
On May 26, 2020, the
board of directors of the Company and stockholders holding a majority of the outstanding shares of the Company’s common stock
approved resolutions authorizing the board of directors to effect the Split of the Company’s common stock at an exchange
ratio of up to 1-for-3, with the board of directors retaining the discretion as to whether to implement the Split. On December
16, 2020, the Company’s board of directors approved a ratio for the Split of 1-for-3 subject to such registration statement
being declared effective by the U.S. SEC. On January 21, 2021,
the Company’s first planned registration statement and the Split became effective and closed on January 26, 2021. The consolidated
financial statements and accompanying notes give effect to this Split as if it occurred at the beginning of the first period presented.
The Company filed an
additional registration statement that became effective on February 10, 2021 and closed on February 12, 2021.
See Note 19 – Subsequent Events
for details regarding the subsequent public offerings.
COMSovereign had 5,000,000
Preferred Series A shares authorized for issuance and as of March 4, 2019 had 866,667 Preferred Series A shares issued and 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. After the conversion, the
Preferred Series A shares ceased to exist and were no longer authorized for issuance.
As of December 31, 2020
and 2019, the Company had 100,000,000 shares of preferred stock authorized for issuance, none of which were issued and outstanding.
As of December 31,
2020 and 2019, the Company had 300,000,000 shares of common stock authorized for issuance and 49,444,689 and 42,775,415 shares
of common stock issued and outstanding as of December 31, 2020 and 2019, respectively.
On September 4, 2019,
the Company entered into a Redemption Agreement with Robert Guerra, a former director of the Company, pursuant to which 33,334
shares of common stock were redeemed for $1.50 per share, or an aggregate of $50,000. These redeemed shares were recorded as treasury
stock on the Consolidated Balance Sheets as of December 31, 2020 and 2019.
Dividends
The Company did not
pay dividends to holders of its common stock during fiscal 2020 or 2019. 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.
Consulting Agreements and Settlements with Vendors
On January 31, 2020, the Company entered into an agreement with
a consultant to amend an existing consulting agreement between the consultant and the Company 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 55,032 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 55,032 shares
of common stock 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 Consolidated Financial Statements. On
August 8, 2020 and October 27, 2020, an aggregate of 25,661 shares of its common stock, with a fair value of an aggregate of $96,116,
were issued in conjunction with services performed in the first, second and third quarters of 2020. An additional 8,169 shares
of its common stock, with a fair value of $49,012, are recorded at December 31, 2020 as unissued shares, as discussed below, for
services rendered for the fourth quarter of 2020.
On May 15, 2020, the
Company entered into an agreement with a consultant that requires the payment of 18,334 shares of the its common stock, with a
fair value of $49,500, at the inception of the contract with no performance condition. These shares of common stock were issued
on August 26, 2020.
On June 12, 2020, the
Company entered into an agreement with a consultant that requires payment of $5,000 to be paid in shares of its common stock, as
well as warrants to purchase 1,334 shares of its common stock per month. Six months of warrants were issued at the inception of
the contract with no performance conditions. On October 6, 2020 the Company issued 5,255 shares of its common stock, with a fair
value of $19,861, for services rendered for the third quarter of 2020. This consulting agreement was terminated in October of 2020.
On August 8, 2020, the
Company settled outstanding accounts payable to a vendor by issuing 27,280 shares of its common stock, with a fair value of $102,424.
These shares were issued October 6, 2020.
On December 9, 2020,
the Company entered into an agreement with a consultant that required the payment of 5,000 shares of its common stock with a fair
value of $30,750 at the inception of the contract with the obligation to perform services in the future. These shares of common
stock were issued on December 14, 2020. As of December 31, 2020, 6,375 of these shares of common stock have vested and expense
totaling $13,069 has been recognized, through satisfaction of the performance obligation. The remainder of the shares vested subsequent
to year end.
On November 9, 2020,
the Company entered into a Settlement Agreement and Mutual Release with a prior lender to avoid potential litigation that required
the payment of 300,000 shares of its common stock with a fair value of $690,000 at the agreement date. The expense related to this
settlement has been recorded as Other Expense in the Consolidated Statement of Operations.
Subscription Agreement
On July 16, 2020, the
Company entered into a stock subscription agreement to sell 19,903 shares of its common stock for a total of $59,707. These shares
were issued on August 25, 2020.
On September 28, 2020,
the Company entered into a stock subscription agreement to sell 10,772 shares of its common stock for a total of $32,134. These
shares were issued on August 25, 2020.
On September 28, 2020,
the Company entered into a stock subscription agreement to sell 33,334 shares of its common stock for a total of $240,000. These
shares were issued on October 9, 2020.
Unissued Shares
As of December 31, 2020, the Company had an agreement in place
for which shares of its common stock were required to be issued as compensation to a vendor, although shares had not been administratively
issued. This agreement has met the equity classification requirements and a corresponding increase to additional paid in capital
has been recorded. Upon their issuance, the par value of these shares will be reclassified into common stock and the shares entered
as outstanding. If these shares had been issued on of December 31, 2020, no material change in EPS would have been noted. Unissued
shares as of December 31, 2020 totaled 8,169 shares and were issued subsequent to that date.
14. 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 and warrants, 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. For employee awards, the Company
elected to utilize the simplified method of estimating the expected life of options as allowed by SAB 107. The Company believes
this to be a better estimate of the expected life given the lack of historical information. For nonemployee awards, the Company
will utilize the stated term of the award. Forfeitures will be accounted for as they occur for both employee and nonemployee awards.
Upon exercise or conversion of any share-based payment transaction, the Company will issue shares, generally as new issuances.
As described in
Note 13 – Shareholders’ Equity, effective January 21, 2021, the Company enacted the Split of the Company’s
common stock. As a result, the Company has given effect to the Split as if it occurred at the beginning of the first period presented
for all share-based compensation.
Stock Awards
In
January 2019, Daniel L. Hodges, Chairman and Chief Executive Officer of COMSovereign at such time, and John E. Howell, President
of COMSovereign at such time, each acquired 4,000,000 shares of common stock of COMSovereign at a value of $0.0001 per share of
common stock with no cash paid to COMSovereign and no services required.
On
January 22, 2019, three members of the Board of Directors of COMSovereign and an executive officer of COMSovereign acquired an
aggregate of 716,667 shares of common stock of COMSovereign at a value of $0.0001 per share of common stock with no cash paid to
COMSovereign and no services required. Additionally, four executive officers of InduraPower, Lextrum and VEO acquired an aggregate
of 166,667 shares of common stock of COMSovereign at a value of $0.0001 per share of common stock with no cash paid to COMSovereign
and no services required.
2020 Long-Term Incentive Plan
On April 22, 2020, the
Company’s Board of Directors adopted the 2020 Long-Term Incentive Plan (the “2020 Plan”) which was approved by
the stockholders on or about May 6, 2020. Employees, officers, directors and consultants that provide services to the Company or
one of its subsidiaries may be selected to receive awards under the 2020 Plan. Awards under the 2020 Plan may be in the form of
incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms
of awards including cash awards and performance-based awards.
A total of 3,333,334
shares of the Company’s common stock are authorized for issuance with respect to awards granted under the 2020 Plan. Any
shares subject to awards that are not paid, delivered or exercised before they expire or are cancelled or terminated, or fail to
vest, as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become
available for other award grants under the 2020 Plan. As of December 31, 2020, 908,502 options have been issued under the 2020
Plan, of which 33,334 were forfeited. Any shares forfeited are available for re-issuance. A total of 2,458,165 shares authorized
under the 2020 Plan remained available for award purposes.
The 2020 Plan will terminate
on May 1, 2030. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2020
Plan is ten years after the initial date of the award.
Stock Options
The following options
were issued by the Company, outside of any equity plan, prior to the COMSovereign Acquisition with the attributes described below
to purchase the Company’s common stock (amounts in US$’s, except share data):
Grant Date
|
|
Underlying Shares
|
|
|
Option Price
|
|
|
Full Vesting Date
|
|
Expiration Date
|
January 9, 2017
|
|
|
33,334
|
|
|
$
|
8.70
|
|
|
January 9, 2019
|
|
January 7, 2021
|
August 3, 2017
|
|
|
1,710,000
|
|
|
$
|
1.50
|
|
|
August 3, 2017
|
|
August 3, 2021
|
November 9, 2017
|
|
|
666,667
|
|
|
$
|
1.50
|
|
|
November 9, 2017
|
|
November 9, 2021
|
December 13, 2017
|
|
|
66,667
|
|
|
$
|
3.00
|
|
|
November 13, 2019
|
|
December 13, 2021
|
March 28, 2018
|
|
|
33,334
|
|
|
$
|
3.00
|
|
|
March 28, 2020
|
|
March 28, 2022
|
May 16, 2018
|
|
|
110,000
|
|
|
$
|
3.00
|
|
|
May 16, 2018
|
|
May 16, 2022
|
May 16, 2018
|
|
|
43,334
|
|
|
$
|
3.00
|
|
|
May 16, 2020
|
|
May 16, 2022
|
September 26, 2018
|
|
|
2,000,000
|
|
|
$
|
1.95
|
|
|
December 21, 2018
|
|
September 26, 2022
|
All of the above options
were outstanding as of January 10, 2019.
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 60,001
shares of the Company’s common stock. All the options have an exercise price of $3.18 per share and expire on March 20, 2023.
During Q4 of 2019, 16,667 of these options were forfeited and the remainder vested with the change of control event. Under the
Black-Scholes option pricing model, the fair value of these options on the date of grant was estimated to be $123,130.
On July 6, 2020, the Company issued
replacement options for outstanding VNC options in conjunction with the acquisition of VNC. These options are outside of any equity plan
and are for the purchase of an aggregate 841,837 shares of the Company’s common stock. These options have an exercise price ranging
from $0.1497 – $0.8646 per share, vested immediately, and expire July 6, 2025. The fair value of these options on the grant date
was estimated to be $2,239,950.
Also on July 6, 2020,
the Company issued options to two employees as share-based compensation under the Company’s 2020 Long-Term Incentive
Plan for the purchase of an aggregate of 66,668 shares of the common stock. These options expire on July 6, 2025, have an exercise
price of $3.24 per share, and half of these options vest six months from the date of issuance and the remainder vest 12 months
from the date of issuance. The fair value of these options on the grant date was estimated to be $59,000. Of these, 33,334 options
with a weighted average grant date fair value of $0.885 were forfeited during the third quarter of 2020 and 33,334 remain outstanding
and unvested as of December 31, 2020.
All options issued during fiscal years 2019 and 2020 have been
valued utilizing the Black-Scholes pricing model using the assumptions listed below. The weighted average grant date fair value
of all options issued during the year ended December 31, 2020 was $2.55 per share and during the period January 10, 2019 (inception)
through December 31, 2019 was $2.04 per share. The weighted average grant date fair value of the 33,334 unvested options as of
December 31, 2020 was $0.885 per share. The weighted average grant date fair value of the 33,334 options that were forfeited during
the year ended December 31, 2020 was $0.885 per share.
The following table
summarizes the assumptions used to estimate the fair value of stock options granted during fiscal 2020 and 2019:
|
|
2020
|
|
2019
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
38.17%
|
|
90%
|
Risk-free interest rate
|
|
0.205–0.310%
|
|
2.40-2.47%
|
Expected life of options
|
|
3.250-05.00 years
|
|
4.0 years
|
The following table
represents stock option activity of COMSovereign and the Company as of and for the year ended December 31, 2020 and the period
January 10, 2019 (Inception) to December 31, 2019:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted-
Average
Contractual
Life in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding – December 31, 2019
|
|
|
2,898,347
|
|
|
$
|
1.90
|
|
|
|
1.92
|
|
|
$
|
2,264,770
|
|
Exercisable – December 31, 2019
|
|
|
2,898,347
|
|
|
$
|
1.90
|
|
|
|
1.92
|
|
|
$
|
2,264,770
|
|
Granted
|
|
|
908,505
|
|
|
|
0.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,668
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(366,669
|
)
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2020
|
|
|
3,433,515
|
|
|
$
|
1.59
|
|
|
|
2.01
|
|
|
$
|
15,220,798
|
|
Exercisable – December 31, 2020
|
|
|
3,400,181
|
|
|
$
|
1.58
|
|
|
|
1.99
|
|
|
$
|
15,128,796
|
|
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted-
Average
Contractual
Life in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding – January 10, 2019
|
|
|
4,663,350
|
|
|
$
|
1.83
|
|
|
|
2.41
|
|
|
$
|
—
|
|
Granted
|
|
|
60,001
|
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,750,001
|
)
|
|
|
1.70
|
|
|
|
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(75,003
|
)
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2019
|
|
|
2,898,347
|
|
|
$
|
1.90
|
|
|
|
1.92
|
|
|
$
|
2,264,770
|
|
Exercisable – December 31, 2019
|
|
|
2,898,347
|
|
|
$
|
1.90
|
|
|
|
1.92
|
|
|
$
|
2,264,770
|
|
Total recognized compensation
expense related to the Company’s stock options was $12,290 and $157,441 for fiscal 2020 and 2019, respectively. All options
granted by the Company prior to the change of control resulting from the completion of the COMSovereign Acquisition on November
27, 2019 vested immediately upon the change of control. The Company did not record any compensation expense for the period from
November 27, 2019, the date of the COMSovereign Acquisition, to December 31, 2019. Compensation expense related to stock options
is recorded in share-based compensation expense, a component of general and administrative expenses, in the Consolidated Statements
of Operations. For year ended December 31, 2020 the Company has $17,210 of unrecognized compensation expense related to options.
For the period January 10, 2019 (Inception) to December 31, 2019, there was no unrecognized compensation expense related to stock
options.
Restricted Stock Awards
On March 25, 2019,
COMSovereign’s Board of Directors granted an aggregate of 26,667 Restricted Stock Awards (“RSAs”) to a non-employee
for consulting services, of which 20,000 RSAs immediately vested and 6,667 RSAs vested upon the change in control of COMSovereign
in connection with the COMSovereign Acquisition. The grant date fair value of these RSAs was $13.20 per share of common stock for
a total value of $352,000 recognized in share-based compensation expense.
On November 12, 2019,
the Company’s Board of Directors granted an aggregate of 766,667 RSAs to eight employees. The RSAs vested upon the change
of control upon the completion of the COMSovereign Acquisition on November 27, 2019. The Company recorded $1,495,000 in share-based
compensation expense related to these RSAs during fiscal 2019, prior to the COMSovereign Acquisition. No compensation expense was
recognized for the period November 27, 2019, the date of the COMSovereign Acquisition, through December 31, 2019.
On November 14, 2019,
COMSovereign’s Board of Directors granted an aggregate of 13,334 RSAs to a non-employee for consulting services that vested
immediately, with a grant date fair value of $13.20 per share of common stock for a total value of $176,000 recognized in share-based
compensation expense during fiscal 2019.
On November 19, 2019,
COMSovereign’s Board of Directors granted an aggregate of 90,267 RSAs to noteholders, employees, non-employees and an officer
that vested immediately, with a grant date fair value of $13.20 per share of common stock for a total value of $1,191,520 recognized
in share-based compensation expense during fiscal 2019.
On November 19, 2019,
COMSovereign’s Board of Directors granted an aggregate of 8,000 RSAs to three executives of DragonWave and Silver Bullet,
with a grant date fair value of $13.20 per share of common stock for a total value of $105,600 recognized in share-based compensation
during fiscal 2019.
On November 27, 2019,
COMSovereign’s Board of Directors granted an aggregate of 16,667 RSAs that immediately vested to a non-employee for assistance
in negotiating a secured loan agreement on COMSovereign’s behalf, with a grant date fair value of $13.20 per share of common
stock for a total value of $220,000 recognized in share-based compensation during fiscal 2019.
On December 2, 2019,
the Company’s Board of Directors granted an aggregate of 633,334 RSAs to nine officers and directors at a grant date fair
value of $2.46 per share. The vesting period for these RSAs is as follows: 283,334 vest on the one-year anniversary of the grant
date; 283,334 vest on the two-year anniversary of the original grant date; and 66,667 vest on the three-year anniversary of the
original grant date. The Company recognized $700,484 in share-based compensation expense for these RSAs during fiscal 2020 and
$54,667 during fiscal 2019 which was recognized after the COMSovereign Acquisition.
There were no RSAs
that were forfeited in the year ended December 31, 2020 or the period of January 10, 2019 (Inception) through December 31, 2019.
For the year ended December 31, 2020 and the period of January 10, 2019 (Inception) through December 31, 2019, the Company recognized
a total of $700,484 and $258,256, respectively, of compensation expense related to all RSAs which was recorded as share-based compensation
expense, a component of general and administrative expenses, in the Consolidated Statement of Operations. Unrecognized compensation
cost for RSAs totaled $802,947 and $ 1,503,431 as of December 31, 2020 and 2019, respectively. See Note 1 – Description
of Business and Basis of Presentation for information about the shares issued in connection with the formation of COMSovereign.
Warrants
The following warrants,
were issued by the Company prior to the COMSovereign Acquisition with the attributes described below to purchase the Company’s
common stock (amounts in US$’s, except share data):
Issuance Date
|
|
Warrants Issued
|
|
|
Exercise Price
|
|
|
Full Vesting Date
|
|
Expiration Date
|
November 20, 2015
|
|
|
23,334
|
|
|
$
|
15.00
|
|
|
November 20, 2015
|
|
November 20, 2020
|
April 27, 2016
|
|
|
20,000
|
|
|
$
|
8.73
|
|
|
April 27, 2016
|
|
April 27, 2019
|
August 3, 2017
|
|
|
10,000
|
|
|
$
|
1.50
|
|
|
August 3, 2017
|
|
August 3, 2021
|
August 3, 2017
|
|
|
666,667
|
|
|
$
|
1.50
|
|
|
August 3, 2017
|
|
August 3, 2022
|
November 9, 2017
|
|
|
6,667
|
|
|
$
|
1.50
|
|
|
November 9, 2017
|
|
November 9, 2021
|
September 26, 2018
|
|
|
33,334
|
|
|
$
|
3.00
|
|
|
September 26, 2018
|
|
September 26, 2022
|
During the third quarter
of 2019, COMSovereign issued eight warrants to purchase an aggregate of 33,334 shares of COMSovereign’s common stock. The
warrants were issued in conjunction with the sale of the COMSovereign’s 9% Senior Convertible Debentures. The warrants had
an exercise price of $15.00 per share and an expiration date of December 31, 2021. Prior to conversion of the related debentures,
COMSovereign cancelled warrants to purchase 26,667 shares of common stock at $15.00 per share, and reissued warrants to purchase
37,500 shares of common stock at $4.50 per share. COMSovereign valued the new warrants at $250,835 using the Black-Scholes pricing
model, which is included in interest expense on the Consolidated Statement of Operations. Warrants to purchase all 44,167 shares
of common stock were exercised in November 2019 prior to the COMSovereign Acquisition.
On September 24, 2019,
COMSovereign issued a warrant to purchase 50,000 shares of the COMSovereign’s common stock, which was converted into the
ability to purchase 94,510 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 has an exercise price of $0.03
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 94,510 shares of the Company’s common stock.
During September 2019,
COMSovereign issued two warrants to purchase 666,667 shares of COMSovereign’s common stock. The warrants were issued in conjunction
with the sale by COMSovereign of a promissory note. The warrants had an exercise price of $0.03 per share and an expiration date
of December 31, 2021. Warrants to purchase the full 666,667 shares of COMSovereign’s common stock were exercised in November
2019 prior to the COMSovereign Acquisition.
On October 15, 2019,
COMSovereign issued a warrant to purchase 147,500 shares of COMSovereign’s common stock. The warrant was issued in conjunction
with the sale by COMSovereign of a promissory note. The warrant had an exercise price of $0.03 per share and an expiration date
of December 31, 2021. Warrants to purchase the full 147,500 shares of COMSovereign’s common stock were exercised in November
2019 prior to the COMSovereign Acquisition.
On November 26, 2019,
COMSovereign issued warrants to purchase 310,000 shares of COMSovereign’s common stock to non-employees for consulting services
in connection with the COMSovereign Acquisition. The warrants had an exercise price of $0.03 per share and an expiration date of
November 26, 2024. Warrants to purchase the full 310,000 shares of COMSovereign’s common stock were exercised on November
27, 2019.
On April 13, 2020, the Company issued warrants to purchase an
aggregate of 33,342 shares of the Company’s common stock. The warrants were issued as compensation to a vendor and had no
vesting requirements. The warrants have an exercise price of $3.60 per share and an expiration date of April 12, 2025. None of
these warrants were exercised during the year ended December 31, 2020.
On April 29, 2020, the Company
issued a warrant to purchase 52,910 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 and had no vesting requirements. The warrant has an exercise price of $2.97 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 warrants to purchase an aggregate of 9,262 shares of the Company’s common stock. The warrants have an exercise price
of $2.97 per share and an expiration date of April 29, 2025. None of these warrants were exercised during the year ended December 31,
2020.
On June 8, 2020, the Company
issued warrants to purchase an aggregate of 8,000 shares of the Company’s common stock at an exercise price of $3.00 per share to
a vendor in conjunction with a consulting agreement. These warrants expire on June 7, 2023. None of these warrants were exercised during
the year ended December 31, 2020.
On July 6, 2020, and in conjunction with the acquisition of VNC, the
Company issued replacement warrants for outstanding VNC warrants to purchase an aggregate of 578,763 shares of the Company’s common
stock. The warrants have an exercise price of ranging from $0.1497 to $0.7212 per share and an expiration date of July 6, 2025. 18,572
of these warrants were exercised during the year ended December 31, 2020.
On July 7, 2020, the
Company issued warrants to purchase an aggregate of 96,668 shares of the Company’s common stock. The warrants were issued
as part of a convertible debenture offering with no vesting requirement, have an exercise price of $3.00 per share, and expire
on December 31, 2022. None of these warrants were exercised during the year ended December 31, 2020.
On July 7, 2020, the
Company issued a warrant to purchase 52,910 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 and had no vesting requirements. The warrant has an exercise price of
$2.97 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 warrants to purchase an aggregate of 9,262 shares of the Company’s common stock. The
warrants have an exercise price of $2.97 per share and an expiration date of April 29, 2025. None of these warrants were exercised
during the year ended December 31, 2020.
On August 21, 2020,
the Company issued a warrant to purchase an aggregate of 17,866 shares of the Company’s common stock in conjunction with
the sale of the Company’s 13.33% OID Convertible Note. These warrants were issued as payment of a placement fee to an unrelated
third-party and had no vesting requirements. The warrant has an exercise price of $8.40 per share and an expiration date of August
20, 2025. None of these warrants were exercised during the year ended December 31, 2020.
The following table
summarizes the assumptions used to estimate the fair value of the warrants granted during fiscal 2019:
|
|
2020
|
|
2019
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
36.96-41.55%
|
|
32-33%
|
Risk-free interest rate
|
|
0.19-0.44%
|
|
1.38-1.82%
|
Contractual life of warrants
|
|
2.5-5.0 years
|
|
2.27-3.0 years
|
Under the Black-Scholes
option pricing model, the fair value of the warrants issued during fiscal years 2020 and 2019, was estimated at $2,061,368 and
$3,138,667 or $2.40 and $12.69 per share on the dates of grants, respectively. Warrants issued in conjunction with the issuance
of indebtedness are recorded as debt discounts. See Note 2 – Summary of Significant Accounting Policies and Note 10
– Debt Agreements. Warrants issued in conjunction with an acquisition is accounted for as purchase price consideration.
See Note 3 – Business Acquisitions.
The following tables
represents warrant activity for the year ended December 31, 2020 and the period from January 10, 2019 (Inception) to December 31,
2019:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding – December 31, 2019
|
|
|
167,846
|
|
|
$
|
2.85
|
|
|
|
1.96
|
|
|
$
|
258,332
|
|
Exercisable – December 31, 2019
|
|
|
167,846
|
|
|
$
|
2.85
|
|
|
|
1.96
|
|
|
$
|
258,332
|
|
Granted
|
|
|
858,983
|
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(113,080
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(23,334
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2020
|
|
|
890,415
|
|
|
$
|
1.46
|
|
|
|
4.02
|
|
|
$
|
4,083,357
|
|
Exercisable – December 31, 2020
|
|
|
890,415
|
|
|
|
1.46
|
|
|
|
4.02
|
|
|
|
4,083,357
|
|
|
|
Number of Warrants
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Contractual
Life in
Years
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding – January 10, 2019
|
|
|
760,005
|
|
|
$
|
2.17
|
|
|
|
3.44
|
|
|
$
|
—
|
|
Exercisable – January 10, 2019
|
|
|
760,005
|
|
|
$
|
2.17
|
|
|
|
3.44
|
|
|
$
|
—
|
|
Granted
|
|
|
1,289,511
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,824,165
|
)
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(57,505
|
)
|
|
|
10,56
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2019
|
|
|
167,846
|
|
|
$
|
2.85
|
|
|
|
1.96
|
|
|
$
|
258,332
|
|
Exercisable – December 31, 2019
|
|
|
167,846
|
|
|
$
|
2.85
|
|
|
|
1.96
|
|
|
$
|
258,332
|
|
15. INCOME TAXES
Deferred taxes are provided
on the liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and rates
on the date of enactment. The Tax Cut and Jobs Act was enacted on December 22, 2017, which reduced the U.S. corporate statutory
income tax rate from 35% to 21% beginning January 1, 2018.
Net deferred tax liabilities
consisted of the following as of December 31, 2020 and 2019:
|
|
December 31
|
|
(Amounts in US$’s)
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Share-based compensation
|
|
$
|
14,500
|
|
|
$
|
13,700
|
|
Inventory reserve
|
|
|
164,600
|
|
|
|
137,000
|
|
Allowance for bad debt
|
|
|
421,700
|
|
|
|
172,700
|
|
Net operating loss carryover
|
|
|
19,037,000
|
|
|
|
11,867,800
|
|
Foreign losses
|
|
|
4,836,400
|
|
|
|
4,130,000
|
|
General business credits
|
|
|
256,400
|
|
|
|
256,400
|
|
Total deferred tax assets
|
|
|
24,730,600
|
|
|
|
16,577,600
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(381,600
|
)
|
|
|
(43,000
|
)
|
Amortization
|
|
|
(13,156,300
|
)
|
|
|
(12,771,800
|
)
|
Total deferred tax liabilities
|
|
|
(13,537,900
|
)
|
|
|
(12,814,800
|
)
|
Valuation allowance:
|
|
|
(11,192,700
|
)
|
|
|
(3,762,800
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
The 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 fiscal 2019 due to the following:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
US$’s
|
|
|
Rates
|
|
|
US$’s
|
|
|
Rates
|
|
Income tax benefit at statutory federal income tax rate
|
|
$
|
8,397,400
|
|
|
|
21.00
|
%
|
|
$
|
6,653,400
|
|
|
|
21.00
|
%
|
State tax expense, net of federal benefit
|
|
|
1,599,500
|
|
|
|
4.00
|
%
|
|
|
1,267,300
|
|
|
|
4.00
|
%
|
Permanent items
|
|
|
233,700
|
|
|
|
0.58
|
%
|
|
|
(20,000
|
)
|
|
|
(0.06
|
)%
|
Other
|
|
|
105,700
|
|
|
|
0.26
|
%
|
|
|
—
|
|
|
|
—
|
%
|
Valuation allowance
|
|
|
(7,429,900
|
)
|
|
|
(18.58
|
)
|
|
|
(3,762,800
|
)
|
|
|
(11.88
|
)%
|
Income tax benefit
|
|
$
|
2,906,400
|
|
|
|
(7.27
|
)%
|
|
$
|
4,137,900
|
|
|
|
13.06
|
%
|
As of December 31,
2020, the Company had domestic net operating loss carryforwards of approximately $76,148,000, of which approximately $13,615,000
was generated pre-2018 that may be carried forward 20 years to offset against future taxable income from the year 2018 through
2038, and approximately $62,533,000 that may offset future taxable income with no definite expiration date.
Due to the change in
the ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes
are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use
in future years.
The Company records
uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) the Company
determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of
the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the
largest amount of tax benefit that is more than 50% likely to be realized upon the ultimate settlement with the related tax authority.
The Company did not record any liabilities related to uncertain tax positions as of December 31, 2020 and 2019.
The Company records
valuation allowances to reduce its deferred tax assets to an amount it believes is more likely than not to be realized. In assessing
the realizability of deferred tax assets, management considers all positive and negative evidence to determine whether future taxable
income will be generated during the periods in which those temporary differences become deductible. As a result, the Company recorded
a valuation allowance on the portion of the deferred tax assets, including current year losses, deemed not to have enough sources
of income to utilize the future benefits.
16. LEASES
Operating Leases
The impact of ASU 2016-02
on the Company’s Consolidated Balance Sheet beginning January 10, 2019 was from the recognition of the present value of the
remaining payments on the remaining lease term totaling $116,876 of ROU assets and $116,876 lease liabilities for operating leases.
The Company elected the practical expedient under ASU 2018-11, which allows the Company to apply the transition provision for Topic
842 at the Company’s adoption date. Therefore, the Company recognized and measured leases existing at January 10, 2019 (inception
date). In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the
Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact was recorded to the Consolidated
Statement of Operations or beginning retained earnings resulting from the adoption of Topic 842.
The Company has
operating leases for office, manufacturing and warehouse space, along with office equipment. Amounts recognized as of
December 31, 2020 and 2019 for operating leases were as follows:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Operating lease ROU assets
|
|
$
|
2,725,462
|
|
|
$
|
2,199,682
|
|
Operating lease liability
|
|
$
|
2,884,997
|
|
|
$
|
2,212,548
|
|
On January 10, 2019, the Company had one
operating lease for office space with a right-of-use asset and lease liability recognized for $116,876. The lease is for 5,533
square feet of office space with monthly payments ranging from $6,316 to $6,464 and an incremental borrowing rate of 5.90%, which
expired July 31, 2020. On August 14, 2020, the Company amended this lease, to extend the term for an additional 36-months through
July 31, 2023. A right-of-use asset and lease liability for $161,328 was recorded on the commencement date of August 1, 2020. Monthly
payments range from $4,786 to $5,078 over the extended lease term. The lease did not include an implicit rate of return; therefore,
the Company used an incremental borrowing rate. The lease agreement has no renewal option.
On March 1, 2019, the
Company entered into a 37-month lease for 2,390 square feet of office space. A right-of-use asset and lease liability for $72,887
was recorded, with monthly payments ranging from $2,091 to $2,189 per month through March 2022. The lease did not include an implicit
rate of return, so the Company used an incremental borrowing rate of 5.5%.
On June 1, 2018, InduraPower
entered into a one-year lease on its executive office located at 1668 S. Research Loop in Tucson, Arizona. InduraPower leases 7,432
square feet of a business park. On February 1, 2019, the date InduraPower was acquired, there were five months remaining on the
original lease. On June 7, 2019, InduraPower entered into a two-year lease renewal. A right-of-use asset and lease liability for
$140,210 was recorded, with monthly payments ranging from $5,351 to $5,717 per month until June 2021. The lease did not include
an implicit rate of return; therefore, the Company used the average interest rate of InduraPower’s debt financings, which
is 8.46%. The lease does not have a renewal option.
On June 1, 2019, VEO
entered into a five-year lease on its executive office located at 10509 Vista Sorrento Parkway in San Diego, California. VEO leases
3,031 square feet of a business park. A right-of-use asset and lease liability for $376,998 was recorded, with monthly payments
ranging from $6,800 to $7,654 per month until May 2024. The lease did not include an implicit rate of return and VEO did not have
any outstanding debt financing. Therefore, the Company used the average rate of the first two outstanding leases mentioned above,
which is 5.70%. The lease has a renewal option of two additional periods of five years each.
On June 12, 2019, DragonWave
entered into a two-year lease on office space located at 362 Terry Fox Drive, Ottawa Canada. DragonWave leases 13,541 square feet
of a business park with monthly payments of CAD 10,708. The lease was recorded with a right-of-use asset and lease liability of
$170,343. The lease is effective as of July 1, 2019 through June 2021. DragonWave used a 15% interest rate and there is no renewal
option.
On December 13, 2019,
the Company entered into a 63-month lease on its executive office located at 5000 Quorum Drive, Dallas, TX 75254. The Company is
leasing 15,289 square feet of a business park. The lease began on April 1, 2020 and will expire on July 31, 2025. A right-of-use
asset and lease liability for $1,540,142 was recorded on December 13, 2019. Monthly payments will range from $27,074 to $29,622
during the life of the lease. The lease did not include an implicit rate of return; therefore, the Company used the average rate
of the first two outstanding leases mentioned above, which is 5.70%. The lease has a renewal option of two additional periods of
five years each. The renewal periods were not included in the analysis of the right-to-use asset and lease liability as the Company
does not consider them to be reasonably certain of being exercised, as comparable locations could generally be identified for comparable
lease rates, without the Company incurring significant costs. During 2020, the Company recognized three months of rent abatement,
applied a portion of a security deposit balance towards two months of future rent for this lease, and also applied its unused tenant
improvement allowance towards future rent, resulting in a reduction of the right-of-use asset and lease liability by $188,623.
Recognition of the security deposit balance towards two months of future rent also resulted in an increase of the right-of-use
asset by $54,148.
As part of the acquisition
of the business of Sovereign Plastics 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 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.
On September 17, 2020,
the Company entered into a 63-month lease of office equipment. The lease commenced on September 29, 2020 and will expire on December
29, 2025. A right-of-use asset and lease liability for $23,898 was recorded on the commencement date of September 29, 2020. Monthly
payments are $529 during the life of the lease, excluding a lease incentive of $1,750 payable at lease commencement. The lease
did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate. The renewal periods were
not included in the analysis of the right-to-use asset and lease liability as the Company does not consider them to be reasonably
certain of being exercised, as comparable equipment could generally be identified for comparable lease rates, without the Company
incurring significant costs. In December 2020, the lessor provided a concession that deferred
payment and extended the expiration date for 1 ½ months, resulting in a reduction of the right-of-use asset and lease liability
by $167 and lease expiration date of January 15, 2026.
On November 11, 2020, the Company entered into a 12 ½-month
lease for 2,335 square feet of office space. The lease commenced on November 15, 2020 and will expire on November 30, 2021. A right-of-use
asset and lease liability for $53,793 was recorded on the commencement date of November 15, 2020. Monthly payments are $4,865 during
the life of the lease, excluding a 1-month rent abatement. The lease did not include an implicit rate of return; therefore,
the Company used an incremental borrowing rate. The lease agreement has no renewal option.
Other information related
to the Company’s operating leases are as follows:
|
|
Year Ended
December 31,
|
|
|
January 10,
2019
(Inception) to
December 31,
|
|
(Amounts in US$’s)
|
|
2020
|
|
|
2019
|
|
Operating lease ROU Asset – Beginning Balance
|
|
$
|
2,199,682
|
|
|
$
|
116,876
|
|
Increase
|
|
|
1,341,225
|
|
|
|
2,300,580
|
|
Decrease
|
|
|
(188,790
|
)
|
|
|
—
|
|
Amortization
|
|
|
(626,655
|
)
|
|
|
(217,774
|
)
|
Operating lease ROU Asset – Ending Balance
|
|
$
|
2,725,462
|
|
|
$
|
2,199,682
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability – Beginning Balance
|
|
$
|
2,212,548
|
|
|
$
|
116,876
|
|
Increase
|
|
|
1,287,077
|
|
|
|
2,300,580
|
|
Decrease
|
|
|
(188,790
|
)
|
|
|
—
|
|
Amortization
|
|
|
(425,838
|
)
|
|
|
(204,908
|
)
|
Operating lease liability – Ending Balance
|
|
$
|
2,884,997
|
|
|
$
|
2,212,548
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability – short term
|
|
$
|
676,019
|
|
|
$
|
467,979
|
|
Operating lease liability – long term
|
|
|
2,208,978
|
|
|
|
1,744,569
|
|
Operating lease liability – total
|
|
$
|
2,884,997
|
|
|
$
|
2,212,548
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
770,630
|
|
|
$
|
166,345
|
|
Variable lease cost
|
|
$
|
7,101
|
|
|
|
—
|
|
Short-term lease cost
|
|
$
|
158,533
|
|
|
$
|
6,231
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
590,490
|
|
|
$
|
138,670
|
|
The following table presents the weighted-average remaining lease term and weighted
average discount rates related to the Company’s operating leases as of December 31, 2020 and 2019:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Weighted average remaining lease term
|
|
|
4.19 years
|
|
|
|
4.56 years
|
|
Weighted average discount rate
|
|
|
5.95
|
%
|
|
|
6.50
|
%
|
The table below reconciles
the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease
liabilities recorded on the Consolidated Balance Sheet as of December 31, 2020:
(Amounts in US$’s)
|
|
Operating Leases
|
|
2021
|
|
$
|
819,481
|
|
2022
|
|
|
699,255
|
|
2023
|
|
|
713,647
|
|
2024
|
|
|
641,648
|
|
2025
|
|
|
377,459
|
|
Thereafter
|
|
|
529
|
|
Total minimum lease payments
|
|
|
3,252,019
|
|
Less: effect of discounting
|
|
|
(367,022
|
)
|
Present value of future minimum lease payments
|
|
|
2,884,997
|
|
Less: current obligations under leases
|
|
|
(676,019
|
)
|
Long-term lease obligations
|
|
$
|
2,208,978
|
|
Finance Leases
There were no finance leases on the
Company’s books and records as of and for the period of January 10, 2019 (Inception) through December 31, 2019.
As part of the acquisition
of the business of Sovereign Plastics 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.
On July 19, 2020, the
Company entered into a 12-month finance lease for certain equipment, with a commencement date of August 6, 2020. The finance lease
transfers ownership of the equipment to the Company at the end of the term on August 6, 2021. A right-of-use asset and lease liability
for $28,405 was recorded on August 6, 2020. Monthly payments range from $2,473 to $2,498.66 during the life of the lease. The lease
did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate.
Other information related
to the Company’s finance leases are as follows:
(Amounts in US$’s)
|
|
Year Ended December 31,
2020
|
|
Finance lease ROU Asset – Beginning Balance
|
|
$
|
—
|
|
Increase
|
|
|
81,976
|
|
Amortization
|
|
|
(14,284
|
)
|
Finance lease ROU Asset – Ending Balance
|
|
$
|
67,692
|
|
|
|
|
|
|
Finance lease liability – Beginning Balance
|
|
$
|
—
|
|
Increase
|
|
|
81,976
|
|
Interest accretion
|
|
|
1,715
|
|
Payment
|
|
|
(28,455
|
)
|
Finance lease liability – Ending Balance
|
|
$
|
55,236
|
|
|
|
|
|
|
Finance lease liability – short term
|
|
$
|
46,345
|
|
Finance lease liability – long term
|
|
|
8,891
|
|
Finance lease liability – total
|
|
$
|
55,236
|
|
The following table
presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases
as of December 31, 2020:
(Amounts in US$’s)
|
|
December 31,
2020
|
|
Weighted average remaining lease term
|
|
|
1.10 years
|
|
Weighted average discount rate
|
|
|
3.91
|
%
|
The table below reconciles
the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the finance
lease liabilities recorded on the Consolidated Balance Sheet as of December 31, 2020:
(Amounts in US$’s)
|
|
Finance Leases
|
|
2021
|
|
$
|
47,213
|
|
2022
|
|
|
8,891
|
|
Total minimum lease payments
|
|
|
56,104
|
|
Less: effect of discounting
|
|
|
(868
|
)
|
Present value of future minimum lease payments
|
|
|
55,236
|
|
Less: current obligations under leases
|
|
|
(46,345
|
)
|
Long-term lease obligations
|
|
$
|
8,891
|
|
17. COMMITMENTS AND CONTINGENCIES
From time to time, the
Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Management
does not believe that after the final disposition any of these matters is likely to have a material adverse impact on the Company’s
financial condition, results of operations or cash flows, except as follows.
On January 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.
On August 18, 2020, the $200,000 was paid to Arrow. On September 28, 2020, Arrow and DragonWave entered into an amendment to the
June 12, 2020, settlement agreement whereby DragonWave was obligated to pay Arrow a remaining balance of $323,500 on or before
November 6, 2020. On December 1, 2020, Arrow filed suit against DragonWave, Daniel L. Hodges, the Chairman and Chief Executive
Officer, and the Company in the United States District Court for the District of Colorado, Case No. 1:20-cv-03532-NYW. In its complaint,
Arrow alleges that the Company and DragonWave breached the June 12, 2020 settlement agreement, as amended, by failing to pay the
remaining balance due, and that Mr. Hodges breached his personal guaranty. Arrow sought damages of approximately $340,000. On December
3, 2020, we, DragonWave and Mr. Hodges provided waivers of service of process in the case. As of December 31, 2020, these amounts
remain unpaid. In February 2021, the Company paid $374,410 in full settlement and received inventory valued at approximately $283,500.
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. The judgment was satisfied, and on August
26, 2020, Tessco filed a notice of satisfaction of judgment.
On May 22, 2020, Michael
Powell, a former employee, filed suit against DragonWave-X, LLC, DragonWave-X, Inc., Transform-X, Inc., COMSovereign Corp, and
the Company in the Pima County Arizona Superior Court, Case No. C20202216. On December 7, 2020, Mr. Powell filed his first amended
complaint against DragonWave Corp., COMSovereign Holding Corp., and Transform-X, Inc. Mr. Powell has alleged that he entered into
an employment agreement with DragonWave-X, Inc. in July 2018, was terminated without cause in May 2019, and claims he is owed approximately
$182,000 in wages and $50,000 in bonuses. Mr. Powell is seeking approximately $697,000 in treble damages, punitive damages, consequential
damages, interest and attorneys’ fees and costs. The Company disputes Mr. Powell’s allegations and it intends to vigorously
defend the lawsuit.
On December 1, 2020,
Arrow filed suit against Elitise, LLC, the research and development arm of the Company’s wholly-owned subsidiary InduraPower,
in the United States District Court for the Southern District of New York, Case No. 1:20-cv-10045. In its complaint, Arrow alleges
that Elitise breached an August 19, 2016 secured promissory note and a September 11, 2019 forbearance agreement. The outstanding
principal under this promissory note has been included in our balance sheet as a current portion of long-term debt. See Note 10
- Debt Agreements for detail on the promissory note. In such action, Arrow was seeking damages of approximately of up to
$950,000. On December 3, 2020, Elitise provided a waiver of service of process in the case. In February 2021, the Company reached
and paid a settlement on this matter totaling $900,000.
In December 2020, the Company entered into two software licensing
agreements with vendors for software to be utilized in products moving into production in 2021 with an option for a separate annual
maintenance agreement, which was elected for 2021. Upon receipt of the source code in 2021, the Company is required to pay a total
of approximately $1.7 million under these licensing agreements and an additional $0.3 million for the maintenance agreement. The
elected maintenance agreement will expire December 31, 2021, and will be re-evaluated near expiration.
18. CONCENTRATIONS
Financial instruments,
which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company
performs ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable.
At December 31, 2020 and 2019, accounts receivable from customers over 10% of Company’s trade accounts receivable comprised
33% and 84%, respectively of the Company’s total trade accounts receivable, and none of this balance has been characterized
as uncollectible as of December 31, 2020 and 2019.
A single customer accounted
for more than 10% of the Company’s revenues for 2020. This customer accounted for approximately 17% of the Company’s
total revenue for the year ended December 31, 2020.
19. SUBSEQUENT EVENTS
Management evaluated
for subsequent events requiring disclosure within the financial statements through the date of the filing of this report and noted
the following items.
Corporate Acquisitions
On August 24, 2020,
the Company entered into an Agreement and Plan of Merger and Reorganization dated as of August 24, 2020 (the “FN Merger Agreement”)
among the Company and its wholly-owned subsidiary, CHC Merger Sub 8, LLC, Skyline Partners Technology LLC, a Colorado limited liability
company that does business under the name Fastback Networks (“Fastback”), and John Helson, solely in his capacity as
the representative of the security holders of Fastback, pursuant to which, subject to the terms and conditions of the FN Merger
Agreement, the Company has agreed to acquire Fastback.
On January 29, 2021,
the Company completed the acquisition of Fastback for a purchase price that included the payment of approximately $1.32 million
in cash and, as described below, the issuance of $1.5 million aggregate principal amount of term notes and $11.15 million aggregate
principal amount of convertible notes that are convertible into common stock of the Company at a conversion price of $5.22 per
share, subject to adjustment.
On February 25, 2021, the Company
entered into a Share Purchase Agreement dated as of February 25, 2021 (the “Purchase Agreement”) by and among the Company,
Sky Sapience Ltd., a company organized under the laws of the State of Israel (“SKS”), certain of the shareholders of SKS,
and Neuberger, Quinn, Gielen, Rubin & Gibber P.A., solely in its capacity as the Shareholders’ Representative (as defined therein),
pursuant to which, subject to the terms and conditions of the Purchase Agreement, the Company purchased or agreed to purchase all of the
issued and outstanding capital stock of SKS and SKS will become a wholly-owned subsidiary of the Company.
Pursuant to the Purchase
Agreement, on the closing date, the Company paid approximately $2.7 million to repay in full an outstanding third-party secured
loan to SKS. In addition, the Company agreed to issue to the shareholders of SKS, the holders of outstanding options or warrants
of SKS and certain other entities with which SKS had contractual obligations an aggregate of 2,555,209 shares of common stock of
the Company, par value $0.001 per share, in consideration of the purchase of all outstanding shares of SKS and the cancellation
of such outstanding options, warrants and contractual obligations. The total preliminary purchase price consideration amounted
to approximately $13 million, subject to working capital and other post-closing adjustments.
On March 26, 2021,
the Company entered into a Share Exchange Agreement dated as of March 26, 2021 (the “RVision Exchange Agreement”) among the
Company, RVision, Inc. (“RVision”), Industrial Security Alliance Partners, Inc. and Halls of Valhalla, LLC pursuant to which,
subject to the terms and conditions of the RVision Exchange Agreement, the Company has agreed to acquire RVision.
Pursuant to the RVision Exchange
Agreement, the aggregate purchase consideration the Company is obligated to pay for RVision consists of 2,000,000 shares of the Company’s
common stock, with an initial estimated fair value of approximately $5.6 million, subject to certain working capital adjustments. The
RVision Exchange Agreement contains customary representations, warranties and covenants of the Company, on one hand, and RVision, on the
other hand, including, among others, covenants by RVision with respect to the operations of RVision during the period between execution
of the RVision Exchange Agreement and the closing of the transactions contemplated thereby, and provides that each party will indemnify
the other party following the closing for breaches of the warranties and covenants of such party. The closing of the acquisition of RVision
is subject to the satisfaction of the closing conditions stated in the RVision Exchange Agreement and there can be no assurance that such
conditions will be met or that the Company will consummate the acquisition of RVision.
Capital Acquisitions
On January 29, 2021,
the Company, through its wholly-owned subsidiary, AZCOMS LLC (“AZCOMS”), completed the acquisition of a 140,000-square-foot
building on 12.7 acres in Tucson, Arizona for a purchase price of approximately $6.125 million, of which approximately $2.2 million
was paid in cash and the balance was paid with the net proceeds of the $5.3 million term loan described below. The Company intend
to use this facility for manufacturing, shipping and office space.
Debt Agreements
As of December 31,
2020, the Company had total undiscounted debt obligations of approximately $19.1 million of total long-term debt and $1.0 million
of notes payable – related party. Since December 31, 2020, the Company paid or converted/exchanged for common stock, approximately
$18.3 million of principal related to these obligations. See Note 10 - Debt Agreements for detail.
Secured
Notes Payable
On
January 15, 2021, in connection with its acquisition of the new manufacturing facility in Tucson, Arizona, AZCOMS entered into
a secured loan agreement pursuant to which it received a loan in the amount of up to $5,355,000 that bears interest on the outstanding
loan balance at the greater of (i) 8% per annum or (ii) 6.75% per annum in excess of the 1-month LIBOR rate, and matures on January
15, 2022. At the closing of the loan, the lender withheld $513,000 of the loan amount as an interest reserve. In addition, $875,000
of the loan amount was withheld and may be disbursed at later dates to pay for lender-approved improvements to the property secured
by the loan. Interest is payable monthly. The loan is due in full at maturity. Upon an event of default, the interest rate on the
loan will increase by an additional 5.00% per annum, and the outstanding principal amount of the loan, accrued interest thereon
and fees may become due on-demand. Upon the maturity date or earlier date upon which the unpaid balance of the loan may become
immediately payable due to acceleration, and on any prepayments of the loan, AZCOMS will owe an exit fee equal to the greater of
(a) $53,850, or (b) 1.00% of the unpaid loan balance and all unpaid accrued interest and fees. Subject to certain terms and conditions
and upon payment of a fee, AZCOMS may request a six-month extension of the maturity date. The loan is secured by the land, building
and certain other assets of AZCOMS and is guaranteed by the Company and Daniel L. Hodges, the Company’s Chief Executive Officer.
In addition, all rights to leases and rent related to the land and building assets have been assigned to the lender for potential
non-performance by AZCOMS of its obligations under the loan. This loan is subject to certain financial and non-financial covenants
on the part of AZCOMS at the end of each fiscal quarter and fiscal year.
Notes Payable
In connection with its acquisition
of Fastback on January 29, 2021, the Company issued to the sellers $1,500,000 aggregate principal amount of term promissory notes. The
individual principal amounts of the notes ranged from $1,500 to $393,484. These notes bear interest at the rate of 10% per annum and mature
on the earlier of (i) January 1, 2022, (ii) the date on which an aggregate of $6,000,000 worth of products and services are sold following
the acquisition date by (A) Fastback or (B) the Company and its subsidiaries (other than Fastback) to certain specified Fastback customers,
or (iii) the date on which the Company issues and sells shares of its common stock or debt securities to investors in a bona-fide arms-length
financing transaction for aggregate consideration of at least $12,000,000. Interest is payable in cash semi-annually in arrears on each
June 1 and December 1, commencing on June 1, 2021, and on the maturity date. Upon an event of default, the interest rate will automatically
increase to 15% per annum compounded semi-annually, and all unpaid principal and accrued interest may become due on-demand. Principal
and any unpaid accrued interest are due on the maturity date. Upon maturity, the interest rate will automatically increase to 15% per
annum compounded semi-annually on any unpaid principal. These notes matured on February 10, 2021 upon the Company’s closing of a
public offering, as discussed below. However, the representative of the Fastback sellers has requested that the Company withhold payment
of principal and interest on these notes until a dispute among such sellers can be resolved. As payment was withheld at the request of
the sellers’ representative, no event of default has occurred and interest has been accrued only through the maturity date.
Convertible Notes Payable
In
connection with its acquisition of Fastback on January 29, 2021,
the Company issued to the sellers $11,150,000 aggregate principal amount of convertible promissory notes. The individual principal
amounts of the notes ranged from $5,575 to $5,575,000. These notes initially bear interest at the rate of 1.01% per annum, which
is to be adjusted to the prime rate as published by the Wall Street Journal on each annual anniversary of the issuance date, and
mature on January 29, 2026. Interest is payable in cash annually in arrears on each January 1. Commencing on January 29, 2022,
the outstanding principal and accrued interest on these notes may be converted in full to shares of the Company’s
common stock at a conversion price of $5.22 per share, subject to adjustment.
Upon an event of default, the interest rate will automatically increase to 15% per annum compounded annually, and all unpaid principal
and accrued interest may become due on-demand. Principal
and any unpaid accrued interest are due on the maturity date. Upon maturity,
the interest rate will automatically increase to 15% per annum compounded annually on any unpaid principal.
Capital and Equity Transactions
Public Offerings
On January 26, 2021
(the “First Offering Closing Date”), the Company sold an aggregate of 3,855,422 units at a price to the public of $4.15
per unit (the “First Offering”), each unit consisting of one share of the Company’s common stock, par value $0.0001
per share, and a warrant to purchase one share of common stock at an exercise price of $4.50 per share (the “First Offering
Warrants”), pursuant to an Underwriting Agreement, dated as of January 21, 2021 (the “First Offering Underwriting Agreement”),
between the Company and the representative (the “Representative”) of the several underwriters named in the Underwriting
Agreement. In addition, pursuant to the First Offering Underwriting Agreement, the Company granted the Representative a 45-day
option to purchase up to 578,312 additional shares of Common Stock, and/or 578,312 additional Warrants, to cover over-allotments
in connection with the First Offering, which the Representative partially exercised to purchase 578,312 Warrants on the First Offering
Closing Date.
The common stock and
the warrants of the First Offering were offered and sold to the public pursuant to the Company’s registration statement on
Form S-1 (File No. 333-248490), filed by the Company with the SEC under the Securities Act of 1933, as amended (the “Securities
Act”), on August 28, 2020, as amended, and which became effective on January 21, 2021.
On the First Offering
Closing Date, the Company received gross proceeds of approximately $16,000,000, before deducting underwriting discounts and commissions
of eight percent (8%) of the gross proceeds and estimated offering expenses.
On January 27, 2021,
the Representative exercised its over-allotment option for the First Offering to purchase 329,815 additional shares of common stock,
which closed on January 29, 2021. The Company received gross proceeds of approximately $1,365,000 before deducting underwriting
discounts and commissions of eight percent (8%) of the gross proceeds.
Pursuant to the First
Offering Underwriting Agreement, the Company also agreed to issue to the Representative warrants (the “Representative’s
First Offering Warrants”) to purchase up to a total of 154,216 shares of common stock (4% of the shares of common stock sold
in the First Offering). The Representative’s First Offering Warrants are exercisable at $5.1875 per share of Common Stock
and have a term of five years. The Representative’s First Offering Warrants are subject to a lock-up for 180 days from the
commencement of sales in the First Offering, including a mandatory lock-up period in accordance with FINRA Rule 5110(e), and will
be non-exercisable for six (6) months after January 21, 2021.
The total expenses
of the First Offering are approximately $2.7 million, which included the underwriting discounts and commissions and the Representative’s
reimbursable expenses relating to the First Offering. As part of this offering, the Company also issued 100,000 warrants to purchase
the Company’s common stock at $4.15 per share to compensate a vendor for certain offering costs.
The issuance date fair
value of all of the warrants issued in the First Offering, using the Black-Scholes Option-Pricing model was estimated to be $1.597
per share for a total of $7,080,673. The issuance date fair value of all the warrants issued to a vendor to pay offering costs
related to the First Offering, using the Black-Scholes Option-Pricing model was estimated to be $1.703 per share for a total of
$170,300. The issuance date fair value of all the warrants issued to the Representative in conjunction with the First Offering,
using the Black-Scholes Option-Pricing model was estimated to be $1.376 per share for a total of $212,201.
On February 10, 2021
(the “Second Offering Closing Date”), the Company sold an aggregate of 5,647,059 shares of the Company’s common
stock, par value $0.0001 per share, at a price to the public of $4.25 per share (the “Second Offering”), pursuant to
a Second Offering Underwriting Agreement, dated as of February 10, 2021 (the “Second Offering Underwriting Agreement”),
between the Company the Representative of the several underwriters named in the Second Offering Underwriting Agreement. In addition,
pursuant to the Second Offering Underwriting Agreement, the Company granted the Representative a 45-day option to purchase up to
847,058 additional shares of common stock to cover over-allotments in connection with the Second Offering, which the Representative
exercised in full on February 11, 2021.
The common stock was
offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-252780), filed
by the Company with the SEC under the Securities Act, on February 5, 2021, and the Company’s registration statement on Form
S-1 (File No. 333-252974), filed by the Company with the SEC under Rule 462(b) of the Securities Act on February 10, 2021, each
of which became effective on February 10, 2021.
The Company received
gross proceeds of approximately $27,600,000, before deducting underwriting discounts and commissions of eight percent (8%) of the
gross proceeds and estimated offering expenses.
Pursuant to the Second
Offering Underwriting Agreement, the Company also agreed to issue to the Representative warrants (the “Representative’s
Second Offering Warrants”) to purchase up to a total of 225,882 shares of common stock (4% of the shares of common stock
sold in the Second Offering), of which warrants to purchase 198,776 shares of common stock were registered under the Securities
Act and warrants to purchase 27,106 shares of common stock were issued in a private placement to the Representative. The Representative’s
Second Offering Warrants are exercisable at $5.3125 per share of common stock and have a term of five years. The Representative’s
Second Offering Warrants are subject to a lock-up for 180 days from the commencement of sales in the Second Offering, including
a mandatory lock-up period in accordance with FINRA Rule 5110(e), and will be non-exercisable for six (6) months after February
10, 2021.
The total expenses of
the Second Offering are approximately $2.6 million, which included the underwriting discounts and commissions and the Representative’s
reimbursable expenses relating to the Second Offering.
The issuance date fair
value of all the warrants issued to the Representative in conjunction with the Second Offering, using the Black-Scholes Option-Pricing
model was estimated to be $1.918 per share for a total of $433,242.
Restricted Stock Awards
On January 26, 2021,
the Company’s Board of Directors granted 66,667 RSAs to a new director at a grant date fair value of $4.50 per share. These
RSAs vest pro rata annually on the anniversary of the director’s appointment over two years.
Options
On January 9, 2021, 3,334 options were exercised
at an exercise price of $0.1497 per share.
Consulting Agreements and Settlements with Vendors
On February 12, 2021,
the Company issued 10,000 shares of common stock to a vendor as partial compensation. These shares had a fair value as of the grant
date of $5.09 per share of common stock for a total of $50,899.
On February 26, 2021,
the Company issued 209,000 shares of common stock to three vendors as partial compensation. These shares had a fair value as of
the grant date of $5.18 per share of common stock for a total of $1,082.620.
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