UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2020

 

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

 

For the transition period from ____________ to ____________

 

Commission File Number 333-150332

 

COMSOVEREIGN HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   46-5538504
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)
     
5000 Quorum Drive, STE 400, Dallas, TX   75254
(Address of Principal Executive Offices)   (Zip Code)

 

(904) 834-4400

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)  

Name of each
exchange on which registered

Common Stock, par value $.0001 per share   COMS   The Nasdaq Stock Market LLC
Warrants to purchase Common Stock   COMSW   The Nasdaq Stock Market LLC

 

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

 

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.:

 

  Large accelerated filer   Accelerated filer   Non-accelerated filer  
  Smaller reporting company Emerging growth company    

 

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

 

Indicate by check mark whether the registrant 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.

Yes ☐  No ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes   No

 

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.

  

DOCUMENTS INCORPORATED BY REFERENCE

 

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.

  

 

 

 

 

COMSOVEREIGN HOLDING CORP.

 

TABLE OF CONTENTS

 

PART I  
     
Item 1 Business 1
     
Item 1A Risk Factors 15
     
Item 1B Unresolved Staff Comments 34
     
Item 2 Properties 34
     
Item 3 Legal Proceedings 34
     
Item 4 Mine Safety Disclosures 34
     
PART II  
     
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35
     
Item 6 Selected Financial Data 35
     
Item 7 Management’s Discussion and Analysis of Financial Condition  and Results of Operations 35
     
Item 7A Quantitative and Qualitative Disclosures About Market Risk 55
     
Item 8 Financial Statements and Supplementary Data 55
     
Item 9 Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure 55
     
Item 9A Controls and Procedures 55
     
Item 9B Other Information 56
     
PART III  
     
Item 10 Directors, Executive Officers and Corporate Governance 57
     
Item 11 Executive Compensation 57
     
Item 12 Security Ownership of Certain Beneficial Owners and Management  and Related Stockholders Matters 57
     
Item 13 Certain Relationships and Related Transactions, and Director Independence 57
     
Item 14 Principal Accounting Fees and Services 57
     
PART IV  
     
Item 15 Exhibits and Financial Statement Schedules 58
     
Item 16 Form 10–K Summary 61
     
SIGNATURES 62
     
EXHIBIT INDEX  
     
LIST XBRL DOCUMENTS  

   

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As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and the “Company” mean COMSovereign Holding Corp. and its subsidiaries (unless the context indicates a different meaning).

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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:

 

our prospects, including our future business, revenues, expenses, net income, earnings per share, gross margins, profitability, cash flows, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;

 

the potential impact of COVID-19 on our business and results of operations;

 

the effects on our business, financial condition and results of operations of current and future economic, business, market and regulatory conditions, including the current economic and market conditions and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;

 

he effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flows, capital expenditures, liquidity, financial condition and results of operations;

 

our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;

 

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our markets, including our market position and our market share;

 

our ability to successfully develop, operate, grow and diversify our operations and businesses;

 

our business plans, strategies, goals and objectives, and our ability to successfully achieve them;

 

the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability of borrowings under our credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;

 

the value of our assets and businesses, including the revenues, profits and cash flows they are capable of delivering in the future;

 

the effects on our business operations, financial results, and prospects of business acquisitions, combinations, sales, alliances, ventures and other similar business transactions and relationships;

 

industry trends and customer preferences and the demand for our products, services, technologies and systems; and

 

the nature and intensity of our competition, and our ability to successfully compete in our markets.

 

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.

 

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PART I

 

ITEM 1. BUSINESS

 

Overview

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio 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:

 

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:

 

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.

 

  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.

 

  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.

 

  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.

 

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:

 

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.

 

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.

 

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.

 

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.

 

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.

 

  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.

 

  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.

 

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.

 

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.

 

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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.

 

(1) 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.

 

(2) 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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(3) 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.

 

(4) 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.

 

(5) 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.

 

(6) 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).

 

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:

 

enhanced mobile broadband to support significant improvement in data rates and user experience in both the uplink and downlink;

 

IoT communications to support the expected billions of connections between machines as well as short bursts of information to other systems; and

 

low latency, high-reliability to support applications that are critical or are needed in real time, like factory machines, virtual reality and augmentation.

 

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.

 

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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:

 

  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.

 

Enhance Sales Growth.  We intend to generate additional growth opportunities by:

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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:

 

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.

 

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:

 

  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.

 

  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:

 

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

 

wireless communications designs in tactical communication systems, automotive telematics, cellular communication systems, municipal/public networks, security systems, seismic detection and consumer electronics.

 

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.

 

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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.

 

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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.

 

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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.

 

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ITEM 1A. RISK FACTORS

 

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:

 

the absence of an operating history in our current business and at our current scale;

 

our ability to raise capital to develop our business and fund our operations;

 

expected continual losses for the foreseeable future;

 

our ability to anticipate and adapt to developing markets;

 

acceptance by customers;

 

limited marketing experience;

 

competition from competitors with substantially greater financial resources and assets;

 

the ability to identify, attract and retain qualified personnel;

 

our ability to provide superior customer service; and

 

reliance on key personnel.

 

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.

 

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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:

 

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;

 

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

 

placing us at a competitive disadvantage compared with our competitors that have less debt.

 

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.

 

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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:

 

attract parties for acquisitions, joint ventures or other collaborations;

 

license proprietary technology that is competitive with the technology we are developing;

 

attract funding; and

 

attract and hire talented and other qualified personal.

 

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.

 

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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:

 

failure to obtain the required regulatory approvals for their use;

 

prohibitive production costs;

 

competing products;

 

lack of innovation of the product;

 

continuing technological changes in the market rendering the product obsolete;

 

failure to scale-up our operations sufficiently to satisfy demand for our products;

 

ineffective distribution and marketing;

 

lack of sufficient cooperation from our partners; and

 

demonstrations of the products not aligning with or meeting customer needs.

 

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.

 

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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.

 

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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:

 

our outsourced manufacturer not being obligated to manufacture our products on a long-term basis in any specific quantity or at any specific price;

 

early termination of, or failure to renew, contractual arrangements;

 

our failure to effectively manage our outsourced manufacturer relationship;

 

our outsourced manufacturer experiencing delays, disruptions or quality control problems in its manufacturing operations;

 

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;

 

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;

 

the possible absence of adequate capacity and reduced control over component availability, quality assurances, delivery schedules, manufacturing yields and costs; and

 

our outsourced manufacturer experiencing financial instability which could affect its ability to manufacture or deliver our products.

 

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.

 

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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.

 

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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:

 

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;

 

data privacy laws which require that customer data be stored and processed in a designated territory;

 

difficulties in staffing and managing foreign operations, including employee laws and regulations;

 

different pricing environments, longer sales cycles and longer accounts receivable payment cycles, and collections issues;

 

new and different sources of competition;

 

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;

 

laws and business practices favoring local competitors;

 

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;

 

increased financial accounting and reporting burdens and complexities;

 

restrictions on the transfer of funds;

 

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;

 

fluctuations in the exchange rates of foreign currency in which our foreign revenues or expenses may be denominated;

 

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;

 

public health crises, such as epidemics and pandemics, including COVID-19; and

 

unstable regional and economic political conditions in the markets in which we operate.

 

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:

 

the need to integrate and manage the businesses and products acquired with our own business and products;

 

additional demands on our resources, systems, procedures and controls;

 

disruption of our ongoing business; and

 

diversion of management’s attention from other business concerns.

 

Moreover, these transactions could involve:

 

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;

 

substantial investment with respect to technology transfers and operational integration; and

 

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.

 

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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:

 

patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage;

 

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;

 

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;

 

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.

  

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.

 

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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.

 

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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:

 

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

 

designing and developing products to collect, distribute and analyze various types of information.

 

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.

 

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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:

 

  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;

 

  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.

 

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:

 

the results of operating and financial performance and prospects of other companies in our industry;

 

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;

 

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

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;

 

changes in government policies in the United States and, as our international business increases, in other foreign countries;

 

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;

 

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

changes in accounting standards, policies, guidance, interpretations or principles;

 

any lawsuit involving us, our services or our products;

 

arrival and departure of key personnel;

 

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.

 

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.

 

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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.

 

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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. UNRESOLVED STAFF COMMENTS

 

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.

 

ITEM 2. PROPERTIES.

  

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.

 

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information for Common Stock

 

Prior to January 22, 2021, our common stock traded under the ticker symbol “COMS” on the OTCQB tier of the OTC Markets, Inc. On January 22, 2021, our common stock commenced trading on the Nasdaq Capital Market under the ticker symbol “COMS.”

 

Holders

 

As of December 31, 2020, there were approximately 398 stockholders of record, according to the records of our transfer agent, and an unknown number of additional holders of common stock held in ‘street name’.

 

Dividends

 

We have not declared any common stock dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, is within the discretion of our board of directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as other relevant factors. There are no material restrictions in our Articles of Incorporation, as amended, or Bylaws that restrict us from declaring dividends.

 

ITEM 6. SELECTED FINANCIAL DATA

 

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 6.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report. All share and per share amounts presented herein have been restated to reflect the implementation of the 1-for-3 reverse stock split effected on January 21, 2021 as if it had occurred at the beginning of the earliest period presented.

 

Business Overview

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the 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.

 

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Corporate History

 

We were incorporated in Nevada on April 17, 2014, as a wholly owned subsidiary of MacroSolve, Inc., an Oklahoma corporation (“MacroSolve”), and effective April 30, 2014, in order to consolidate our operations into an entity incorporated in Nevada, MacroSolve merged with and into us. On June 3, 2014, we acquired Drone Aviation Corp. through a share exchange transaction, and on March 26, 2015, Drone Aviation Corp. merged with and into us. As a result of the share exchange and merger with Drone Aviation Corp., we acquired Drone Aviation Corp.’s subsidiary, Lighter Than Air Systems Corp., which does business under the name Drone Aviation.

 

On November 27, 2019, we completed the COMSovereign Acquisition in a stock-for-stock transaction with a total purchase price of approximately $75 million. The COMSovereign Acquisition was treated as a reverse merger for accounting purposes under U.S. GAAP with COMSovereign as the accounting acquirer and our Company as the accounting acquiree. As a result, our audited consolidated financial statements included in this report are those of COMSovereign from the date of its incorporation (January 10, 2019) through December 31, 2019. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only from the date of acquisition of COMSovereign, November 27, 2019.

 

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

 

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

 

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

 

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

 

On April 1, 2019, COMSovereign acquired the equity securities of DragonWave, a Dallas-based manufacturer of high-capacity microwave and millimeter point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide. According to a report by the U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America.

 

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

 

On November 30, 2019, following our acquisition of COMSovereign, we changed our corporate name to COMSovereign Holding Corp.

 

On March 6, 2020, our newly-formed subsidiary, Sovereign Plastics, acquired substantially all of the assets of a Colorado Springs, Colorado-based manufacturer of plastic and metal components to third-party manufacturers. We acquired our Sovereign Plastics business to increase our operating margins by reducing the manufacturing and production costs of our telecom products. Sovereign Plastics will also primarily operate as the material, component manufacturing and supply chain source for all of our subsidiaries. We do not expect the revenues of Sovereign Plastics from sales to third parties to be material.

 

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On July 6, 2020, we acquired the equity securities of VNC, 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. 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.

 

On January 29, 2021, we acquired Fastback, 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.

 

On February 25, 2021, we acquired SKS, an Israeli-based company with 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. HoverMast is utilized by the Israeli government for border patrol and coastal applications and is also deployed in several international markets.

 

On March 26, 2021, we entered into the RVision Exchange Agreement pursuant to which, subject to the terms and conditions of the RVision Exchange Agreement, we have agreed to acquire RVision in consideration 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 the parties and is subject to the satisfaction of the closing conditions stated therein. 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.

 

Each of our subsidiaries was acquired, and RVision will be acquired, to address a different opportunity or sector within the North American telecom infrastructure and service market.

 

Principle of Consolidation

 

Our consolidated financial statements included in this report include our accounts and those of our subsidiaries: Drone AFS Corp. and Lighter Than Air Systems Corp. (from the date of consummation of the COMSovereign Acquisition), and DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics and VNC from their respective dates of acquisition. These consolidated financial statements do not include the accounts of Fastback and SKS as they were acquired subsequent to the respective balance sheet dates.

 

Segment Information

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, establishes standards for reporting information about operating 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. Our chief operating decision maker is our 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 our Company. Accordingly, we currently consider ourselves 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 we are still in the early stages of developing our Company, we have historically managed our 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 our subsidiaries is operated under the same senior management of our Company, and we view the operations of our 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 our Company matures and we move toward full scale production with increased marketing efforts, we will continue to evaluate additional segment disclosure requirements.

 

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Significant Components of Our Results of Operations

 

Revenues

 

Our revenues are generated primarily from the sale of our products, which consist primarily of backhaul telecom radios and tethered aerostats and drones. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met.

 

We expect our revenues for the year ending December 31, 2021 (“fiscal 2021”) to materially exceed those of fiscal 2019 and 2020, primarily due to our availability of working capital, including from a portion of the net proceeds of the equity offerings we completed in 2021, for the purchase of parts and components and the manufacturing of products, primarily those of DragonWave, in quantities that greatly exceed the quantities that we were able to manufacture in 2019 and 2020. Additionally, we expect to commence commercial production of new products in 2021 that we have previously produced in only limited quantities or as prototypes, including, among others, intelligent battery back-up power solutions for the telecom, aerospace and transportation industries and airborne high-bandwidth, LTE-Advanced and 5G aerostats.

 

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. We expect that over the short term our percentage of sales outside the United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.S. government and its agencies, even if such systems are for integration into foreign locations.

 

Cost of Goods Sold and Gross Profit

 

Our cost of goods sold is comprised primarily of the costs of manufacturing products, procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, shipping and handling costs and warranty costs. We presently outsource the manufacturing of DragonWave’s microwave products to a single third-party manufacturer, Benchmark, which manufactures our products from its facilities. Cost of goods sold also includes costs associated with supply operations, including personnel-related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to the services we provide. Additionally, cost of goods sold does not include any depreciation and amortization expenses as we separate depreciation and amortization expense into its own category within operating expenses.

 

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

 

Operating Expenses

 

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

 

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Research and Development

 

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

 

Sales and Marketing

 

In addition to personnel costs for sales, marketing, service and product management personnel, sales and marketing expense consists of the expenses associated with our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approvals of our products, travel, entertainment and recruiting. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales, marketing, service and product management organization in support of our investment in our growth opportunities, whether through the development and rollout of new or modified products or through acquisitions. We expect our sales and marketing expense to increase materially in the year ending December 31, 2021 as we ramp up our sales and marketing efforts to correspond to our increased production efforts relating to certain of our telecom products.

 

General and Administrative

 

In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs. We expect general and administrative expense to increase in absolute dollars as we continue to expand our product offerings and expand into new markets. During fiscal 2020, we incurred, and during fiscal 2021 we expect to continue to incur, increases in supporting overhead costs, professional fees, transfer agent fees and expenses; development costs and other expenses related to operating as a public company.

 

Depreciation and Amortization

 

Depreciation and amortization expense consists of depreciation related to fixed assets such as test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, as well as amortization related to definite-lived intangibles.

 

Interest Expense

 

Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense. As many of our debt instruments, were past due at various times during fiscal 2020 and, as a result, were accruing interest at increased interest rates, and as we have been able to refinance our debt or issue equity to reduce our outstanding debt in the first quarter of fiscal 2021, our interest expense is expected to decrease in fiscal 2021 due to lower interest rates on our debt or lower debt balances.

 

Provision for Income Taxes

 

Current and deferred income tax expense or benefit in any given period will depend upon a number of events and circumstances, one of which is the income tax net income or loss from operations for the period which is usually different from the U.S. GAAP net income from operations for the period due to differences in tax laws and timing differences. See Note 16 — Income Taxes in the Notes to our financial statements included elsewhere in this report for a reconciliation on U.S. GAAP income or loss and tax income or loss. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period.

 

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Results of Operations

 

    Year
Ended
December 31,
    January 10,
2019
(Inception) to
December 31,
 
(Amounts in US$’s, except share data)   2020     2019  
Revenue   $ 9,426,836     $ 4,712,212  
Cost of Goods Sold     4,595,961       2,990,716  
Gross Profit     4,830,875       1,721,496  
                 
Operating Expenses                
Research and development (1)     2,012,689       174,257  
Sales and marketing (1)     24,049       6,222  
General and administrative (1)     17,484,764       14,325,078  
Depreciation and amortization     12,531,452       7,567,184  
Gain on the sale of assets     (663 )     (98,410 )
Total Operating Expenses     32,052,291       21,974,331  
Net Operating Loss     (27,221,416 )     (20,252,835 )
Other Income (Expense)                
Interest expense     (11,309,143 )     (8,399,663 )
Other income (expense)     (1,368,837 )     (147,430 )
Loss on extinguishment of debt     (15,818 )     (434,774 )
Loss on conversion of debt           (2,640,000 )
Foreign currency transaction gain (loss)     (74,764 )     191,547  
Interest income     2,114        
Total Other Expenses     (12,766,448 )     (11,430,320 )
Net Loss Before Income Taxes     (39,987,864 )     (31,683,155 )
Deferred Tax Benefit     2,906,400       4,137,900  
Net Loss   $ (37,81,464 )   $ (27,545,255 )
Loss per common share:                
Basic   $ (0.82 )   $ (1.70 )
Diluted   $ (0.82 )   $ (1.70 )
Weighted-average shares outstanding:                
Basic     45,293,697       16,238,036  
Diluted     45,293,697       16,238,036  

 

 
(1) These are exclusive of depreciation and amortization

 

Year Ended December 31, 2020 Compared to January 10, 2019 (inception) to December 31, 2019

 

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

 

Total Revenues

 

For the year ended December 31, 2020, total revenues increased $4,714,624, or 100%, which were derived primarily from a full year of revenue from mobile network backhaul products, the acquisition of Sovereign Plastics and VNC, the test-market sale of certain high-performance after-market models of our intelligent batteries, and to a lesser extent, from a full year of revenue of our Drone Aviation aerostat products and accessories, which were included in our operating results after November 27, 2019, the date of the COMSovereign Acquisition.

 

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Cost of Goods Sold and Gross Profit

 

For the year ended December 31, 2020, cost of goods sold increased $1,605,245, or 54%, which primarily consisted of the increases in payments to our contact manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with the manufacturing of our intelligent batteries and plastics, all due directly related to our increase in revenues.

 

Gross profit for the year ended December 31, 2020 increased $3,109,379 with a gross profit margin of 51% compared to 37% for the period January 10, 2019 (Inception) to December 31, 2019. These changes in gross profit margin resulted primarily from the increased gross profit margin of DragonWave during the year and the inclusion of a full year of operating results for Drone Aviation and most of the year for Sovereign Plastics, which were acquired on November 27, 2019 and March 6, 2020, respectively. As described above, for fiscal 2019, COMSovereign generated only nominal revenues. DragonWave’s sales and gross profit margin increased following the preparatory actions performed in 2019, including manufacturing line readiness and subsidiary integration actions.

 

Research and Development Expense

 

For the year ended December 31, 2020, research and development expenses increased $1,838,432, or 1,055%. This increase resulted from multiple new technology integration efforts across our subsidiaries, including expenses related to additional contracted engineering services teams and a large conversion of inventory into customer testing.

 

Sales and Marketing Expense

 

For the year ended December 31, 2020, sales and marketing expenses increased $17,827, or 287% which primarily consisted of increases in payroll and related costs.

 

General and Administrative Expense

 

For the year ended December 31, 2020, general and administrative expenses increased $3,159,686, or 22%. This increase primarily consisted of increases in payroll and related costs of $4,469,161, bad debt expense of $905,680, rent of $784,729, share-based compensation expense of $454,518 and insurance expense of $ $250,996, which were partially offset by decreases to overhead totaling $334,166 and miscellaneous and professional fees totaling $3,448,317. These increases were due primarily to higher head count, a one-time event bad debt expense, and changes to operations that included additional facilities. The decreases primarily consisted of decreases in administrative activities brought about by adjusting the operations of our subsidiaries, costs related to acquisitions, and legal, accounting and compliance expenses for first year public company costs.

 

Depreciation and Amortization

 

For the year ended December 31, 2020, depreciation and amortization increased $4,964,268, or 66%, due to the commencement of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements. This increase was driven primarily through the realization of full periods of depreciation and amortization for acquisitions that occurred during 2019 as well as additional acquisitions in the current year. 

 

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Other Expense

 

For the year ended December 31, 2020, total other expenses increased $1,336,128, or 12%. This increase primarily consisted of an increase of $2,909,480 in interest expense due primarily to the acceleration in the amortization of debt discounts on our outstanding debt, an increase in other expense of $1,221,407 due primarily to the occurrence of various default penalties on outstanding indebtedness, and an increase in foreign currency loss of $266,311 due to standard currency fluctuations, which were partially offset by a decrease of $418,956 in losses on extinguishment of debt and decrease of $2,640,000 in loss on conversion of debt, both due to the reduction of the quantitiy of extinguishments and conversions of debt instruments as compared to the prior year.

 

Provision for Income Taxes

 

For the year ended December 31, 2020, deferred tax benefit decreased $1,231,500, or 30%, primarily as a result of changes in the valuation allowance for deferred tax assets driven by the effect of deferred tax liabilities on acquisitions that occurred during 2020.

 

Net Loss

 

For the year ended December 31, 2020, we had net loss of $37,081,464 compared to a net loss of $27,545,255 for the period January 10, 2019 (Inception) to December 31, 2019, related to the items described above.

 

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Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of December 31, 2020, we had $730,502 in cash compared to $812,452 at December 31, 2019, a decrease of $81,950. As of December 31, 2020, we had $787,333 in accounts receivable compared to $2,168,659 at December 31, 2019, a decrease of $1,381,326 resulting from increased collections for 2020.

 

As of December 31, 2020, we had total current assets of $7,681,210 and total current liabilities of $34,262,263, or negative working capital of $26,581,053, compared to total current assets of $8,665,369 and total current liabilities of $15,142,599, or negative working capital of $6,477,230 at December 31, 2019. This is a decline of $20,103,823 over the working capital balance at the end of 2019.

 

Since December 31, 2020, we incurred an additional $18.0 million of indebtedness, repaid an aggregate of $7.6 million of indebtedness outstanding as of December 31, 2020, including accrued interest thereon, and converted $12.8 million aggregate principal amount of promissory notes outstanding as of December 31, 2020, including accrued interest thereon, to shares of our common stock at a weighted average conversion price of $4.10 per share.

 

After giving effect to such additional debt issuances, repayments and conversions, as of December 31, 2020, we had undiscounted obligations relating to the payment of indebtedness and past due payroll, accrued liabilities, and accounts payable, exclusive of interest, due and payable on or prior to December 31, 2021 as follows:

 

$10,144,622 related to payroll, accrued liabilities and accounts payable that were past due;

 

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$5,904,158 related to secured notes payable that were past due;

 

$7,766,037 related to notes payable that were past due;

 

$84,000 related to senior debentures that were past due;

 

$2,612,376 related to convertible notes that were past due;

 

$1,250,000 related to senior convertible debentures that were past due;

 

$1,723,341 related to indebtedness that is due in the first quarter of 2021;

 

$23,641 related to indebtedness that is due in the second quarter of 2021;

 

$23,956 related to indebtedness that is due in the third quarter of 2021; and

 

$24,276 related to indebtedness that is due in the fourth quarter of 2021.

 

In January and February 2021, we completed two public offerings of our equity securities in which we received aggregate net proceeds of $39.7 million, after payment of all offering expenses. We applied approximately $7.6 million of such net proceeds to repay debt and interest and approximately $9.4 million to pay accounts payable and accrued liabilities and payroll costs outstanding at December 31, 2020. In addition, we converted or exchanged debt and interest for equity totaling approximately $12.8 million. As a result, our remaining indebtedness that is payable on or prior to December 31, 2021 that was outstanding at December 31, 2020 is approximately $4.5 million and is made up primarily of accounts payable, accrued liabilities, and debt that is not past due.

 

We anticipate meeting our cash obligations on our remaining indebtedness that is payable on or prior to December 31, 2021 from the net proceeds of our public offerings in January and February of 2021, earnings from operations, including, in particular, the operations of DragonWave, VNC and Drone Aviation, and possibly from the proceeds of additional indebtedness or equity raises.

 

Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of our operations. We have been investing in research and development in anticipation of increasing revenue opportunities in our cellular network solutions business, which has contributed to our losses from operations.

 

We plan to generate positive cash flow from our recently-completed acquisitions to address some of our liquidity needs. However, to execute our business plan, service our existing indebtedness, finance our proposed acquisitions and implement our business strategy, we anticipate that we may need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership in us and could also result in a decrease in the market price of our common stock. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in their current form. The report of our independent registered public accountants on our financial statements for the year ended December 31, 2020, stated that our losses, negative cash flows from operations, limited capital resources and accumulated deficit raise substantial doubt about our ability to continue as a going concern.

 

We had capital expenditures of $176,697 for the year ended December 31, 2020 and of $87,038 in fiscal 2019. We expect our capital expenditures for next 12 months will be consistent with our prior spending. These capital expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment. We expect to fund such capital expenditures out of our working capital.

 

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Line of Credit and Debt Agreements

 

Line of Credit

 

In 2017, we issued a promissory note (the “CNB Note”) to City National Bank of Florida (“CNB”) in the principal amount of $2,000,000. Through various amendments, the CNB Note had a maturity date of August 2, 2020 and allowed for a CNB line of credit with advances that could have been requested until the maturity date of August 2, 2020 so long as no event of default existed under the CNB Note or certain other events.

 

The CNB Note bore an interest rate equal to the average of the interest rates per annum at which U.S. dollars were offered in the London Interbank Borrowing Market (“LIBOR”) for a 30-day period (the “Index”) plus 2.9 percentage points over the Index. A late charge of 5.0% of any monthly payment not received by CNB within 10 calendar days after its due date would have been charged. Prepayment of the CNB Note was allowed at any time without penalty. In the event of a default, the interest rate would increase to the highest lawful rate. As of December 31, 2019, the interest rate on the CNB Note is 4.6% per annum.

 

We and our former Chairman and Chief Executive Officer, Jay Nussbaum, were obligated to maintain a minimum average annual balance of $1,600,000 in the aggregate with CNB. In the event we did not maintain this account balance, CNB could charge us a fee equal to 2% of the deficiency as additional interest under the CNB Note. The CNB Note was personally guaranteed by Mr. Nussbaum and his estate, who along with us were obligated to maintain an aggregate unencumbered liquidity of no less than $6,000,000. In addition, the CNB Note was secured by all of Drone Aviation’s accounts, inventory and equipment along with an assignment of a $120,000 bank account that we maintained at CNB. As of December 31, 2019, $2,000,000 was drawn against the CNB line of credit.

 

As discussed below, on March 19, 2020, we issued a promissory note to the estate of Mr. Nussbaum in the principal amount of $2,007,971, the proceeds of which, were used to repay the balance of the CNB Note.

 

Secured Notes Payable

 

In August 2016, InduraPower issued 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 and both parties agreed that the outstanding balance of $813,709 would be due on February 28, 2020. This promissory note was secured by substantially all of the assets of InduraPower. As of December 31, 2020, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note was past due and accrued interest at an increased default rate of 12.5% per annum. This note, and all related accrued interest, was repaid in January 2021.

 

In August 2016, InduraPower issued a promissory note in the principal amount of $450,000 that bears interest at 9.0% per annum and matures on March 1, 2022. Accrued interest only payments were due monthly beginning October 1, 2016 through March 1, 2017. Monthly payments of $9,341 for interest and principal are due on this note for the following 60 consecutive months. This promissory note is secured by all assets, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. As of December 31, 2020, an aggregate principal amount of $150,710 was outstanding under this note. This promissory note was past due and accrued interest at an increased default rate of 18.0% per annum. See Note 10 — Debt Agreements in the Notes to our consolidated financial statements for December 31, 2020 included elsewhere in this report.

 

In August 2016, InduraPower issued 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 secured by business equipment, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. As of December 31, 2020, an aggregate principal amount of $10,790 was outstanding under this note. This promissory note was past due and accrued interest at an increased default rate of 18.0% per annum. See Note 10 — Debt Agreements in the Notes to our consolidated financial statements for December 31, 2020 included elsewhere in this report.

 

In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2,000,000 loan that bears interest at the rate of 9% per annum and matures on November 26, 2021. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal is due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of DragonWave and is guaranteed by COMSovereign. As of December 31, 2020, an aggregate principal amount of $2,000,000 was outstanding under this note. In January 2021, a total of $1,000,000 of principal of this note, plus all related accrued interest and charges, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

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On February 26, 2020, we entered into a $600,000 secured business loan from TVT Capital, LLC bearing interest at 78.99% per annum which matured on December 26, 2020. The proceeds of such loan were used to pay past due payroll, accounts payable and notes payable. Principal and interest payments of $19,429 were due weekly. The loan was secured by our assets. As of December 31, 2020, an aggregate principal amount of $75,219 was outstanding under this note. This note was paid off subsequent to December 31, 2020 in accordance with our normal operating procedures.

 

In connection with the acquisition of the business by Sovereign Plastics on March 6, 2020, we 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 subject 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 past due under this loan. This loan, plus all related accrued interest, was repaid in January 2021.

 

On March 19, 2020, we entered into a secured loan agreement in the amount of $2,007,971 bearing interest at 5% per annum with a maturity date of August 31, 2020. Interest payments of $8,428 were due monthly, with the full principal amount due at maturity. On August 5, 2020, the maturity date of this loan was extended to October 15, 2020. The loan was secured by certain intellectual property assets of our 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 under this loan. In January 2021, this loan, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

In connection with the acquisition of the business by Sovereign Plastics on March 6, 2020:

 

 

we 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 were 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. This loan, plus all related accrued interest, was repaid in January 2021.

 

 

We 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 were 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. This loan, plus all related accrued interest, was repaid in January 2021.

 

 

we 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 were 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. This loan, plus all related accrued interest, was repaid in January 2021.

 

On December 8, 2020, we entered into a secured loan agreement pursuant to which we received a loan in the amount of $1,000,000 that was evidenced by a promissory note in the principal amount of $1,100,000, including $100,000 of original issue discount, that bore interest at the rate of 10% per annum and matured on January 6, 2021. Interest and principal were payable in full at maturity. The loan was guaranteed by VNC and was secured by our equity in VNC, substantially all of the assets of VNC and certain intellectual property assets of our Company. As additional consideration for such loan, Daniel L. Hodges, our Chairman and Chief Executive Officer, transferred to the lender 16,667 shares of common stock. The proceeds of the loan were used for working capital purposes, including the acquisition of certain inventory As of December 31, 2020, an aggregate principal amount of $1,100,000 was outstanding under this loan.  In January 2021, $350,000 of this loan, plus all accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. The remaining $750,000 principal amount of this loan was fully repaid during January 2021.

 

On January 15, 2021, in connection with the acquisition of our new manufacturing facility in Tucson, Arizona, our wholly-owned subsidiary, AZCOMS LLC (“AZCOMS”), the purchaser of such facility, 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 our Company and by our Chief Executive Officer, Daniel L. Hodges. 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.

  

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Notes Payable

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, COMSovereign assumed the obligations of the seller of a promissory note in the principal amount of $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 December 31, 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. Accrued interest and the full principal balance were due at maturity. On April 30, 2020, we also issued 4,832 shares of common stock in lieu of an aggregate cash interest payment payable by COMSovereign through December 31, 2019 on this outstanding note payable. As of December 31, 2020, an aggregate principal amount of $500,000 was outstanding and past due under this note. In January 2021, this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, COMSovereign assumed the obligations of the seller of a promissory note in the principal amount of $175,000 that bore interest at the rate of 15% per annum and was due on November 30, 2017. The interest rate increased to 18% per annum when the note became past due. On October 1, 2019, COMSovereign amended the promissory note to extend the maturity date to September 30, 2020 and to change the interest rate to 10% per annum. Both parties to the note also agreed to convert all unpaid accrued interest into 3,334 shares of common stock of COMSovereign. Accrued interest and principal were due and payable at maturity. As of December 31, 2020, an aggregate principal amount of $175,000 was outstanding and past due under this note. This note, plus all related accrued interest, was repaid in January 2021.

 

In October 2017, DragonWave issued a 90-day promissory note in the principal amount of $4,400,000 and received proceeds of $4,000,000. Through several amendments, accrued interest was charged at the rate of 8% per annum, payment terms were amended and the maturity date was extended to February 28, 2019. On September 3, 2019, the promissory note was increased to $5,000,000 as all unpaid accrued interest was added to the principal balance. Additionally, the maturity date was extended to March 30, 2020 and the interest rate was changed to 10% per annum. Under this new amendment, principal and interest payments 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 we issued to the lender 33,334 shares of our 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 with a fair value of $4.53 per share. As of December 31, 2020, an aggregate principal amount of $3,500,000 was outstanding and past due under this note. In January 2021, this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

On November 7, 2019, COMSovereign issued several promissory notes in the aggregate principal amount of $450,100 that bore interest at 133% per annum 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. We repaid $250,000 of the aggregate principal amount of these promissory notes during the first quarter of 2020. An additional $133,400 of the aggregate principal amount of these promissory notes, 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 common stock with a fair value of $4.53 per share. As of December 31, 2020, the remaining aggregate principal amount of $66,700 was outstanding and past due under these notes. This note, plus all related accrued interest, was repaid in January 2021.

 

On March 5, 2020, we issued a promissory note for consideration totaling $446,000 in the principal amount of $500,000 that matured on November 30, 2020. Additionally, in lieu of interest, we issued to the lender 16,667 shares of our common stock. As of December 31, 2020, an aggregate principal amount of $500,000 was outstanding and past due under this note. In January 2021, this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

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In connection with the acquisition of the business by Sovereign Plastics on March 6, 2020:

 

  we entered into several promissory notes with the sellers in the aggregate principal amount of $409,586 that did not bear interest and had 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. These notes, plus all related accrued interest, was repaid in January 2021.

 

  we agreed to pay an aggregate of $165,986 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 this note. This loan, plus all related accrued interest, was repaid in January 2021.

 

  we 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. This note was brought current in January 2021.

 

On May 29, 2020, we issued a promissory note in the principal amount of $290,000 with an original issue discount of $40,000 and a maturity date of December 31, 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, the aggregate principal amount of $290,000 was outstanding and past due under this note. In January 2021, this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.

 

Between July 2, 2020 and August 21, 2020, we 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 are between $50,000 and $200,000. The notes bear interest at a rate of 15% to 18% and have maturity dates between October 13, 2020 and November 30, 2020. As additional consideration for such loans, Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, transferred to such investors an aggregate of 96,634 shares of common stock. As of December 31, 2020, the aggregate principal amount of $1,200,000 was outstanding and past due under these notes. On July 29, 2020, we sold 30,614 shares of common stock at a price of $3.00 per share to one of the accredited investors. In January 2021, $750,000 of these notes, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. Also in January 2021, the remaining aggregate principal balance of $350,000, plus all related accrued interest, was paid.

 

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Between November 4, 2020 and November 24, 2020, we 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 loans bore interest at a rate of 15% and had maturity dates between January 31, 2021 and February 23, 2021. As additional consideration for such loans, Daniel L. Hodges, our Chairman and Chief Executive Officer, guaranteed the notes and transferred to such investors an aggregate of 38,334 shares of common stock. $500,000 principal amount of these notes and accrued interest thereon was converted to shares of common stock in January 2021.The remaining note in the principal amount of $50,000 was repaid in February 2021.

 

On July 1, 2020, we borrowed $50,000 from Mr. Brent Davies, a director of our Company, and issued to Mr. Davies a promissory note evidencing such loan that bore interest at 4.8% and matured on November 30, 2020. As of December 31, 2020, $50,000 plus accrued interest was outstanding under the loan. This loan, plus all related accrued interest, was repaid in January 2021.

 

During 2019, TM made loans to DragonWave in the aggregate principal amount of $1,292,953 to embed TM’s modulation technology within DragonWave’s Harmony line of radios. These loans bore interest at 5% per annum and matured on December 31, 2020. Interest and principal was due at maturity. These loans were converted to shares of common stock on October 1, 2020.

 

On August 5, 2019, Mr. Hodges and his wife loaned DragonWave $200,000 at an interest rate of 5.0% per annum with a maturity date of December 31, 2020. Interest was payable monthly while the full principal balance was due at maturity. As of December 31, 2020, $200,000 plus accrued interest was outstanding under the loan. This loan, plus all related accrued interest, was repaid in January 2021.

 

Between October 15, 2020 and December 28, 2020, we borrowed an aggregate of $600,000 from a related party and issued promissory notes evidencing such loans. The principal amounts of the notes were between $100,000 and $350,000, and such notes bore interest at 10% per annum and were due between January 14, 2021 and March 28, 2021. These notes, plus all related accrued interest, were repaid in January 2021. 

 

Between November 13, 2020 and December 24, 2020, we borrowed an aggregate of $160,000 from a member of our 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. In January 2021, this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. 

 

In connection with our acquisition of Fastback on January 29, 2021, we 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 bore interest at the rate of 10% per annum and matured on the earlier of (i) January 1, 2022, (ii) the date on which an aggregate of $6,000,000 worth of products and services were sold following the acquisition date by (A) Fastback or (B) our Company and our subsidiaries (other than Fastback) to certain specified Fastback customers, or (iii) the date on which we issued and sold shares of our 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 was payable in cash semiannually 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 would have automatically increased to 15% per annum compounded semiannually. These notes matured on February 10, 2021 upon our closing of a public offering of our common stock in which we received gross proceeds of $27.6 million. However, the representative of the Fastback sellers has requested that we 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.

 

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. As of December 31, 2019, an aggregate principal amount of $100,000 was outstanding under these debentures. On April 30, 2020, these debentures were modified to remove the conversion feature and provide for the settlement of these debentures only in cash. As of December 31, 2020, an aggregate principal amount of $84,000 was outstanding under these debentures. This debenture, plus all related accrued interest, was repaid in January 2021.

 

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Convertible Notes Payable

 

On July 7, 2020, we sold a convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 that bore interest at the 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. In connection with this note, we recognized a Beneficial Conversion Feature (“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, we 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 was due on-demand. During the three and year ended September 30, 2020, $261,191 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Consolidated Statement of Operations. As of December 31, 2020, the note was in default and due on demand and an aggregate principal amount of $374,137 was outstanding under this note. In January 2021, this note, plus all accrued interest, was converted into shares of common stock.

 

On August 21, 2020, we sold a $1,700,000 aggregate principal amount convertible promissory note with an original issue discount of $200,000 that bore interest at the rate of 5.0% per annum and matured on November 20, 2020. Accrued interest and principal were due on the maturity date. Additionally, as additional consideration for the loan, we issued to the lender 133,334 shares of our common stock. We also issued to an unrelated third-party as a placement fee for the transaction warrants to purchase up to 17,857 shares of our common stock at an exercise price of $8.40 per share at any time on or prior to August 21, 2025. As of December 31, 2020, the aggregate principal amount of $1,700,000 was outstanding under the loan. This note, plus all related accrued interest, was repaid in January 2021.

 

In connection with our acquisition of Fastback on January 29, 2021, we 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 principal and accrued interest on these notes may be converted in full to shares of our 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. Upon maturity, the interest rate will automatically increase to 15% per annum compounded annually on any unpaid principal.

 

Senior Convertible Debentures

 

On September 24, 2019, COMSovereign sold $250,000 aggregate principal amount of 10% Senior Convertible Debentures that bore interest at the rate of 10% per annum and was scheduled to mature on December 31, 2021. Interest was paid semi-annually in arrears in June and December of each year in cash or, at COMSovereign’s option, in shares of common stock at the conversion price that was equal to the lesser of (1) $7.50 or (2) a future effective price per share of any common stock sold. Upon an event of default, the interest rate would have automatically increased to 15% per annum. As of December 31, 2019, an aggregate principal amount of $250,000 was outstanding under these debentures. On April 30, 2020, these debentures were amended to provide for the conversion of the debentures into shares of our common stock instead of COMSovereign’s common stock. Additionally, the conversion price was changed from $7.50 per share to $2.27 per share. As of December 31, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures. In January 2021, this debenture, plus all related interest, was converted into shares of common stock.

 

On July 2, 2020, we sold $1,000,000 aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor that bore interest at the rate of 9% per annum and had a maturity date of September 30, 2020. On September 30, 2020, 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 our option, in shares of common stock at the conversion price of $3.00 per share. Upon an event of default, the interest rate would have automatically increased to 15% per annum. The debentures were convertible into shares of common stock at a conversion price of $3.00 per share. We 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 our consummation of a public offering of our common stock in connection with an up-listing of the common stock to a national securities exchange, which occurred on January 26, 2021. As of December 31, 2020, an aggregate principal amount of $1,000,000 was outstanding under these debentures. In January 2021, principal of $900,000 related to this debenture was converted into shares of common stock. Also in January 2021, the remaining principal amount of $100,000, plus all accrued interest, was extinguished in exchange for common stock and warrants to purchase common stock.

 

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Paycheck Protection Program of the CARES Act

 

Between April 30 and May 26, 2020, six of our subsidiaries received loan proceeds in the aggregate amount of $455,184 under the Paycheck Protection Program (“PPP”). The PPP loan has a maturity of two 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 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, we 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 our other PPP loans. As of December, 2020, an aggregate amount of principal of $24,028 was outstanding under this loan.

 

On August 11, 2020, one of our subsidiaries received loan proceeds in the aggregate amount of $103,659 under the PPP. The PPP loan has a maturity of five years and an interest rate of 1% per annum. Terms are consistent with our other PPP loans. As of December 31, 2020, an aggregate amount of principal of $103,659 was outstanding under this loan.

 

Sources and Uses of Cash

 

(Amounts in US$’s)   For the
Year
Ended
December 31,
2020
    January 10,
2019
(Inception)
to
December 31,
2019
 
             
Cash flows used in operating activities   $ (6,020,305 )   $ (6,853,247 )
Cash flows (used in) provided by investing activities     (3,322,534 )     2,838,235  
Cash flows provided by financing activities     9,237,506       4,850,847  
Effect of exchange rates on cash     23,383       (23,383 )
Net (decrease)/increase in cash and cash equivalents   $ (81,950 )   $ 812,452  

  

Operating Activities

 

For the year ended December 31, 2020, net cash used in operating activities was $6,020,305. Net cash used in operating activities primarily consisted of the net operating loss of $37,081,464 and the effect of deferred income taxes of $2,906,400, which was offset by depreciation and amortization of $12,531,452, amortized discounts and debt issuance costs on our outstanding debt of $8,936,632, other noncash charges of $3,110,031 and bad debt expense of $1,007,715. Additionally, working capital changes provided $8,366,574 in cash during the period.

 

For fiscal 2019, cash used in operating activities was $6,853,247. Net cash used in operating activities primarily consisted of the net operating loss of $27,545,255 and the effect of deferred income taxes of $4,137,900, which were offset by depreciation and amortization of $7,567,184, amortized discounts and debt issuance costs on our outstanding debt of $8,458,341, loss on conversion of debt of $2,640,000, and other noncash charges of $919,105. Additionally, working capital changes provided $4,908,914 in cash during the period.

 

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Investing Activities

 

For the year ended December 31, 2020, net cash used in investing activities was $3,322,534. Investing activities primarily consisted of the acquisition of the net assets of Sovereign Plastics and VNC for a purchase prices of $829,347 and $18,832,383, respectively. The purchase price of the assets of Sovereign Plastics included cash paid on the closing date of $253,773 and short-term debt incurred to the sellers of $575,574. The purchase price of VNC included cash paid on the settlement date of $2,892,727, shares with values at the acquisition date of $11,855,592, warrants and options with values at the acquisition date of $3,832,817 and a note receivable of $251,247.

 

For fiscal 2019, net cash provided by investing activities was $2,838,235. Investing activities primarily consisted of cash from the acquisitions of VEO, InduraPower, Silver Bullet, DragonWave and Lextrum.

 

Financing Activities

 

For the year ended December 31, 2020, financing activities provided cash of $9,237,506. Financing activities primarily consisted of $12,337,781 of proceeds from the issuance of debt, which was offset by the repayment of $2,000,000 on the line of credit and the repayment of $1,090,862 of debt.

 

For fiscal 2019, cash provided by financing activities was $4,850,847. Financing activities primarily consisted of proceeds of debt of $6,734,170, which was offset by the repayment of $1,808,323 of debt.

 

Off-Balance Sheet Arrangements

 

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

 

Recently Issued Accounting Pronouncements

 

See Note 2 — Summary of Significant Accounting Policies in the Notes to our financial statements included elsewhere in this report for our evaluation of accounting standards not yet adopted.

 

Critical Accounting Policies and Estimates

 

The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 2 — Summary of Significant Accounting Policies in the Notes. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

 

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Besides estimates that meet the “critical” accounting estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”

 

Accounts Receivable and Credit Policies

 

Trade accounts receivable consist of amounts due from the sale of our 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. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. As of December 31, 2020, we characterized $1,686,731 as uncollectible.

 

Beneficial Conversion Features and Warrants

 

We evaluate the conversion feature of convertible debt instruments to determine whether the conversion feature is beneficial as described in ASC 470-30, Debt with Conversion and Other Options. We record 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 record 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. We calculate the fair value of warrants with the convertible instruments using the Black-Scholes valuation model. The Black-Scholes valuation model requires various inputs such as the annualized volatility of our stock, stock price and annual risk-free rate of return. As COMSovereign was a private company for most of 2019, in determining the BCF related to the convertible debt of COMSovereign and its subsidiaries in fiscal 2019, we had to rely on factors outside the public markets for the inputs. If different inputs were used or different judgments were made, the results could have a material adverse effect on our financial statements.

 

Under these guidelines, we first allocate 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 our 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.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606), Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The principles in the standard are applied in five steps: 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. We adopted Topic 606 as of January 10, 2019 (date of inception).

 

Our revenue recognition policies are consistent with this five-step framework. Understanding the complex terms of agreements and determining the appropriate time, amount and method to recognize revenue for each transaction requires judgment. These significant judgments include: (1) determining what point in time or what measure of progress depicts the transfer of control to the customer; (2) applying the series guidance to certain performance obligations satisfied over time; and (3) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue. The timing and revenue recognition in a period could vary if different judgments were made.

 

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Long-Lived Assets and Goodwill

 

We account 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.

 

We account for goodwill and intangible assets in accordance with ASC 350, Intangibles Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or 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.

  

Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed.

 

Assumptions must be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future asset impairment reviews. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.

 

Share-Based Compensation

 

We account 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.

 

In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures and performance attributes. Since share-based compensation expense can be material to our financial condition, different assumptions and estimates could have a material adverse effect on our financial statements.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 7A.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Our Consolidated Financial Statements and supplementary data are on pages F-1 through F-61.

  

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

(a) Evaluation of disclosure controls and procedures.

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the reports that we file with SEC under the Exchange Act is recorded, processes, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures.

 

We are continuing to grow and evolve. During 2020, we acquired two different companies and continue to acquire companies. Our growth and the absorption of acquired companies increases the strain on our limited staff and our accounting systems. Additionally, operations do not yet generate enough cash to fund operations causing management to rely on financing activities to maintain the level of operations and funding needed for anticipated growth. In combination, these activities put stress on our overall controls and procedures.

 

We carried out an evaluation, under the supervision and with the participation of our management, consisting of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, consisting of our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. As such, material weaknesses identified below were discovered:

 

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;

 

a lack of timely reconciliations of the account balances affected by the improperly recorded or omitted transactions; and

 

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

 

Our management, consisting of our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. In addition, as conditions change over time, so too may the effectiveness of internal controls. However, management believes that the financial statements included in this Annual Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the period presented.

 

55

 

 

(b) Management’s Annual Report on Internal Control Over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to ensure that material information regarding our operations is made available to management and the Board of Directors to provide them reasonable assurance that the published financial statements are fairly presented. There are limitations inherent in any internal control, such as the possibility of human error and the circumvention or overriding of controls. As a result, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. As conditions change over time so too may the effectiveness of internal controls.

 

Our management, consisting of our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting as of December 31, 2020 based on the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this assessment, and taking into account the operating structure of our Company, as well as the two acquisitions by our Company and the five acquisitions completed by our subsidiary, COMSovereign Corp., as a privately-held company in fiscal 2019, management identified the material weaknesses with respect to deficiencies in our financial closing and reporting procedures identified above. Management believes this is due to a lack of resources. Management intends to add accounting personnel, operating staff, and utilize consultants, where appropriate. In addition, Management intends to invest in more sophisticated accounting and finance systems in order to improve our internal and external reporting procedures and internal controls, subject to available capital. Until we have adequate resources to address these issues, any material weaknesses may materially adversely affect our ability to accurately report our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of our various financing agreements.

 

As a result of the current business acquisitions and continued efforts to integrate prior acquisitions and our reverse merger completed during 2019, there were significant changes to our internal control over financial reporting during our fiscal year ended December 31, 2020 that materially affected our internal control over financial reporting that resulted in the material weaknesses identified above. Also described above are management’s plans to address those material weaknesses.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information required by Item 10 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. The information under the heading “Executive Officers” in Part I of this Form 10-K is also incorporated herein by reference.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The information required by Item 11 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information required by Item 12 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

 

The information required by Item 13 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information required by Item 14 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

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

 

(1) Our Consolidated Financial Statements and Notes thereto begin on page F-1 of this report immediately after the signature page.

 

Index to Financial Statements:    
Report of Independent Registered Public Accounting Firm   F-2
Consolidated Balance Sheets   F-6
Consolidated Statements of Operations   F-7
Consolidated Statements of Comprehensive Loss   F-8
Consolidated Statements of Stockholders’ Equity   F-9
Consolidated Statements of Cash Flows   F-11
Notes to Consolidated Financial Statements   F-12 – F-61

 

(2) Financial Statement Schedules: All schedules have been omitted because the required information is included in the Consolidated Financial Statements or the Notes thereto, or because it is not required.

 

(3) Exhibits:

 

Exhibit Number   Exhibit Description   Incorporation by Reference
  Form   Filing Date   Exhibit Number
2.1   Agreement and Plan of Merger, dated as of November 27, 2019 by and among the Company, COMSovereign Corp. and DACS Merger Sub., Inc.   8-K   12/4/2019   2.1
3.1   Restated Articles of Incorporation   --   *   --
3.2   Amended and Restated By-Laws   10-K   7/6/2020   3.2
4.1   Form of Convertible Promissory Note Series 2016 due October 1, 2017   8-K   9/30/2016   4.1
4.2   Form of August 2017 Amendment to Convertible Promissory Note Series 2016   10-Q   8/4/2017   4.1(a)
4.3   Form of November 2017 Amendment to Convertible Promissory Note Series 2016   10-Q   11/13/2017   4.1(b)
4.4   Form of March 2018 Amendment to Convertible Promissory Note Series 2016   10-K   3/23/2018   4.1(c)
4.5   Form of December 2018 Amendment to Secured Convertible Promissory Note Series 2016   8-K   12/27/2018   10.3a
4.6   Form of Secured Convertible Promissory Note Series 2017-08 due August 2, 2018   10-Q   8/4/2017   4.2
4.7   Form of December 2018 Amendment to Secured Convertible Promissory Note Series 2017-18   8-K   12/27/2018   10.3b
4.8   Amendment dated September 26, 2018 to Secured Convertible Promissory Note issued by the Company to Frost Nevada Investment Trust   8-K   9/28/2018   10.2
4.9   Form of Promissory Note dated October 25, 2018 issued by the Company to Jay Nussbaum   10-Q   10/26/2018   10.26
4.10   OID Promissory Note dated March 5, 2020 of Sovereign Plastics LLC in favor of Mark Vanderbeek   10-K   7/6/2020   4.10

 

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4.11   12.5% OID Convertible Note dated April 29, 2020 of the Registrant in favor of Red Diamond Partners LLC   8-K   5/5/2020   4.1
4.12   Form of 9% Senior Convertible Debentures   8-K   7/7/2020   4.1
4.13   Form of July Warrants to purchase common stock   8-K   7/7/2020   4.2
4.14   Form of Warrant Agency Agreement dated January 26, 2021 between the Company and ClearTrust, LLC, including form of Warrant Certificate   8-K   1/27/2021   10.1
4.15   12.5% OID Convertible Note dated August 24, 2020 of the Registrant in favor of Red Diamond Partners LLC   8-K   8/26/2020   4.1
4.16   Form of Term Note of COMSovereign Holding Corp. dated January 29, 2021   8-K   2/4/2021   4.1
4.17   Form of Convertible Note of COMSovereign Holding Corp. dated January 29, 2021   8-K   2/4/2021   4.2
10.1   Form of Indemnification Agreement for Directors and Officers#   8-K   6/5/2014   10.4
10.2   Independent Contractor Agreement dated July 29, 2013 by and among US Technik, Inc., Lighter Than Air Systems Corp., and World Surveillance Group, Inc.   8-K   6/5/2014   10.9
10.3   2015 Equity Incentive Plan#   8-K   9/11/2015   99.1
10.4   Form of Nonqualified Stock Option Agreement under 2015 Equity Incentive Plan#   8-K   1/12/2017   10.3
10.5   Form of Amendment No. 1 dated December 2017 to the Form of Nonqualified Stock Option Agreement   8-K   12/27/2018   10.5
10.6   Form of Amendment No. 2 dated November 2019 to the Form of Nonqualified Stock Option Agreement   10-Q   11/14/2019   10.1
10.7   Form of Subscription Agreement for Convertible Promissory Notes Series 2016 due October 1, 2017   8-K   9/30/2016   10.1
10.8   Director Agreement dated January 9, 2017 by and among the Company, Global Security Innovative Strategies, LLC and David Aguilar#   8-K   1/12/2017   10.2
10.9   Amendment No. 1 dated September 4, 2019 to Director Agreement by and among the Company, Global Security Innovative Strategies, LLC and David Aguilar#   8-K   9/5/2019   10.2
10.10   Warrant dated August 3, 2017 issued by the Company to Dr. Phillip Frost   10-Q   8/4/2017   10.34
10.11   Amendment dated August 3, 2018 to Warrant issued by the Company to Dr. Phillip Frost   8-K   12/27/2018   10.4
10.12   Promissory Note and Security Agreement dated August 2, 2017 issued by the Company to City National Bank of Florida   10-Q   8/4/2017   10.29
10.13   Form of Guarantee dated August 2, 2017 issued by Jay Nussbaum to City National Bank of Florida   10-Q   8/4/2017   10.30
10.14   Promissory and Guaranty dated September 26, 2018 among the Company, City National Bank of Florida and Jay Nussbaum   8-K   9/28/2018   10.1
10.15   Consulting Agreement dated November 10, 2017 between the Company and Global Security Innovative Strategies, LLC   10-Q   11/13/2017   10.35
10.16   Amendment No. 1 dated September 26, 2018 to the Consulting Agreement between the Company and Global Security & Innovative Strategies, LLC   8-K   9/28/2018   10.4

  

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10.17   Form of Amendment No. 3 dated August 3, 2017 to Independent Contractor Agreement   10-Q   10/26/2018   10.2
10.18   Form of Common Stock Purchase Agreement dated October 24, 2018 between the Purchasers thereto and the Company   10-Q   10/26/2018   10.1
10.19   Form of Amended and Restated Stock Purchase Agreement dated December 12, 2018 between the Purchasers thereto and the Company   8-K   12/27/2018   10.1
10.20   Stock Redemption and Note Cancellation Agreement dated as of April 30, 2019 between the Company and Daniyel Erdberg   10-Q   5/3/2019   10.5
10.21   Form of Promissory Note dated January 28, 2019 in favor of the Company (the Non-Affiliate Note)   8-K   1/31/2019   10.2
10.22   Form of Promissory Note in favor of the Company (the Erdberg and Carpenter Trust Note)   8-K   1/31/2019   10.3
10.23   Independent Contractor Agreement dated March 21, 2019 between the Company and Cognitive Carbon Corporation   10-K   3/22/2019   10.55
10.24   Stock Redemption Agreement dated September 4, 2019 between the Company and Robert Guerra   8-K   9/5/2019   10.1
10.25   Form of the Company Restricted Stock Agreement   10-Q   11/14/2019   10.2
10.26   Employment Agreement dated December 2, 2019 between the Company and Daniel L. Hodges#   8-K   12/12/2019   10.1
10.27   Employment Agreement dated December 2, 2019 between the Company and John E. Howell#   8-K   12/12/2019   10.2
10.28   Employment Agreement dated December 2, 2019 between the Company and Dr. Dustin McIntire, Ph.D. 9#   8-K   12/12/2019   10.3
10.29   Employment Agreement dated December 2, 2019 between the Company and Brian T. Mihelich#   8-K   12/12/2019   10.3
10.30   Employment Agreement dated January 2, 2020 between the Company and Kevin M. Sherlock#   8-K   1/8/2020   10.2
10.31   COMSovereign Holding Corp. 2020 Long-Term Incentive Plan   8-K   5/12/2020   10.1
10.32   Stock Agreement dated as of March 5, 2020 between the Company and Mark Vanderbeek   10-K   7/6/2020   10.32
10.33   Warrant dated April 29, 2020 issued to Red Diamond Partners LLC   8-K   5/5/2020   4.2
10.34   Securities Purchase Agreement dated as of April 29, 2020 between the Company and Red Diamond Partners LLC   8-K   5/5/2020   10.1
10.35   Registration Rights Agreement dated as of April 29, 2020 between the Company and Red Diamond Partners LLC   8-K   5/5/2020   10.2
10.36   Agreement and Plan of Merger and Reorganization dated as of May 21, 2020 among the Company, CHC Merger Sub 7, Inc., VNC Acquisition LLC, Virtual Network Communications Inc. and the Stockholders’ Representative Named Therein   8-K   5/22/2020   10.1

   

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10.37   Manufacturing Services Agreement dated as of April 4, 2018 between DragonWave-X and Benchmark Electronics, Inc.   10-K   7/6/2020   10.37
10.38   Employment Agreement dated as of July 6, 2020 between Mohan Tammisetti and COMSovereign Holding Corp.#   8-K   7/7/2020   10.2
10.39   Employment Agreement dated as of July 6, 2020 between Keith Kaczmarek and COMSovereign Holding Corp.#   8-K   7/7/2020   10.3
10.40   Agreement and Plan of Merger, dated as of August 24, 2020, by and among the Company, CHC Merger Sub 8, LLC, and Skyline Technology Partners d/b/a Fastback Networks and the Stockholders’ Representative named therein.   S-1/A   12/10/2020   10.40
10.41   Securities Purchase Agreement, dated as of August 24, 2020 between COMSovereign Holding Corp. and RedDiamond Partners LLC   8-K   8/26/2020   10.2
10.42†   Transpositional Modulation Technology Licensing Agreement dated as of August 3, 2020 among TM Technologies, Inc., TM IP Holdings, LLC and COMSovereign Holding Corp.   S-1/A   8/28/2020   10.42
10.43   Secured Loan Agreement dated as of December 8, 2020 among COMSovereign Holding Corp, as Borrower, Virtual Netcom, LLC, as Guarantor, and DWX Servicing Agent, LLC.   S-1/A   12/17/2020   10.43
10.44   Pledge and Security Agreement dated as of December 8, 2020 among COMSovereign Holding Corp, as Borrower, Virtual Netcom, LLC, as Guarantor, and DWX Servicing Agent, LLC.   S-1/A   12/17/2020   10.44
10.45   Secured Promissory Note dated December 8, 2020 of COMSovereign Holding Corp. in favor of DWX Servicing Agent, including the Guarantee of Virtual Netcom, LLC.   S-1/A   12/17/2020   10.45
10.46   Business Loan Agreement dated January 15, 2021 between AZCOMS LLC and TerraCotta Credit REIT, LLC   8-K   2/4/2021   10.1
10.47   Employment Agreement dated February 19, 2021 between the Company and Martin R. Wade, III   8-K   02/23/2021   10.1
10.48   Severance Agreement and General Release dated February 19, 2021 between the Company and Brian T. Mihelich   8-K   02/23/2021   10.2
10.49   Share Purchase Agreement dated as of February 25, 2021 among the Company, Sky Sapience Ltd., the shareholders of Sky Sapience Ltd. and the Shareholders’ Representative   8-K   03/01/2021   10.1
10.50   Share Exchange Agreement dated as of March 26, 2021 among COMSovereign Holding Corp., RVision, Inc., Industrial Security Alliance Partners, Inc. and Halls of Valhalla, LLC   --   *   --
21   List of Subsidiaries   --   *   --
31.1   Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   --   *   --
31.2   Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   --   *   --
32.1   Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   --   *   --
32.2   Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   --   *   --
101 INS   XBRL Instance Document     *  
101 SCH   XBRL Taxonomy Extension Schema Document     *  
101 CAL   XBRL Taxonomy Calculation Linkbase Document     *  
101 LAB   XBRL Taxonomy Labels Linkbase Document     *  
101 PRE   XBRL Taxonomy Presentation Linkbase Document     *  
101 DEF   XBRL Taxonomy Extension Definition Linkbase Document     *  

 

 

# Indicates management contract or compensatory plan or arrangement.

 

* Filed herewith.

 

Portions of this exhibit have been redacted in compliance with Item 601(b)(10) of Regulation S-K. Schedules, exhibits and similar supporting attachments to this exhibit are omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to furnish a supplemental copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

61

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  COMSOVEREIGN HOLDING CORP.
     
  By: /s/ Daniel L. Hodges
    Daniel L. Hodges
    Chief Executive Officer
    Date: March 30,2021
     
  By: /s/ Martin R. Wade III
    Martin R. Wade III
    Chief Financial Officer
    (Principal Financial and
Accounting Officer)
    Date: March 30, 2021

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated.

 

Name   Position   Date
         
/s/ Daniel L. Hodges   Chairman and Chief Executive Officer   March 30, 2021
Daniel L. Hodges   (Principal Executive Officer)    
         
/s/ Martin R. Wade III   Chief Financial Officer   March 30, 2021
Martin R. Wade III   (Principal Financial and Accounting Officer)    
         
/s/ John E. Howell   Director   March 30, 2021
John E. Howell        
         
/s/ David Aguilar   Director   March 30, 2021
David Aguilar        
         
/s/ Richard J. Berman   Director   March 30, 2021
Richard J. Berman        
         
/s/ Brent M. Davies   Director   March 30, 2021
Brent M. Davies        
         
/s/ Kay Kapoor   Director   March 30, 2021
Kay Kapoor        
         
/s/ James A. Marks   Director   March 30, 2021
James A. Marks        

 

62

 

  

COMSOVEREIGN HOLDING CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets   F-6
     
Consolidated Statements of Operations   F-7
     
Consolidated Statements of Comprehensive Loss   F-8
     
Consolidated Statements of Stockholders’ Equity   F-9
     
Consolidated Statements of Cash Flows   F-11
     
Notes to the Consolidated Financial Statements   F-12 – F-61

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

COMSovereign Holding Corp.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of COMSovereign Holding Corp. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2020 and for the period from January 10, 2019 (inception) through December 31, 2019 and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019 and the consolidated results of its operations and its cash flows for the year ended December 31, 2020 and for the period from January 10, 2019 (inception) through December 31, 2019, in conformity with U.S. generally accepted accounting principles. 

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has experienced losses, negative cash flows from operations, has limited capital resources, and an accumulated deficit. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

F-2

 

 

Share Based Compensation – Refer to Note 14 to the Consolidated Financial Statements

 

Critical Audit Matter Description

 

The Company issues stock options to employees. Management uses the Black-Scholes option-pricing model to estimate the fair value of its stock options. The Black-Scholes option-pricing model involves the use of significant estimates, including the following:

 

Expected dividend yield;

 

Risk-free interest rate;

 

Expected share price volatility; and

 

Expected life of the award.

 

Given the significant estimates involved in determining the fair value of stock options, the related audit effort in evaluating management’s estimates in determining the fair value of stock options was extensive and required a high degree of auditor judgment.

 

How the Critical Audit Matter was Addressed in the Audit

 

We obtained an understanding over the Company’s process to estimate the fair value of stock options, including how the Company develops each of the estimates required to utilize the Black-Scholes option-pricing model. We applied the following audit procedures related to testing the Company’s estimates utilized in the Black-Scholes option-pricing model:

 

We performed a look-back at the Company’s previously issued dividends, noting there were none. We inquired with management of the Company who informed us that no future dividends were currently anticipated.

 

We compared the Company’s risk-free interest rate used to the comparable United States treasury yield for a term comparable to the stock options’ expected term.

 

Because the Company does not have historical share price values prior to its merger with Drone Aviation, Inc. in November 2019, we recalculated the average volatility of three peer companies selected by management, and their individual historical share price volatility for a term comparable to the stock options’ expected term, and the average volatility for those three peer companies.  We also evaluated those peer companies for relevance to the expected future operations of the Company.

 

We recalculated the expected term of stock options granted to employees and nonemployee directors using the simplified method, whereby, the expected term equals the average of the vesting term and the original contractual term of the option.

 

Accounting for Complex Debt Transactions—Refer to Note 10 to the Consolidated Financial Statements

 

Critical Audit Matter Description

 

During the year ended December 31, 2020, the Company refinanced a revolving line of credit in connection with the acquisition of a business and amended several note agreements for payment and maturity terms. Management determined whether to account for the refinance and other amended notes as a debt modification or a debt extinguishment. Management follows the guidance of Accounting Standards Codification (“ASC”) 470-50, Debt Modifications and Extinguishments. Per the guidance, management determines if the modified terms of the refinance are considered substantially different, defined as the present value of the remaining cash flows after modification differ by at least 10% of those prior to the modification.

 

The Company also entered into several secured and unsecured notes payable that included beneficial conversion features, incentive shares and warrants for which the values were estimated and recorded using their relative fair values in accordance with ASC 470-20, Debt with Conversion and Other Options. Management used the Black-Scholes option-pricing model to estimate the fair value of the warrants issued with the convertible notes, limited to a relative fair value based upon the percentage of its fair value to the total fair value including the fair value of the convertible note. The Black-Scholes option-pricing model involves the use of significant estimates, including the following:

 

Risk-free interest rate;

 

Expected share price volatility;

 

Expected dividend yield; and

 

Contractual life of the award.

 

F-3

 

 

Given the significant estimates involved in determining the total debt discounts resulting from the relative fair value of the warrants and beneficial conversion features, as well as determining whether the debt refinance was a debt modification or debt extinguishment, the related audit effort in evaluating both management’s estimates in determining the total debt discount and the determination of whether the refinance and other changes made the debt agreements a debt modification or debt extinguishment was extensive and required a high degree of auditor judgment.

 

How the Critical Audit Matter was Addressed in the Audit

 

We obtained an understanding over the Company’s process to determine whether a debt refinance and term amendments are a debt modification or debt extinguishment. We reviewed the guidance in ASC 470-50 and management’s calculation of the present value of the cash flows prior to and after the debt modification. We also recalculated the change in the present value of the remaining cash flows after the debt modification for each of the modified notes to determine if management applied the correct accounting treatment.

 

Additionally, we obtained an understanding over the Company’s process to estimate the debt discounts, resulting from the relative fair value of the warrants and beneficial conversion features, including how the Company develops each of the estimates required utilizing the Black-Scholes option-pricing model. We applied the following audit procedures related to testing the Company’s estimates utilized in the Black-Scholes option-pricing model:

 

We performed a look-back of the Company’s previously issued dividends, noting there were none. We inquired with management of the Company who informed us that no future dividends were currently anticipated.

 

We compared the Company’s risk-free interest rate used to the comparable United States Treasury yield for a term comparable to the warrants’ remaining contractual term.

 

Because the Company does not have historical share price values prior to its merger with Drone Aviation, Inc. in November 2019, we recalculated the average volatility of three peer companies selected by management, and their individual historical share price volatility for a term comparable to the stock warrants’ expected term, and the average volatility for those three peer companies. We also evaluated those peer companies for relevance to the expected future operations of the Company.

 

We agreed the remaining contractual term of the warrants to the term within the revised convertible note.

 

We also reviewed management’s relative fair value calculation used to determine the total debt discounts and agreed all inputs as follows:

 

We agreed the proceeds of the notes to the convertible note agreements.

 

We agreed the fair value of the warrants to the fair value calculated using the Black-Scholes option-pricing model.

 

We agreed the conversion price to the convertible note agreement and recalculated the intrinsic value of the beneficial conversion features.

 

Acquisition Accounting and Fair Value Allocation of Purchase Price - Refer to Note 3 to the Consolidated Financial Statements

 

Critical Audit Matter Description

 

As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Fast Plastic Parts, LLC and Spring Creek Manufacturing, Inc. (“FPSC”) on March 6, 2020 for a total purchase price of $829,347. The Company also completed the acquisition of Virtual Network Communications, Inc. (“VNC”) on July 6, 2020 for a total purchase price of $18,832,383.

 

The Company applied the acquisition method of accounting for business combinations to account for both acquisitions. Accordingly, the assets acquired and liabilities assumed were recorded at their acquisition date fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets and liabilities assumed, was recorded as goodwill.

 

Auditing the Company’s accounting for the acquisitions was complex due to the significant estimation uncertainty in determining the fair value of the identified intangible assets related to customer relationships, technology, trade name and licenses. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired businesses. The significant assumptions used to estimate the value of the intangible assets included revenue growth rates, which are forward-looking and could be affected by future economic and market conditions.

 

We have identified the valuation of the intangible assets from these acquisitions as a critical audit matter because auditing the fair value involved significant auditor judgment and increased audit effort because of the extent of estimation required by management.

 

F-4

 

 

How the Critical Audit Matter was Addressed in the Audit

 

We applied the following audit procedures related to testing the Company’s estimates and approach utilized to determine the fair value of the acquired intangible assets:

 

Obtained a copy of the Company’s independent appraisal of the fair value of the acquired intangible assets that was used by management to determine the fair values, and assessed the qualifications of the specialist.

 

Evaluated the valuation approach used by the Company’s third-party valuation specialist to calculate the fair value of intangible assets.

 

Evaluated the key assumptions used in the discounted cash flow analysis used to value the intangible assets, including projected revenue and expenses, discount rates, attrition rates, and hypothetical royalty rates.

 

Lastly, we tested the completeness and accuracy of data inputs provided by management and utilized in the calculation by comparing the data to source documents and external information sources.

 

Impairment of Goodwill and Long-lived Assets – Refer to Note 2 to the Consolidated Financial Statements

 

Critical Audit Matter Description

 

As reflected in the Company’s consolidated financial statements at December 31, 2020, the Company’s goodwill was $64,898,222 and the net carrying amount of intangible assets was $53,187,714. As disclosed in Note 2 to the consolidated financial statements, goodwill and long-lived intangible assets are tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment. As a result of these assessments, management concluded that there was no impairment to goodwill or to the Company’s intangible assets and other long-lived assets during the year ended December 31, 2020.

 

Auditing management’s impairment tests of goodwill and long-lived assets was complex and highly judgmental due to the significant measurement uncertainty in determining the fair values of the reporting units and long-lived assets. In particular, the fair value estimates of the reporting units were sensitive to changes in significant assumptions such as discount rates, revenue growth rates, operating margins, estimated spending on capital expenditures, and terminal growth rates. These assumptions are affected by expected future market or economic conditions, including the impact of COVID-19.

 

How the Critical Audit Matter was Addressed in the Audit

 

We obtained a copy of the Company’s independent appraisals of the fair value of the Company’s reporting units that were used by management to determine their fair values, in accordance with ASC 350 (Intangibles – Goodwill and Other) and assessed the qualifications of the specialist.

 

To test the fair values of the reporting units, our audit procedures included:

 

We obtained an understanding of the Company’s process to evaluate goodwill and long-lived assets for impairment and related controls.

 

We evaluated management’s assessment that there were no indicators of impairment. This assessment included consideration that current year losses were not indicative of future expected results and that future results were not expected to produce continuing losses.

 

We assessed the valuation methodologies and tested the reasonableness of significant assumptions and underlying data used by management and the third-party valuation specialist, including forecasted revenue and discount rates.

 

Lastly, we compared managements’ summary of the fair value of the reporting units to the market capitalization of the Company, noting that the market capitalization exceeded the combined fair value of the reporting units, and that both of these metrics exceeded the carrying value of the reporting units. As such, we concurred with management that there was no impairment of goodwill or long-lived assets.

 

/s/ HASKELL & WHITE LLP

 

We have served as the Company’s auditor since 2019.

 

Irvine, California

March 30, 2021

 

F-5

 

 

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED BALANCE SHEETS

 

    December 31,  
(Amounts in US$’s, except share data)   2020     2019  
ASSETS            
Current Assets            
Cash   $ 730,502     $ 812,452  
Accounts receivable, net     787,333       2,168,659  
Receivables – related party           1,595  
Inventory, net     4,538,432       4,671,396  
Prepaid and deferred expenses     1,473,111       916,729  
Other current assets     151,832       94,538  
Total Current Assets     7,681,210       8,665,369  
Property and equipment, net     2,286,466       1,458,106  
Operating lease right-of-use assets     2,725,462       2,199,682  
Finance lease right-of-use-assets     67,692        
Intangible assets, net     53,187,714       51,277,482  
Goodwill     64,898,222       56,386,796  
Other assets – long term     30,413        
Total Assets   $ 130,877,179     $ 119,987,435  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current Liabilities                
Accounts payable   $ 5,582,532     $ 2,245,704  
Accrued interest     2,028,569       306,445  
Accrued liabilities     1,649,003       1,383,008  
Accrued liabilities – related party     30,000       461,254  
Accrued payroll     3,992,454       1,050,703  
Contract liabilities, current     721,220       149,923  
Accrued warranty liability     185,415       195,138  
Operating lease liabilities, current     676,019       467,979  
Finance lease liabilities, current     46,345        
Line of credit           2,000,000  
Notes payable – related party     1,010,000       1,492,953  
Current portion of long-term debt, net of unamortized discounts and debt issuance costs     18,340,706       5,389,492  
Total Current Liabilities     34,262,263       15,142,599  
Debt – long term     706,293        
Contract liabilities – long term     143,082       152,892  
Operating lease liabilities – long term     2,208,978       1,744,569  
Finance lease liabilities – long term     8,891        
Total Liabilities     37,329,507       17,040,060  
COMMITMENTS AND CONTINGENCIES (Note 17)                
STOCKHOLDERS’ EQUITY                
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2020 and 2019, respectively            
Common stock, $0.0001 par value, 300,000,000 shares authorized, 49,444,689 and 42,775,415 shares issued and outstanding as of December 31, 2020 and 2019, respectively     14,833       12,833  
Additional paid-in capital     158,209,558       130,553,180  
Accumulated deficit     (64,626,719 )     (27,545,255 )
Accumulated other comprehensive loss           (23,383 )
Treasury stock, at cost, 33,334 shares as of December 31, 2020 and 2019, respectively     (50,000 )     (50,000 )
Total Stockholders’ Equity     93,547,672       102,947,375  
Total Liabilities and Stockholders’ Equity   $ 130,877,179     $ 119,987,435  

 

See Notes to the Consolidated Financial Statements

 

F-6

 

 

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Year Ended
December 31,
    January 10,
2019
(Inception) to
December 31,
 
(Amounts in US$’s, except share data)   2020     2019  
Revenue   $ 9,426,836     $ 4,712,212  
Cost of Goods Sold     4,595,961       2,990,716  
Gross Profit     4,830,875       1,721,496  
                 
Operating Expenses                
Research and development (1)     2,012,689       174,257  
Sales and marketing (1)     24,049       6,222  
General and administrative (1)     17,484,764       14,325,078  
Depreciation and amortization     12,531,452       7,567,184  
Gain on the sale of assets     (663 )     (98,410 )
Total Operating Expenses     32,052,291       21,974,331  
Net Operating Loss     (27,221,416 )     (20,252,835 )
Other Income (Expense)                
Interest expense     (11,309,143 )     (8,399,663 )
Other income (expense)     (1,368,837 )     (147,430 )
Loss on extinguishment of debt     (15,818 )     (434,774 )
Loss on conversion of debt           (2,640,000 )
Foreign currency transaction gain (loss)     (74,764 )     191,547  
Interest income     2,114        
Total Other Expenses     (12,766,448 )     (11,430,320 )
Net Loss Before Income Taxes     (39,987,864 )     (31,683,155 )
Deferred Tax Benefit     2,906,400       4,137,900  
Net Loss   $ (37,081,464 )   $ (27,545,255 )
Loss per common share:                
Basic   $ (0.82 )   $ (1.70 )
Diluted   $ (0.82 )   $ (1.70 )
Weighted-average shares outstanding:                
Basic     45,293,697       16,238,036  
Diluted     45,293,697       16,238,036  

 

(1) These are exclusive of depreciation and amortization

 

See Notes to the Consolidated Financial Statements

 

F-7

 

 

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   

Year Ended

December 31,

    January 10,
2019
(Inception) to
December 31,
 
(Amounts in US$’s)   2020     2019  
Net Loss   $ (37,081,464 )   $ (27,545,255 )
Other Comprehensive Income:                
Foreign currency translation adjustment     23,383       (23,383 )
Total Comprehensive Loss   $ (37,058,081 )   $ (27,568,638 )

 

See Notes to the Consolidated Financial Statements

 

F-8

 

  

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(Amounts in US$’s, except   Preferred Stock     Common Stock     Additional
Paid-In
    Accumulated
Other
Comprehensive
    Treasury     Accumulated     Total
Stockholders’
 
share data)   Shares     Amount     Shares     Amount     Capital     Loss     Stock     Deficit     Equity  
December 31, 2019         $       42,775,415     $ 12,833     $ 130,553,180     $ (23,383 )   $ (50,000 )   $ (27,545,255 )   $ 102,947,375  
Issuance of common stock for Virtual Network Communications Inc. acquisition                 3,912,737       1,174       11,854,418                         11,855,592  
Issuance of options for Virtual Network Communications Inc. acquisition                             2,239,950                         2,239,950  
Issuance of warrants for Virtual Network Communications Inc. acquisition                             1,592,867                         1,592,867  
Issuance of common stock for extinguishment of debt and interest                 759,377       227       3,953,808                         3,954,035  
Issuance of common stock for conversion of debt, interest and penalty                 788,185       236       2,319,969                         2,320,205  
Issuance of common stock for debt issue costs                 150,001       45       1,396,955                         1,397,000  
Beneficial conversion feature                             795,999                         795,999  
Share-based compensation                 633,334       190       712,584                         712,774  
Non-cash contribution from Chief Executive Officer                             881,126                         881,126  
Common stock issued for cash                 63,948       19       331,823                         331,842  
Issuance of common stock as vendor compensation                 81,562       25       330,096                         330,121  
Issuance of common stock for settlement of accounts payable                 55,032       17       193,143                         193,160  
Issuance of warrants for debt issue costs                             297,726                         297,726  
Issuance of common stock for payment of accrued interest                 7,066       2       38,362                         38,364  
Issuance of warrants as vendor compensation                             24,782                         24,782  
Issuance of common stock for exercise of warrants                 94,510       28       2,807                         2,835  
Issuance of common stock as a settlement                 100,000       30       689,970                         690,000  
Issuance of common stock for cashless exercise of warrants                 16,667       5       (5 )                        
Issuance of common stock for cashless exercise of options                 5,041       2       (2 )                        
Effect of rounding from reverse stock split                 1,814                                      
Net loss                                               (37,081,464 )     (37,081,464 )
Other comprehensive gain                                   23,383                   23,383  
December 31, 2020         $       49,444,689     $ 14,833     $ 158,209,558     $     $ (50,000 )   $ (64,626,719 )   $ 93,547,672  

 

F-9

 

 

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

  

(Amounts in US$’s, except   Preferred Stock     Common Stock     Additional
Paid-In
    Accumulated
Other
Comprehensive
    Treasury     Accumulated     Total
Stockholders’
 
share data)   Shares     Amount     Shares     Amount     Capital     Loss     Stock     Deficit     Equity  
January 10, 2019 (Inception)           —     $       —             —     $       —     $       —     $       —     $       —     $       —     $       —  
Issuance of founder shares at inception                 9,296,667       2,789                               2,789  
Issuance of preferred stock for VEO acquisition     1,500,000       150                   13,214,850                         13,215,000  
Issuance of preferred stock for InduraPower, Inc. acquisition     800,000       80                   7,047,920                         7,048,000  
Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition     300,000       30                   2,642,970                         2,643,000  
Issuance of common stock for DragonWave-X LLC and Lextrum, Inc. acquisitions                 4,412,382       1,324       58,242,132                         58,243,456  
Common stock issued for cash                 166,667       50       4,950                         5,000  
Issuance of common stock issued for cashless exercise of warrants                 1,124,167       337       33,388                         33,725  
Issuance of common stock for conversion of senior convertible debentures                 366,667       110       3,752,388                         3,752,498  
Issuance of common stock for conversion of debt                 53,334       16       703,984                         704,000  
Issuance of warrants as vendor compensation                             4,074,330                         4,074,330  
Issuance of warrants in conjunction with debt agreements                             3,138,667                         3,138,667  
Issuance of common stock for debt issue costs                 411,714       123       7,805,489                         7,805,612  
Issuance of common stock as vendor compensation                 40,000       12       525,290                         525,302  
Share-based compensation                 15,220       5       258,256                         258,261  
Beneficial conversion feature                             855,549                         855,549  
Conversion of preferred stock     (2,600,000 )     (260 )     866,667       260                                
Conversion of COMSovereign Corp. stock at 0.8902 into Drone Aviation Holding Corp. stock                 14,913,183       4,474       (4,474 )                        
Merger with Drone Aviation Holding Corp.                 11,108,747       3,333       28,257,491             (50,000 )           28,210,824  
Net loss                                               (27,545,255 )     (27,545,255 )
Other comprehensive loss                                   (23,383 )                 (23,383 )
December 31, 2019         $       42,775,415     $ 12,833     $ 130,553,180     $ (23,383 )   $ (50,000 )   $ (27,545,255 )   $ 102,947,375  

 

See Notes to the Consolidated Financial Statements

 

F-10

 

 

COMSOVEREIGN HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Amounts in US$’s)   Year Ended
December 31, 2020
    January 10,
2019
(Inception) to
December 31, 2019
 
Cash flows from operating activities:            
Net loss   $ (37,081,464 )   $ (27,545,255 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     1,107,400       623,884  
Amortization     11,409,768       6,943,300  
Amortization of financing lease right-of-use asset     14,284        
Share-based compensation     712,774       258,261  
Deferred income taxes     (2,906,400 )     (4,137,900 )
Amortization of debt discounts and debt issuance costs     8,936,632       8,458,341  
Operating lease expense     626,655       135,542  
Bad debt expense     1,007,715        
Gain on the sale of assets     (663 )     (98,410 )
Paid-in-kind penalties and interest     723,984        
Loss on extinguishment of debt     15,818       434,774  
Settlement paid in common stock     690,000        
Loss on conversion of debt           2,640,000  
Other, net     356,618       525,302  
Changes in assets and liabilities:                
Accounts receivable     373,611       (26,992 )
Receivables-related party     1,595       (4,876,258 )
Inventory     382,728       (1,136,012 )
Prepaids     (173,840 )     (767,355 )
Other current assets     (305,706 )     (93,289 )
Other non-current assets     (30,413 )      
Accounts payable     3,524,988       (1,141,823 )
Accrued liabilities     (365,495 )     2,295,273  
Accrued interest     2,032,715       1,109,252  
(Repayments)/advances from related party     (141,286 )     9,826,112  
Contract liabilities     561,487        
Operating lease liabilities     (425,838 )     (123,534 )
Other current liabilities     2,932,028       (156,460 )
Net cash (used in) operating activities     (6,020,305 )     (6,853,247 )
Cash flows from investing activities:                
Business acquisitions     (3,146,500 )     2,925,273  
Purchases of property and equipment     (176,697 )     (87,038 )
Proceeds from disposal of property and equipment     663        
Net cash (used in) provided by investing activities     (3,322,534 )     2,838,235  
Cash flows from financing activities:                
Principal payment on finance lease     (28,455 )      
Proceeds from issuance of related party note     2,710,000       485,000  
Payment on line of credit     (2,000,000 )      
Proceeds from sale of common stock     331,842       5,000  
Proceeds from issuance of debt     9,627,781       6,249,170  
Proceeds from issuance of warrant     200        
Debt issuance costs     (313,000 )     (80,000 )
Repayment of debt     (1,090,862 )     (1,808,323 )
Net cash provided by financing activities     9,237,506       4,850,847  
Effect of exchange rates on cash     23,383       (23,383 )
Net (decrease)/increase in cash and cash equivalents     (81,950 )     812,452  
Cash and cash equivalents, beginning of period     812,452        
Cash and cash equivalents, end of period   $ 730,502     $ 812,452  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period:                
Taxes   $     $  
Interest     395,911        
Non-cash investing and financing activities:                
Issuance of common stock for Virtual Network Communications, Inc. acquisition     11,855,592        
Issuance of options for Virtual Network Communications Inc. acquisition     2,239,950        
Issuance of warrants for Virtual Network Communications Inc. acquisition     1,592,867        
Issuance of preferred stock for VEO acquisition           13,215,000  
Issuance of preferred stock for InduraPower, Inc. acquisition           7,048,000  
Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition           2,643,000  
Issuance of common stock for Lextrum, Inc. acquisition           16,162,064  
Issuance of common stock for DragonWave-X LLC acquisition           42,081,392  
Issuance of common stock for extinguishment of debt     2,343,400        
Issuance of common stock for conversion of related party note     1,900,000        
Issuance of common stock as debt issuance costs     1,397,000       7,805,612  
Issuance of common stock in exchange of related party note and related interest and penalty     1,292,953        
Contribution from Chief Executive Officer of common stock as debt issuance costs     881,126        
Beneficial conversion feature     795,999       855,549  
Debt incurred to sellers for Fast Plastics Parts LLC and Spring Creek Manufacturing, Inc. acquisition     575,574        
Deferral of unpaid offering costs     408,871          
Issuance of common stock to settle interest and penalty     383,215        
Issuance of common stock as vendor compensation     330,121        
Issuance of warrants in conjunction with debt agreements     297,726       3,138,667  
Issuance of common stock for conversion of debt     285,714       704,000  
Settlement of VNC notes receivable and interest in connection with the acquisition     251,247        
Recognition of operating lease right-of-use asset and liability     239,019        
Issuance of common stock as settlement of accounts payable     193,160        
Recognition of operating lease right-of-use asset and liability rent abatement     188,790        
Recognition of finance lease right-of-use asset and liability     63,967        
Reclassification of prepaid rent to operating lease right-of-use asset     54,148        
Issuance of warrants as vendor compensation     24,782       4,074,330  
Issuance of common stock for cashless exercise of warrants or options     7       33,725  
Issuance of common stock for conversion of senior convertible debentures           3,725,498  
Recognition of operating right-of-use asset and liability           2,335,224  
Issuance of founder shares at inception           2,789  

 

See Notes to the Consolidated Financial Statement

 

F-11

 

 

COMSOVEREIGN HOLDING CORP.

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.

 

F-12

 

 

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.

 

F-13

 

 

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. 

 

F-14

 

 

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.

 

F-15

 

 

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.

 

F-16

 

 

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.

 

F-17

 

 

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.

 

F-18

 

 

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.

 

F-19

 

  

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.

 

F-20

 

 

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.

 

F-21

 

 

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. 

 

F-22

 

 

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  

 

F-23

 

 

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.

 

F-24

 

 

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  

 

F-25

 

 

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  

 

F-26 </