The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE
1 DESCRIPTION OF BUSINESS
COMSovereign Holding Corp. (“COMSovereign”)
and subsidiaries (collectively the “Company”) a provider of solutions to network operators, mobile device carriers, governmental
units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities
and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G
and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware
technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented
by a broad array of services, including technical support, systems design and integration, and sophisticated research and development
programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality
cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American
telecom infrastructure and service market. 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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes in the Company’s
significant accounting policies as of and for the three and six months ended June 30, 2022, as compared to the significant accounting
policies described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021.
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 results of operations and financial position for the three and six months ended June 30, 2022 and 2021 and cash flows for the six
months ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other
period. The amounts reported in the unaudited condensed consolidated financial statements, and the tables in the notes hereto, of the
Quarterly Report on Form 10-Q as of June 30, 2022 and for the three months and six months ended June 30, 2022 and 2021, are presented
in United States dollars and are rounded in thousands with the exception of share and per share data. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of
December 31, 2021 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form
10-K on August 16, 2022.
Effective January 21, 2021, the Company enacted
a 1-for-3 reverse stock split (the “Split”) of the Company’s common stock. These condensed consolidated financial statements
and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
Reclassifications
Certain reclassifications have been made to prior
period amounts to conform to the current period financial statement presentation. These reclassifications had no effect on the previously
reported results of operations or loss per share.
Principles of Consolidation
The unaudited condensed consolidated financial
statements as of June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021, include the accounts
of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Company’s significant estimates consist of the valuation of stock-based compensation; the valuation
of the assets and liabilities acquired; the valuation of the Company’s equity securities issued in transactions; the valuation of
inventory; the allowance for credit losses; the valuation of equity securities; the valuation allowance for deferred tax assets; and impairment
of long-lived assets and goodwill.
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in
accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets.
This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
The Company accounts for goodwill and intangible
assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase
price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other
intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the
fair value of an asset has decreased below its carrying value. As of June 30, 2022, the Company determined that it was more likely than
not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due to a decline in the Company’s
market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2022. See Note 12 – Goodwill
and Other Intangible Assets.
The Company calculates the estimated fair value
of a reporting unit using the income approach. In evaluating the recoverability of goodwill, the Company estimates the fair value of its
reporting units, which is determined using the income approach, and compares it to the carrying value. For the income approach, the Company
uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses,
and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated
discount rates. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There
are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.
In determining whether a qualitative assessment
is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the two-step
goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is
not more than likely that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required. The
Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition
projections, and its expectations. The only reporting unit with a pre-impairment negative carrying value is Virtual Network Communications,
Inc.
Fair Value Measurements
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price). ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest
priority to unobservable inputs (level 3 measurement) as follows:
Level 1 – Observable inputs
that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets
are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on
an ongoing basis.
Level 2 – Quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3 – Unobservable inputs
for which there is little, if any, market activity for the asset or liability being measured. These inputs may be used with standard pricing
models or other valuation or internally-developed methodologies that result in management’s best estimate of fair value.
The Company utilizes fair value measurements primarily
in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial
assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP. In general, nonfinancial
assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of
impairment and are recorded at fair value only when an impairment is recognized.
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 June 30, 2022 and December 31, 2021 approximated
their fair value due to their short-term nature.
Discontinued Operations
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest
of 5% and a maturity date of May 31, 2025. The assets and liabilities of Sovereign Plastics are reflected in the accompanying condensed
consolidated balance sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations”,
respectively. The results of operations of Sovereign Plastics are included in “Income (loss) from discontinued operations, net
of tax provision” in the accompanying condensed consolidated statements of operations and comprehensive loss. For comparative purposes,
all prior periods presented have been reclassified to reflect the classifications on a consistent basis. See Note 3 – Discontinued
Operations for additional information.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
Recently Adopted Accounting Standards
In August 2020, the FASB issued ASU 2020-06, “Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies the accounting for convertible instruments
by eliminating certain accounting models when the conversion features are not required to be accounted for as derivatives under Topic
815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. Under this ASU, certain
debt instruments with embedded conversion features will be accounted for as a single liability measured at its amortized cost. Additionally,
this ASU eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments. The new guidance is
effective for smaller reporting companies during annual periods beginning after December 15, 2023, including interim periods within those
fiscal years. Early adoption is permitted. The Company early adopted ASU 2020-06 effective January 1, 2022 which eliminates the need on
a go forward basis to assess whether a beneficial conversion feature needs to be recognized upon either (a) the issuance of new convertible
securities; or (b) the resolution of any prior period contingent beneficial conversion features.
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718),
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications
or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in
an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants)
that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15,
2021, including interim periods within those fiscal years. Companies should apply the new standard prospectively to modifications or exchanges
occurring after the effective date of the new standard. This standard was adopted on January 1, 2022 and did not have a material impact
on the Company’s unaudited condensed consolidated financial statements.
NOTE 3 DISCONTINUED OPERATIONS
Sovereign Plastics LLC
Sovereign Plastics LLC (“Sovereign Plastics”)
is a manufacturer of plastic and metal components to third-party manufacturers based out of Colorado Springs, Colorado. The Company’s
Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including
the risks and challenges facing Sovereign Plastics in the future as compared to the opportunities available to Sovereign Plastics in the
future, and the availability of strategic alternatives. On June 13, 2022, after careful consideration, the Board of Directors unanimously
approved the sale.
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest
of 5% and a maturity date of May 31, 2025.
Results of Discontinued Operations
The results and net loss of Sovereign Plastics’
discontinued operations were as follows:
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| (Amounts in thousands, except share and per share data) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Revenue | |
$ | 542 | | |
$ | 1,210 | | |
$ | 1,718 | | |
$ | 2,196 | |
| Cost of goods sold | |
| 352 | | |
| 543 | | |
| 1,065 | | |
| 1,014 | |
| Gross profit | |
| 190 | | |
| 667 | | |
| 653 | | |
| 1,182 | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| General and administrative | |
| 314 | | |
| 352 | | |
| 691 | | |
| 700 | |
| Depreciation and amortization | |
| 134 | | |
| 162 | | |
| 283 | | |
| 323 | |
| Gain on sale of Sovereign Plastics | |
| (1,074 | ) | |
| - | | |
| (1,074 | ) | |
| - | |
| Total operating expenses, net | |
| (626 | ) | |
| 514 | | |
| (100 | ) | |
| 1,023 | |
| Income from operations | |
| 816 | | |
| 153 | | |
| 753 | | |
| 159 | |
| Other income (expense) | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
| (5 | ) | |
| (1 | ) | |
| (6 | ) | |
| (34 | ) |
| Other income | |
| - | | |
| 8 | | |
| - | | |
| - | |
| Loss on extinguishment of debt | |
| - | | |
| - | | |
| - | | |
| (246 | ) |
| Total other income (expense) | |
| (5 | ) | |
| 7 | | |
| (6 | ) | |
| (280 | ) |
| Income (loss) from discontinued operations, net of tax | |
$ | 811 | | |
$ | 160 | | |
$ | 747 | | |
$ | (121 | ) |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
Assets and liabilities of discontinued operations
as of December 31, 2021 were classified as current because the sale transaction closed during the following twelve months during the period
ended June 30, 2022. The details are as follows:
| | |
Sovereign Plastics | |
| | |
December 31, | |
| (Amounts in thousands, except share and per share data) | |
2021 | |
| Assets | |
| |
| Cash | |
$ | 26 | |
| Accounts receivable, net | |
| 222 | |
| Inventory, net | |
| 295 | |
| Prepaid and deferred expenses | |
| 266 | |
| Assets of discontinued operations - current | |
| 809 | |
| Property and equipment, net | |
| 736 | |
| Operating lease right-of-use assets | |
| 717 | |
| Goodwill | |
| 48 | |
| Other assets – long term | |
| 73 | |
| Assets of discontinued operations - long-term | |
| 1,574 | |
| Total assets of discontinued operations | |
$ | 2,383 | |
| | |
| | |
| Liabilities | |
| | |
| Accounts payable | |
$ | 129 | |
| Accrued liabilities | |
| 50 | |
| Accrued payroll | |
| 52 | |
| Contract liabilities, current | |
| 475 | |
| Operating lease liabilities, current | |
| 194 | |
| Current portion of long-term debt, net of unamortized discounts and debt issuance costs | |
| 11 | |
| Liabilities of discontinued operations - current | |
| 911 | |
| Contract liabilities – long term | |
| 34 | |
| Operating lease liabilities – long term | |
| 553 | |
| Liabilities of discontinued operations - long-term | |
| 587 | |
| Total liabilities of discontinued operations | |
$ | 1,498 | |
NOTE 4 GOING CONCERN
U.S. GAAP requires management to assess a company’s
ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in
certain circumstances.
The accompanying unaudited condensed consolidated
financial statements and notes have been prepared assuming the Company will continue as a going concern. For the six months ended June
30, 2022, the Company used cash flows in operating activities of $11.1 million, and at June 30, 2022 had cash of $0.2 million, had an
accumulated deficit of $255.5 million, and had a working capital deficit of $9.2 million.
The Company’s fiscal operating results,
accumulated deficit and working capital, among other factors, raise substantial doubt about the Company’s ability to continue as
a going concern. Based on current cash on hand and subsequent activity as described herein (see Note 21 – Subsequent Events -
Business Developments and Debt and Equity Developments), the Company presently only has enough cash on hand to operate
on a month-to-month basis, without raising additional capital or selling assets. Because of the Company’s limited cash availability,
its operations have been scaled back to the extent possible (see Note 21 – Subsequent Events - Business Developments).
Management continues to explore opportunities with third parties and related parties to provide additional capital and/or sell assets;
however, it has not entered into any agreement to provide the necessary additional capital, except as disclosed herein. In the near term,
there may be limited opportunities to raise capital of significance due to the Company’s Nasdaq compliance issues, as discussed
in Note 21 – Subsequent Events - Nasdaq Compliance Developments.
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. If the Company is
not able to obtain additional financing on a timely basis, it may have to delay vendor payments and/or initiate cost reductions, which
would have a material adverse effect on its business, financial condition and results of operations, and ultimately, it could be forced
to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE 5 REVENUE
The following table is a summary of the Company’s
timing of revenue recognition for the three and six months ended June 30, 2022 and 2021:
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| (Amounts in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Timing of revenue recognition: | |
| | |
| | |
| | |
| |
| Services and products transferred at a point in time | |
$ | 2,037 | | |
$ | 2,263 | | |
$ | 3,992 | | |
$ | 3,174 | |
| Services and products transferred over time | |
| 51 | | |
| 138 | | |
| 149 | | |
| 328 | |
| Total revenue | |
$ | 2,088 | | |
$ | 2,401 | | |
$ | 4,141 | | |
$ | 3,502 | |
The Company disaggregates revenue by source and
geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenue by source consisted of the following for
the three and six months ended June 30, 2022 and 2021:
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| (Amounts in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Revenue by products and services: | |
| | |
| | |
| | |
| |
| Products | |
$ | 2,037 | | |
$ | 2,040 | | |
$ | 3,992 | | |
$ | 2,671 | |
| Services | |
| 51 | | |
| 361 | | |
| 149 | | |
| 831 | |
| Total revenue | |
$ | 2,088 | | |
$ | 2,401 | | |
$ | 4,141 | | |
$ | 3,502 | |
Revenue by geographic destination consisted of
the following for the three and six months ended June 30, 2022 and 2021:
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| (Amounts in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Revenue by geography: | |
| | |
| | |
| | |
| |
| North America | |
$ | 1,944 | | |
$ | 1,340 | | |
$ | 3,493 | | |
$ | 2,085 | |
| International | |
| 144 | | |
| 1,061 | | |
| 648 | | |
| 1,417 | |
| Total revenue | |
$ | 2,088 | | |
$ | 2,401 | | |
$ | 4,141 | | |
$ | 3,502 | |
Contract Balances
The Company records contract assets when it has
a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist
of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of June 30, 2022
and December 31, 2021, the Company did not have a material contract assets balance.
The following table is a summary of the Company’s
opening and closing balances of contract liabilities related to contracts with customers.
| (Amounts in thousands) | |
Total | |
| Balance at December 31, 2021 | |
$ | 3,415 | |
| New invoices not yet earned | |
| 1,880 | |
| Old invoices earned | |
| (599 | ) |
| Balance at June 30, 2022 | |
$ | 4,696 | |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE 6 EARNINGS (LOSS) PER SHARE
The Company accounts for earnings or loss per
share pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which requires disclosure on the financial
statements of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by
dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding
plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period.
There were no adjustments to net loss, the numerator,
or the denominator for purposes of computing basic earnings per share.
Potential common shares issuable to employees,
non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share
when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss attributable to common shareholders.
Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of
the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss attributable
to common shareholders.
The following weighted-average potential common
shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of June 30, 2022 and 2021, respectively:
| | |
June 30, | |
| | |
2022 | | |
2021 | |
| Options | |
| 6,334,103 | | |
| 3,320,181 | |
| Unvested restricted stock | |
| 99,998 | | |
| 328,543 | |
| Warrants | |
| 12,814,923 | | |
| 775,362 | |
| Convertible notes | |
| 4,566,849 | | |
| 4,835,781 | |
| | |
| 23,815,873 | | |
| 9,259,867 | |
NOTE 7 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash, cash equivalents and restricted cash consisted
of the following as of June 30, 2022, and December 31, 2021:
| (Amounts in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| Cash and cash equivalents | |
$ | 126 | | |
$ | 1,596 | |
| Restricted cash | |
| 35 | | |
| 277 | |
| Total | |
$ | 161 | | |
$ | 1,873 | |
Cash, cash equivalents, and restricted cash are
represented by operating accounts or money market accounts maintained with insured financial institutions, including cash equivalents,
defined as all short-term, highly-liquid investments with maturities of three months or less when purchased. The Company had no cash equivalents
as of June 30, 2022 and December 31, 2021, respectively. During the six months ended June 30, 2022, restricted cash decreased by $242,000,
including $195,000 of restricted cash which was released upon the sale of a building. The remainder of the restricted cash will be released
as overseas leases expire in January and July of 2023. See Note 11 – Property and Equipment, Net for additional information
related to the sale of the building.
NOTE 8 ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following
as of June 30, 2022 and December 31, 2021:
| (Amounts in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| Accounts receivable | |
$ | 3,173 | | |
$ | 2,391 | |
| Less: allowance for doubtful accounts | |
| (1,064 | ) | |
| (1,014 | ) |
| Total accounts receivable, net | |
$ | 2,109 | | |
$ | 1,376 | |
Bad debt expense totaled $0.1 million and $0.1
million, respectively, for the three and six months ended June 30, 2022, compared to $0.2 million and $0.2 million for the three and six
months ended June 30, 2021, respectively.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE 9 INVENTORY, NET
Inventory consisted of the following as of June
30, 2022 and December 31, 2021:
| (Amounts in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| Raw materials | |
$ | 5,999 | | |
$ | 6,587 | |
| Work in progress | |
| 1,043 | | |
| 1,202 | |
| Finished goods | |
| 1,039 | | |
| 3,592 | |
| Total inventory | |
| 8,081 | | |
| 11,381 | |
| Reserve | |
| (605 | ) | |
| (1,132 | ) |
| Total inventory, net | |
$ | 7,476 | | |
$ | 10,249 | |
The Company maintains a perpetual inventory system
which is supplemented by periodic reviews of inventory quantities on hand. The Company 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.
NOTE 10 PREPAID EXPENSES
Prepaid expenses consisted of the following as
of June 30, 2022 and December 31, 2021:
| (Amounts in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| Prepaid products and services | |
$ | 4,839 | | |
$ | 6,840 | |
| Prepaid rent and security deposit | |
| 30 | | |
| 96 | |
| Total prepaid expenses | |
$ | 4,869 | | |
$ | 6,936 | |
NOTE 11 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following
as of June 30, 2022 and December 31, 2021:
| (Amounts in thousands) | |
June 30,
2022 | | |
December 31,
2021 | |
| Shop machinery and equipment | |
$ | 2,081 | | |
$ | 10,103 | |
| Computers and electronics | |
| 992 | | |
| 1,436 | |
| Office furniture and fixtures | |
| 317 | | |
| 744 | |
| Leasehold improvements | |
| 301 | | |
| 543 | |
| Building | |
| - | | |
| 4,801 | |
| Land | |
| - | | |
| 1,330 | |
| Building improvements | |
| - | | |
| 755 | |
| Total property and equipment | |
| 3,691 | | |
| 19,712 | |
| Less: accumulated depreciation | |
| (2,307 | ) | |
| (10,960 | ) |
| Total property and equipment, net | |
$ | 1,384 | | |
$ | 8,752 | |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
On January 31, 2022, the Company sold its Tucson,
Arizona office building (the “Tucson Building”) for $15.8 million of cash. The Tucson Building had a carrying value of $6.7
million, including the $4.8 million cost basis of the building, the $1.3 million cost basis of the land, and the $0.8 million related
to building improvements, partially offset by $0.2 million of accumulated depreciation. The Company recognized an $8.4 million gain on
sale of assets, which is net of $0.7 million of related transaction costs. See Note 13 – Leases for additional information
about the subsequent leaseback of the office building.
During the three months ended June 30, 2022, the
Company derecognized the property and equipment in connection with the following transactions (see Note 20 – Other Business Developments
for additional information):
| a) | Sale of DragonWave-X Canada, Inc. assets – gross assets of $8.5 million with a net book value of $0.0 million; |
| b) | Idling of InduraPower – gross assets of $0.6 million with a net book value of $0.1 million; and |
| c) | Transfer of Innovation Digital, LLC assets – gross assets of $0.1 million with a net book value of $0.1 million. |
The Company recognized $0.5 million and $0.6 million
of depreciation expense for the three and six months ended June 30, 2022, respectively, compared to $0.3 million and $0.5 million of depreciation
expense for the three and six months ended June 30, 2021, respectively.
NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill activity during the six months ended
June 30, 2022 was as follows:
| (Amounts in thousands) | |
Total | |
| Balance at December 31, 2021 | |
$ | 37,943 | |
| Derecognition | |
| (710 | ) |
| Impairments | |
| (7,200 | ) |
| Balance at June 30, 2022 | |
$ | 30,033 | |
The following table sets forth the gross carrying
amount activity during the six months ended June 30, 2022, plus the accumulated amortization of the Company’s intangible assets
as of June 30, 2022.
| (Amounts in thousands) | |
Gross Carrying
Amount | | |
Derecognition
of Patents | | |
Impairment | | |
Accumulated
Amortization | | |
Net Carrying
Amount | |
| Definite-lived intangible assets: | |
| | |
| | |
| | |
| | |
| |
| Technology | |
| 14,196 | | |
| (561 | ) | |
| (8,575 | ) | |
| (194 | ) | |
| 4,866 | |
| Intellectual property | |
| 591 | | |
| - | | |
| - | | |
| (71 | ) | |
| 520 | |
| Software | |
| 673 | | |
| - | | |
| - | | |
| (118 | ) | |
| 555 | |
| Total definite-lived intangible assets at June 30, 2022 | |
$ | 15,460 | | |
$ | (561 | ) | |
$ | (8,575 | ) | |
$ | (383 | ) | |
$ | 5,941 | |
On June 23, 2022, the Company executed an
agreement to return fifteen patents and five pending or provisional patents to the former owners of Innovation Digital, LLC
(“Innovation Digital”) which resulted in the derecognition of goodwill and intangible assets shown in the
tables above. See Note 20 – Other Business Developments for additional information.
As of June 30, 2022, the Company determined that
it was more likely than not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due
to a decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of
June 30, 2022. For the three and six months ended June 30, 2022, the Company, utilizing a 10% revenue growth rate and a weighted-average
cost of capital range of 13-25%, recorded an impairment charge for goodwill in the amount of $7.2 million and an impairment charge for
other definite-lived intangible assets of $8.6 million. The Company calculates the estimated fair value of a reporting unit and the definite-lived
intangible assets using the income approach and compares it to the carrying value. For the income approach, the Company uses internally
developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related
cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount
rates. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of
goodwill impairment.
In determining whether a qualitative
assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity
concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would
perform the two-step goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the
entity concludes that it is not more than likely that the fair value is less than the carrying amount, the two-step goodwill
impairment test is not required. The Company bases these assumptions on its historical data and experience,
industry projections, micro and macro general economic condition projections, and its expectations. The only reporting unit with a
pre-impairment negative carrying value is Virtual Network Communications, Inc.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
During the three and six months ended June 30,
2022, the Company recorded amortization expense of intangible assets of $0.4 million and $0.8 million, respectively. During the three
and six months ended June 30, 2021, the Company recorded amortization expense of intangible assets of $3.2 million and $6.5 million, respectively.
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 |
|
| Technology | |
| 10.0 years |
|
| Intellectual property | |
| 10.0 years |
|
| Software | |
| 10.0 years |
|
| All intangible assets | |
| 10.0 years |
|
As of June 30, 2022, 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 thousands) | |
Estimated | |
| 2022 | |
$ | 297 | |
| 2023 | |
| 594 | |
| 2024 | |
| 594 | |
| 2025 | |
| 594 | |
| 2026 | |
| 594 | |
| Thereafter | |
| 3,268 | |
| All intangible assets | |
$ | 5,941 | |
As part of the Company’s restructuring, commencing January 1, 2023,
the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief
Executive Officer intends to manage the Company and make decisions based on the Company’s consolidated operating results.
NOTE 13 LEASES
Operating Leases
The Company has operating leases for office, manufacturing
and warehouse space, along with office equipment. The carrying values of operating lease right-of-use (“ROU”) assets and operating
lease liabilities as of June 30, 2022 and December 31, 2021 were as follows:
| | |
June 30, | | |
December 31, | |
| (Amounts in thousands) | |
2022 | | |
2021 | |
| Operating lease ROU assets | |
$ | 1,305 | | |
$ | 3,000 | |
| Operating lease liability | |
$ | 11,618 | | |
$ | 3,126 | |
On February 1, 2022, the Company entered into
a lease agreement with the new owners of the Tucson Building (see Note 11 - Property and Equipment, Net), for a term of 10 years
with no option to renew. Monthly rent increases annually from $98,300 per month in year one to $128,200 a month in the final year of the
lease. The Company posted a $1.0 million security deposit in connection with the commencement of the lease, which is classified within
other assets – long term on the balance sheet. The Company determined that the transactions represented a sale and leaseback and,
accordingly, established a new operating lease ROU asset and operating lease liability of $10.1 million. 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.
In May 2022, the Company abandoned its lease of
the Tucson Building after previously defaulting on the lease. In June 2022, ComSovereign Corp. abandoned its Dallas, TX office lease and
VEO Photonics, Inc. abandoned its San Diego, CA office lease. In connection with the lease abandonments, the Company recognized an $11.3
million loss due to the write-offs of the ROU-assets and applied its security deposit assets against its operating lease liabilities.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
Other information related to the Company’s
operating leases are as follows:
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| (Amounts in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Operating lease cost | |
$ | 535 | | |
$ | 343 | | |
$ | 1,088 | | |
$ | 595 | |
| Short-term lease cost | |
$ | 19 | | |
$ | 63 | | |
$ | 28 | | |
$ | 102 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | | |
| | | |
| | |
| Operating cash flows from operating leases | |
$ | 24 | | |
$ | 339 | | |
$ | 517 | | |
$ | 598 | |
The following table presents the weighted-average
remaining lease term and weighted average discount rates related to the Company’s operating leases as of June 30, 2022, and December
31, 2021:
| | |
June 30 | | |
December 31 | |
| (Amounts in thousands) | |
2022 | | |
2021 | |
| Weighted average remaining lease term | |
| 4.19 years | | |
| 5.37 years | |
| Weighted average discount rate | |
| 5.95 | % | |
| 5.97 | % |
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 June 30, 2022:
| | |
Operating
| |
| (Amounts in thousands) | |
Leases | |
| 2022 | |
$ | 1,240 | |
| 2023 | |
| 2,026 | |
| 2024 | |
| 1,768 | |
| 2025 | |
| 1,625 | |
| 2026 | |
| 1,386 | |
| Thereafter | |
| 8,285 | |
| Total minimum lease payments | |
| 16,330 | |
| Less: effect of discounting | |
| (4,712 | ) |
| Present value of future minimum lease payments | |
| 11,618 | |
| Less: current obligations under leases | |
| (734 | ) |
| Long-term lease obligations | |
$ | 10,884 | |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE 14 DEBT
Debt consisted of the following as of June 30,
2022 and December 31, 2021:
| | |
| |
| |
June 30, 2022 | | |
December 31, 2021 | |
| (Amounts in thousands) | |
Note
Reference | |
Original
Maturity
Date | |
Amount
Outstanding | | |
Interest
Rate | | |
Amount
Outstanding | | |
Interest
Rate | |
| Secured Notes Payable | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Secured senior convertible note payable | |
A | |
5/27/23 | |
$ | 3,571 | | |
| 6.0 | % | |
$ | 6,417 | | |
| 6.0 | % |
| Secured senior convertible note payable | |
B | |
8/25/23 | |
| 3,722 | | |
| 6.0 | % | |
| 4,833 | | |
| 6.0 | % |
| Secured note payable | |
C | |
11/26/21 | |
| 500 | | |
| 9.0 | % | |
| 1,000 | | |
| 9.0 | % |
| Secured note payable | |
D | |
1/29/22 | |
| - | | |
| 0.0 | % | |
| 5,205 | | |
| >8% or Libor +6.75 | % |
| Total secured notes payable | |
| |
| |
| 7,793 | | |
| | | |
| 17,455 | | |
| | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Notes Payable | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Notes payable | |
E | |
3/31/23 | |
| 100 | | |
| 3.0 | % | |
| - | | |
| 3.0 | % |
| Notes payable | |
F | |
7/29/22 | |
| 550 | | |
| 0.0 | % | |
| - | | |
| 0.0 | % |
| PPP loans | |
G | |
5/5/22 | |
| - | | |
| 1.0 | % | |
| 2 | | |
| 1.0 | % |
| SBA loan | |
H | |
5/15/50 | |
| 143 | | |
| 3.8 | % | |
| 150 | | |
| 3.8 | % |
| Total notes payable | |
| |
| |
| 793 | | |
| | | |
| 152 | | |
| | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Convertible Notes Payable | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Convertible note payable | |
I | |
6/3/22 | |
| - | | |
| 5.0 | % | |
| 600 | | |
| 5.0 | % |
| Convertible note payable | |
J | |
1/29/26 | |
| 11,150 | | |
| 3.3 | % | |
| 11,150 | | |
| 1.0 | % |
| Total convertible notes payable | |
| |
| |
| 11,150 | | |
| | | |
| 11,750 | | |
| | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
| Total long-term debt | |
| |
| |
| 19,736 | | |
| | | |
| 29,357 | | |
| | |
| Less: unamortized discounts and debt issuance costs | |
| |
| |
| (2,360 | ) | |
| | | |
| (3,518 | ) | |
| | |
| Total long-term debt, less discounts and debt issuance costs | |
| |
| |
| 17,376 | | |
| | | |
| 25,839 | | |
| | |
| Less: current portion of long-term debt | |
| |
| |
| (11,467 | ) | |
| | | |
| (13,566 | ) | |
| | |
| Debt classified as long-term debt | |
| |
| |
$ | 5,909 | | |
| | | |
$ | 12,273 | | |
| | |
Lind Debt
For Notes A and B (the “Lind Debt”),
on or about April 15, 2022, as a result of the Company not filing its Annual Report on Form 10-K for the year ended December 31, 2021
on a timely basis, the Lind Debt entered into default, which resulted in a 5% or $0.4 million increase in the principal value, pursuant
to the terms of the Lind Debt. The default also enabled the note holders, upon notice to the Company, to periodically convert a portion
of the associated principal and accrued interest into common stock at a 20% discount to the three lowest daily volume-weighted-average-prices
during the prior twenty trading days (“Note Holder Conversions”).
For the Lind Debt, during the six months ended
June 30, 2022, the principal amount was reduced by an aggregate of $4.0 million, which was comprised of (a) a reduction of an aggregate
of $1.9 million (plus interest) due to pre-default scheduled cash payments; (b) a reduction of an aggregate of $1.9 million (plus interest)
due to pre-default scheduled equity payments (at the Company’s discretion, in lieu of cash) comprising 3,530,042 shares of common
stock; (c) an increase of an aggregate of $0.4 million (as discussed above) due to the debt’s contractual default provisions; and
(d) a reduction of an aggregate of $0.6 million of principal due to Note Holder Conversions into an aggregate of 4,586,835 shares of the
Company’s common stock.
See Note 21 – Subsequent Events
– Debt and Equity Developments for information related to subsequent Note Holder Conversions. The subsequent
Note Holder Conversions enabled the June 30, 2022 outstanding principal of the Lind Debt (and the related debt discounts) and $0.9
million of Note J to be fully reclassified from current to long term.
Other Debt
For Note C, during the six months ended June 30,
2022, past due principal of $0.5 million was repaid in cash.
For Note D (the Tucson building mortgage), during
the six months ended June 30, 2022, the principal of $5.2 million was repaid in cash from the proceeds of the January 31, 2022 building
sale.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
For Note E, on April 1, 2022, the Company entered
into a note agreement with a related party who is an Executive Officer of the Company for cash proceeds of $100,000 with a maturity date
of March 31, 2023 and an interest rate of 3%. As of June 30, 2022, the proceeds were recorded as a related party note in current
liabilities.
For Note F, on or about April 29, 2022,
the Company sold an original issue discount note with a face value of $550,000 to an investor for the purchase price of $500,000. This
note was due approximately July 29, 2022 and bears a default rate of 12% after the maturity date. On July 26, 2022, the Company received
notice from the promissory note holder that the promissory note in the principal amount of $550,000 was due. As of the date of this filing,
this note remains outstanding. On May 9, 2022, in connection with the note issuance, the Company issued 240,000 shares of common stock
to an advisor pursuant to an advisory agreement dated April 29, 2022.
For Note G, during the six months ended June 30,
2022, principal of $2,000 was repaid in cash.
For Note H, during the six months ended June 30,
2022, principal of $7,000 was repaid in cash.
For Note I, on June 23, 2022, the Company
reached an agreement to cancel the note comprised of principal of $600,000 and interest of $40,000 in exchange for the return of certain patents. See Note 20 – Other
Business Developments for additional information.
For Note J, on May 24, 2022, the Company received
notice from counsel for holders of $11.2 million of convertible promissory notes issued in connection with the acquisition of Fastback
that the Company had failed to file its Annual Report on Form 10-K in a timely manner, as required by the terms of the convertible promissory
notes. While the note holders have the right to accelerate the maturity of the principal, the notice simply indicated that the holders
were reserving their rights.
Future maturities contractually required by the
Company under debt obligations are as follows as of June 30, 2022:
| (Amounts in thousands) | | |
Total | |
| Remaining 2022 | | |
$ | 19,493 | |
| 2023 | | |
| 100 | |
| 2024 | | |
| - | |
| 2025 | | |
| - | |
| 2026 | | |
| - | |
| Thereafter | | |
| 143 | |
| Total | | |
$ | 19,736 | |
During the three and six months ended June 30,
2022, the Company recognized $1.3 million and $2.2 million of interest expense in connection with the aforementioned indebtedness, which
includes the $0.4 million Lind Debt default charge during both periods. During the three and six months ended June 30, 2021, the Company
recognized $0.5 million and $1.0 million of interest expense in connection with the aforementioned indebtedness.
NOTE 15 STOCKHOLDERS’ EQUITY
See Note 14 – Debt and Note 21 –
Subsequent Events – Debt and Equity Developments for additional information related to debt conversions.
Preferred Stock - Liquidation Preference
Upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, before any distribution or payment shall be made to holders of shares of our common stock or
any other class or series of our capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding
up of our affairs, junior to the Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”),
holders of shares of Series A Preferred Stock will be entitled to be paid out of our assets legally available for distribution to our
stockholders, after payment of or provision for our debts and other liabilities and any class or series of our capital stock ranking,
as to rights upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, senior to the Series A Preferred
Stock, a liquidation preference of $25.00 per share of the Series A Preferred Stock (approximately $8.0 million), plus an amount equal
to any accrued and unpaid dividends (whether or not authorized or declared) up to, but excluding, the date of payment. If, upon our voluntary
or involuntary liquidation, dissolution or winding up, our available assets are insufficient to pay the full amount of the liquidating
distributions on all outstanding shares of Series A Preferred Stock and the corresponding amounts payable on all shares of each other
class or series of capital stock ranking, as to rights upon liquidation, dissolution or winding up, on parity with the Series A Preferred
Stock in the distribution of assets, then holders of shares of Series A Preferred Stock and each such other class or series of capital
stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred
Stock will share ratably in any distribution of assets in proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
Dividends
During the three and six months ended June 30,
2022, the Company recorded $184,992 and $308,320, respectively, of dividends paid or payable to the holders of the 9.25% Series A Preferred
Stock.
On or about May 25, 2022, the Company announced
that it had suspended the payment of dividends on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the
Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the
accrued dividends is approximately $493,312.
NOTE 16 SHARE-BASED COMPENSATION
Restricted Stock Awards
A summary of the restricted stock unit (“RSU”)
activity during the six months ended June 30, 2022 is presented below:
| | |
| | |
Weighted- | |
| | |
| | |
Average | |
| | |
Number of | | |
Grant Date
Value | |
| | |
RSU’s | | |
Per Share | |
| RSU’s non-vested - January 1, 2022 | |
| 133,331 | | |
$ | 2.67 | |
| Vested | |
| (33,334 | ) | |
| 1.03 | |
| RSU’s non-vested - June 30, 2022 | |
| 99,998 | | |
$ | 2.05 | |
During the three and six months ended June 30,
2022, the Company recognized $78,496 and $156,996, respectively, of share-based compensation expense associated with RSUs. During the
three and six months ended June 30, 2021, the Company recognized $180,993 and $530,073, respectively, of share-based compensation expense
associated with RSUs. Compensation expense related to RSUs is recorded in general and administrative expense in the condensed consolidated
statement of operations. As of June 30, 2022, there was $114,834 of unrecognized stock-based compensation expense related to RSUs that
will be recognized over the weighted average remaining vesting period of 0.48 years.
Stock Options
There were no stock options issued during the
three and six months ended June 30, 2022. The following table summarizes the assumptions used to estimate the fair value of options granted
during the six months ended June 30, 2021.
| | |
For the Six Months Ended | |
| | |
June 30, | |
| | |
2022 | | |
2021 | |
| Expected dividend yield | |
| N/A | | |
| 0.00 | % |
| Expected volatility | |
| N/A | | |
| 46.50 - 53.02 | % |
| Risk-free interest rate | |
| N/A | | |
| 0.48 - 0.89 | % |
| Expected life of options | |
| N/A | | |
| 3.00 - 5.00 years | |
The following table presents stock option activity for the six months
ended June 30, 2022:
| | |
| | |
Weighted | | |
Weighted | | |
| |
| | |
| | |
Average | | |
Average | | |
| |
| | |
| | |
Exercise | | |
Contractual | | |
Aggregate | |
| | |
Number of
Options | | |
Price
Per Share | | |
Life in
Years | | |
Intrinsic
Value | |
| Outstanding - December 31, 2021 | |
| 7,040,511 | | |
$ | 2.33 | | |
| | | |
| | |
| Exercised | |
| (209,741 | ) | |
| 0.15 | | |
| | | |
| | |
| Cancelled or Expired | |
| (496,667 | ) | |
| 2.27 | | |
| | | |
| | |
| Outstanding - June 30, 2022 | |
| 6,334,103 | | |
$ | 2.41 | | |
| 2.89 | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable - June 30, 2022 | |
| 2,801,270 | | |
$ | 1.96 | | |
| 1.79 | | |
| - | |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
The following table presents information related
to stock options as of June 30, 2022:
| Options Outstanding | | |
Options Exercisable | |
| | | |
| | |
Weighted | | |
| |
| Exercise | | |
Outstanding | | |
Average | | |
Exercisable | |
| Price | | |
Number of | | |
Remaining Life | | |
Number of | |
| Per Share | | |
Options | | |
In Years | | |
Options | |
| | $ 0.01 - $ 0.50 | | |
| - | | |
| - | | |
| - | |
| | $ 0.51 - $ 1.00 | | |
| 568,763 | | |
| 3.02 | | |
| 568,763 | |
| | $ 1.01 - $ 1.50 | | |
| - | | |
| - | | |
| - | |
| | $ 1.51 - $ 2.00 | | |
| 1,356,671 | | |
| 0.30 | | |
| 1,356,671 | |
| | $ 2.01 - $ 2.50 | | |
| - | | |
| - | | |
| - | |
| | $ 2.51 - $ 3.00 | | |
| 4,116,992 | | |
| 3.60 | | |
| 782,501 | |
| | $ 3.01 - $ 3.50 | | |
| 291,677 | | |
| 0.96 | | |
| 93,335 | |
| | | | |
| 6,334,103 | | |
| 1.79 | | |
| 2,801,270 | |
The Company recognized $321,248 and $777,852 of
share-based compensation expense related to options for the three and six months ended June 30, 2022, respectively, compared to $344,638
and $352,012 of share-based compensation expense related to options for the three and six months ended June 30, 2021, respectively. Compensation
expense related to stock options is recorded in general and administrative expense in the condensed consolidated statement of operations.
At June 30, 2022, the Company had $465,322 of unrecognized compensation expense related to options.
Warrants
All warrants are valued utilizing the Black-Scholes
pricing model using the assumptions listed below. There were no warrants issued during the three and six months ended June 30, 2022. The
weighted average grant date fair value of all warrants issued during the six months ended June 30, 2021 was $1.39 per share.
The following tables summarize the assumptions
used to estimate the fair value of warrants granted during the six months ended June 30, 2022 and 2021:
| | |
For the Six Months Ended | |
| | |
June 30, | |
| | |
2022 | | |
2021 | |
| Expected dividend yield | |
| N/A | | |
| 0 | % |
| Expected volatility | |
| N/A | | |
| 39.94 - 46.33 | % |
| Risk-free interest rate | |
| N/A | | |
| 0.42- 0.81 | % |
| Contractual life of warrants | |
| N/A | | |
| 5.0 years | |
The following table presents activity for the
six months ended June 30, 2022:
| | |
| | |
Weighted- | | |
| |
| | |
| | |
Average | | |
Weighted- | |
| | |
Number of
Warrants | | |
Exercise
Price
Per Share | | |
Average
Contractual
Life in Years | |
| | |
| | |
| | |
| |
| Outstanding - December 31, 2021 | |
| 12,831,593 | | |
$ | 3.72 | | |
| | |
| Forfeited or Expired | |
| (16,670 | ) | |
| 1.50 | | |
| | |
| Outstanding - June 30, 2022 | |
| 12,814,923 | | |
$ | 3.72 | | |
| 3.63 | |
| Exercisable - June 30, 2022 | |
| 12,814,923 | | |
$ | 3.72 | | |
| 3.63 | |
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
The following table presents information related
to warrants as of June 30, 2022:
| Warrants Outstanding | | |
Warrants Exercisable | |
| | | |
| | |
Weighted | | |
| |
| Exercise | | |
Outstanding | | |
Average | | |
Exercisable | |
| Price | | |
Number of | | |
Remaining Life | | |
Number of | |
| Per Share | | |
Warrants | | |
In Years | | |
Warrants | |
| | $ 0.01 - $ 1.00 | | |
| 560,192 | | |
| 3.02 | | |
| 560,192 | |
| | $ 1.01 - $ 2.00 | | |
| - | | |
| - | | |
| - | |
| | $ 2.01 - $ 3.00 | | |
| 4,556,001 | | |
| 3.81 | | |
| 4,556,001 | |
| | $ 3.01 - $ 4.00 | | |
| 33,342 | | |
| 2.79 | | |
| 33,342 | |
| | $ 4.01 - $ 5.00 | | |
| 7,285,290 | | |
| 3.58 | | |
| 7,285,290 | |
| | $ 5.01 - $ 6.00 | | |
| 380,098 | | |
| 3.60 | | |
| 380,098 | |
| | | | |
| 12,814,923 | | |
| 3.63 | | |
| 12,814,923 | |
NOTE 17 COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved
in various lawsuits and legal proceedings that arise in the ordinary course of business. Management does not believe that after the final
disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations
or cash flows.
On January 27, 2022, a former employee filed suit
against the Company in the Tulsa County Oklahoma District Court, Case No. CJ-2022-00221. The plaintiff has alleged that she was entitled
to six months of severance pay after her employment contract was not renewed, and that her option agreements did not expire thirty days
after cessation of her employment, and claims she is owed approximately $75,000 in severance and $250,000 in damages for her options.
The Company filed an Answer on or about March 18, 2022. The Company disputes the plaintiff’s allegations, has not accrued for any
contingent losses, and intends to vigorously defend the lawsuit.
On June 16, 2022, the Company received notice
from certain former shareholders of SAGUNA claiming breaches of the SAGUNA stock purchase agreement and claiming that all of the former
shareholders of SAGUNA have suffered damages totaling approximately $13.9 million, which they calculated as the value related to the consideration
issued to those former shareholder for the acquisition of SAGUNA. The Company denies those claims and has not accrued for any contingent
loss. However, the Company may face legal claims or proceedings regarding those claims.
See Note 21 – Subsequent Events –
Litigation, Claims and Contingencies Developments for post-June 30, 2022 developments.
NOTE 18 CONCENTRATIONS
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral related to its trade accounts receivable. At June 30, 2022, accounts receivable
from two customers comprised an aggregate of approximately 40% of the Company’s total trade accounts receivable, and none of these
balances were characterized as uncollectible.
In addition, for the three months ended June 30,
2022, revenue from three customers individually exceeded 10% of revenue and, in total, comprised approximately 41% of the Company’s
total revenue. For the six months ended June 30, 2022, revenue from one customer individually exceeded 10% of revenue and, in total, comprised
approximately 11% of the Company’s total revenue. At June 30, 2022, accounts payable from one vendor accounted for 16% of the Company’s
total expenses.
NOTE 19 BUSINESS ACQUISITIONS
During 2021, the Company completed the acquisitions
of Fastback Networks, a telecommunications provider, Sky Sapience Ltd., a tethered drone provider, Rvision, Inc., a video and communications
developer, Innovation Digital, a developer of signal processing solutions, RF Engineering and Energy Resource, an antenna and accessories
provider, and SAGUNA Networks, a software developer to expand the Company’s product offerings and developments.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
The following information represents the unaudited
pro forma combined results of operations, giving effect to the acquisitions as if they occurred at the beginning of the period ended June
30, 2021.
| | |
For the
Three Months Ended | | |
For the
Six Months Ended | |
| (Amounts in thousands) | |
June 30,
2021 | | |
June 30,
2021 | |
| | |
| | |
| |
| Revenue from continuing operations | |
$ | 2,585 | | |
$ | 4,416 | |
| | |
| | | |
| | |
| Net loss from continuing operations | |
$ | (11,409 | ) | |
$ | (28,790 | ) |
| | |
| | | |
| | |
| Basic and diluted loss per common share | |
$ | (0.15 | ) | |
$ | (0.38 | ) |
| | |
| | | |
| | |
| Weighted-average common shares outstanding | |
| 78,433,662 | | |
$ | 75,442,895 | |
NOTE 20 OTHER BUSINESS DEVELOPMENTS
Executive Officer and Board of Director Developments
On April 21, 2022, the Company’s Chief Financial
Officer resigned from the Company for personal family commitments.
On May 2, 2022, a member of the Board of Directors
of the Company (the “Board”) announced their resignation from the Board and all committees thereof, effective immediately.
The resignation allowed that former member of the Board to focus on personal and other professional commitments.
Business Developments
Commencing in May 2022, the Company embarked
on a restructuring, including a reduction of over 70% of overhead and personnel costs through the divestment of non-core assets in
favor of a refocus on our true core competencies in 5G and beyond technology.
In May 2022, InduraPower idled the employees.
On May 23, 2022, a third party acquired certain
assets and employees from the Canadian subsidiary of DragonWave-X, LLC (“DragonWave Canada”), in return for assuming DragonWave
Canada’s potential employment liabilities and assuming DragonWave Canada’s lease in Kanata, Ontario, Canada, through an Asset
Purchase Agreement. The Company recognized a $2.0 million loss on the aforementioned sale.
In June 2022, the Company idled the employees
of SAGUNA Networks Ltd. (“SAGUNA”), Sky Sapience Ltd. (“SKS”) and VEO Photonics, Inc. (“VEO”).
On June 23, 2022, the Company reached an agreement
to return fifteen patents and five pending or provisional patents to the former owners of Innovation Digital, LLC (“Innovation Digital”),
resulting in the derecognition of an outstanding promissory note of an aggregate $640,000, comprised of $600,000 of principal and $40,000
of interest, the return of 500,000 shares of common stock, and the waiver of certain severance payments. The Company recognized a $0.6
million loss on the aforementioned sale.
NOTE 21 SUBSEQUENT EVENTS
Executive Officer and Board of Director Developments
On September 1, 2022, the Company’s then
Chief Executive Officer and the Company’s then President resigned from the Company as part of the Company’s ongoing transition.
David A. Knight was appointed Interim Chief Executive Officer by the Board.
On October 10, 2022, a member of the Board announced
their resignation from the Board and all committees thereof. The resignation allowed that former member of the Board to focus on personal
and other professional commitments.
On November 23, 2022, the Board appointed David
A. Knight as the Company’s Chief Executive Officer, President, Acting Principal Financial and Accounting Officer, and a Director
of the Board. Mr. Knight is entitled to receive (i) an annual base salary of $180,000 which will be increased to $250,000 upon the Board’s
Compensation Committee’s determination of adequate funding; (ii) eligibility to participate in a cash bonus program for meeting
quarterly and annual goals, milestones, and metrics, as established by the Compensation Committee; (iii) eligibility to receive grants
under the terms of the Company’s 2020 Long-Term Incentive Plan; (iv) the right to participate in all benefit plans offered to the
Company’s senior executive officers; and (v) severance payments of three months of salary, benefits, and prorated bonus (the “Severance”)
if terminated without cause before completion of one year of service, and six months of Severance if terminated without cause after reaching
one year of service.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
Business Developments
On December 21, 2022,
the Company entered into a Share Purchase Agreement (the “SKS Sale Agreement”) with Titan Innovations Ltd., an Israeli corporation
(“Titan”), pursuant to which we agreed to sell our Israel-based tethered drone unit Sky Sapience Ltd. (“SKS”) to
Titan. The total consideration for the sale is $1.8 million. From that consideration, the first two tranches totaling $750,000 would be
utilized to eliminate outstanding liabilities and debt of SKS. Post-closing, the next tranche of $450,000 would be paid to the Company,
less any remaining SKS outstanding liabilities and debt. The final $600,000 is due to be paid within two years of closing, subject to
potential reductions for further claims of SKS debt, which are capped at $300,000. The SKS Sale Agreement contains closing conditions
and there are no assurances that the transaction will close.
On December 29, 2022,
the Company entered into a Settlement Agreement (“Settlement Agreement”) to resolve RVI Claim #1 and RVI Claim #2 (see the
Litigation, Claims and Contingencies Developments section in the Note for additional information). As required by the terms
of the Settlement Agreement, we entered into a Stock Purchase Agreement (the “RVI Sale Agreement”) with the plaintiffs in
the two lawsuits (“Buyers”), pursuant to which, and subject to the terms and conditions of the RVI Sale Agreement, we agreed
to sell Rvision, Inc. (“RVI”) to Buyers. The consideration for the sale was the dismissal of the two lawsuits and $100.
In January 2023, the
Company idled the employees of RF Engineering & Energy Resource, LLC.
Debt and Equity Developments
Subsequent to June 30, 2022 and through the filing
date of this Form 10-Q, there were Note Holder Conversions of $7.5 million of Lind Debt principal and $0.1 million of related interest
into an aggregate of 150,007,860 shares of the Company’s common stock. As of the filing date, the remaining combined principal and
interest balance of the Lind Debt was approximately $228,000.
On July 29, 2022, the Company sold a promissory
note in the principal amount of $26,250 to the Company’s senior secured lenders. This note bears interest at 15% per annum and is
due July 29, 2023.
On October 17, 2022, the Company sold a promissory
note in the principal amount of $367,500 to the Company’s senior secured lenders. This note bears interest at 6% per annum, is due
October 17, 2023, and is secured by the August 25, 2021 Amended and Restated Security Agreement between the Company and its senior secured
lenders.
On November 8, 2022, the Company sold a promissory
note in the principal amount of $262,500 to the Company’s senior secured lenders for proceeds of $250,000. That note bears
interest at 6% per annum, is due November 8, 2023, and also is secured by the August 25, 2021 Amended and Restated Security Agreement
between the Company and its senior secured lenders.
On or about December 8, 2022, the Company canceled
66,666 shares of outstanding common stock due to the non-vesting of certain restricted stock awards.
On January 17, 2023, the Company sold an unsecured
promissory note in the principal amount of $90,000, which pays 8% interest per annum and is due on or before July 30, 2023.
During January 2023, pursuant to a limited time offer, certain Note
J convertible note holders agreed to amend their note and convert an aggregate of $0.9 million principal of their notes and $0.2 million
of accrued interest into 20,469,861 shares of the Company’s common stock.
Lease Developments
In July 2022, the Company abandoned its Chantilly,
VA office lease.
Litigation, Claims and Contingencies Developments
By notice dated July 14, 2022, the Company received
notice from a distributor that has a distribution agreement with InduraPower claiming that InduraPower, and the Company as guarantor,
has breached the distribution agreement, and are claiming approximately $2.0 million in damages, which includes a claim for $0.5 million
of foregone profit, which is not accrued because the Company denies that claim. The Company had received $1.5 million in cash as a deposit
against future product deliveries, of which $0.2 million has been recognized as revenue (resulting from product deliveries) through June
30, 2022 and the other $1.3 million is included in contract liabilities – current in the June 30, 2022 balance sheet.
On or about July 17, 2022, the former employees
of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $400,000
of post- June 30, 2022 claims of the former employees. The approximately $400,000 of post-June 30, 2022 claims of the former employees
were resolved pursuant to the SKS Sale Agreement and the action was dismissed on or about January 9, 2023. See the Business Development
section in this Note for additional information.
On or about July 28, 2022, a former employee
filed suit against the Company, Dustin McIntire, and Daniel Hodges in the San Diego County California Superior Court, Case No. 37-2022-00028083-CU-BC-CTL
(“RVI Claim #1”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company
failed to issue him stock options, and that he is owed future amounts. He is claiming damages of no less than $238,000. As of June 30,
2022, the Company had accrued for the wage claims for services provided, but had not accrued for the claims associated with future services.
On December 29, 2022, the Company resolved this lawsuit. See the Business Development section in this Note for additional
information.
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
On or about August 22, 2022, two former Fastback
employees filed suit against the Company, DragonWave and Fastback in the Alameda County Superior Court, California, Case No. 22CV016666.
The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times,
failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff is claiming damages of no less than $66,500.
The Company has accrued for the wage claims for services provided, but has not accrued for penalties. The Company disputes certain allegations
of the plaintiff and intends to vigorously defend the lawsuit.
On or about August 23, 2022, a former employee
filed suit against the Company in the Clark County District Court, Nevada, Case No. 3 A-22-857361-C (“RVI Claim #2”). The
plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company failed to issue him stock options,
and that he is owed future amounts. He is claiming damages of no less than $184,000. As of June 30, 2022, the Company had accrued for
the wage claims for services provided, but had not accrued for the claims associated with future services. On December 29, 2022, the Company
resolved this lawsuit. See the Business Development section in this Note for additional information.
On or about September 20, 2022, the Company was
served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory
note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806.
The plaintiff alleges that for $125,000 he purchased an 8% promissory note in 2018 from Transform-X which has not been paid. Plaintiff
alleges that the Company is also liable under the Transform-X promissory note. This lawsuit was removed to the United States District
of South Carolina, Civil Action No.:3:22-cv-03645-MGL. The Company strongly disputes the plaintiff’s allegations, has not accrued
for any contingent losses, and intends to vigorously defend the lawsuit.
On or about November 14, 2022, an intellectual
property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego.
The plaintiff alleges that they performed work for the Company and its subsidiaries subsequent to June 30, 2022 and are owed approximately
$75,000.
On or about November 15, 2022, the Company resolved
the claims of former employees of SAGUNA who had, on or about July 17, 2022, filed an insolvency request against SAGUNA in the Nazareth
District Court, Israel, No. 27624-07-22. The approximately $200,000 of post- June 30, 2022 claims of the former employees were resolved
and the action was dismissed on or about November 17, 2022.
On or about January 10, 2023, a recruiting and
staffing company obtained default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for principal
of $134,650, prejudgment interest of $4,542.24, court costs of $425, attorney’s fees of $6,300, and post judgment interest at 7%.
On January 9, 2023, a former employee of Elitise, LLC, filed suit against
our Company in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum
wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount of damages. The Company
disputes plaintiff’s allegations and intends to vigorously defend the lawsuit.
Nasdaq Compliance Developments
As previously disclosed in the Company’s
Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, the Company is not in compliance with Nasdaq Listing Rule 5550(a)(2),
the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of the Company’s common stock.
Additionally, because the Company was late with filing its Quarterly Reports on Form10-Q for the quarters ended March 31, 2022, June 30,
2022, and September 30, 2022 (collectively the “Delinquent Reports”), the Company is not in compliance with Nasdaq Listing
Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”)
with the Securities and Exchange Commission (“SEC”).
On November 17, 2022, a hearing was held before
the Nasdaq Hearings Panel (the “Panel”) regarding the Company’s request for continued listing on The Nasdaq Capital
Market of the Company’s common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the
Panel issued its determination, granting the Company’s request for the continued listing of the Company’s common stock, subject
to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq’s
filing requirement by getting the Company’s remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other
conditions.
The Company is working to file its Delinquent
Reports with the SEC as soon as practicable and is otherwise taking definitive steps to evidence compliance with all other applicable
criteria for continued listing on Nasdaq. The Company had put forth a reverse split proposal to our stockholders to be voted on at the
Company’s Annual Stockholders meeting on January 18, 2023, as part of the Company’s efforts to gain compliance with the minimum
bid price requirement. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.
Because the Company did not reach a quorum,
the Annual Meeting could not conduct business on January 18, 2023, and the vote of the Reverse Stock Split Proposal (referred to as
“Proposal 1”) could not proceed in time for compliance with Nasdaq’s minimum bid price requirement in Nasdaq
Listing Rule 5550(a)(1) on or before February 2, 2023. The Nasdaq Panel granted the Company’s request for an extension to
obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with Listing Rule
5550(a)(2) by February 24, 2023.