UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ______________ to ______________
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive office) | (Zip Code) |
(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 | ||
| The | ||||
| Warrants to purchase Common Stock | COMSW | The Nasdaq Stock Market LLC | ||
| 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share | COMSP | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐
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
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of February 23, 2023, there were
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| (Amounts in thousands, except share and per share data) | 2022 | 2021 | ||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Assets of discontinued operations - current | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Note receivable | ||||||||
| Other assets – long term | ||||||||
| Assets of discontinued operations - long term | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued liabilities | ||||||||
| Accrued liabilities – related party | ||||||||
| Accrued payroll | ||||||||
| Contract liabilities, current | ||||||||
| Accrued warranty liability - current | ||||||||
| Operating lease liabilities - current | ||||||||
| Notes payable – related party | ||||||||
| Current portion of long-term debt; net of unamortized discounts and debt issuance costs | ||||||||
| Liabilities of discontinued operations - current | ||||||||
| Total current liabilities | ||||||||
| Debt – long term | ||||||||
| Contract liabilities – long term | ||||||||
| Operating lease liabilities – long term | ||||||||
| Liabilities of discontinued operations - long-term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development (1) | ||||||||||||||||
| Sales and marketing (1) | ||||||||||||||||
| General and administrative (1) | ||||||||||||||||
| Depreciation and amortization (2) | ||||||||||||||||
| Impairment (2) | ( | ) | ||||||||||||||
| Loss on sales (ID, DWXC) (3) | ||||||||||||||||
| Loss on lease abandonment | ||||||||||||||||
| Gain on the sale of assets | ( | ) | ( | ) | ||||||||||||
| Total operating expenses, net | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | - | ( | ) | - | ( | ) | ||||||||||
| Gain (loss) on extinguishment of debt | ( | ) | ( | ) | ( | ) | ||||||||||
| Foreign currency transaction loss | - | |||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividend on preferred stock | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| - Basic and diluted | ||||||||||||||||
| (1) | |
| (2) |
| (3) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands, | Preferred Stock | Common Stock | Paid-In | Comprehensive | Treasury Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||
| except share data) | Shares | Amount | Shares | Amount | Capital | Income | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||||
| Balance - January 1, 2022 | $ | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for exercise of options | - | |||||||||||||||||||||||||||||||||||||||
| Preferred dividend | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the debt placement agent | - | - | ||||||||||||||||||||||||||||||||||||||
| Preferred dividend | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance - June 30, 2022 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Preferred dividend | - | - | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
3
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued
(unaudited)
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands, | Preferred Stock | Common Stock | Paid-In | Comprehensive | Treasury Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||
| except share data) | Shares | Amount | Shares | Amount | Capital | Income | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||||
| Balance - January 1, 2021 | - | $ | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Common stock issued for exercise of options | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued as vendor compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for public offering | - | - | - | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issuance for extinguishment of debt and interest | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrant issuance for extinguishment of debt and interest | - | - | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued for Sky Sapience Ltd. acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance - March 31, 2021 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of options | - | - | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued as vendor compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issuance for Rvision, Inc. acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issuance for Innovation Digital, LLC acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrant issuance for debt issuance costs | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance - June 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issuance for RF Engineering, LLC acquisition | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Warrant issuance for debt issuance costs | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance - September 30, 2021 | - | $ | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| (Amounts in thousands, except share data) | 2022 | 2021 | ||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Income (loss) from discontinued operations, net of tax | ( | ) | ||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Impairment expense | ||||||||
| Operating lease expense | ||||||||
| Inventory reserve | ||||||||
| Bad debt expense | ||||||||
| Loss on sales (ID, DWXC) (1) | ||||||||
| Loss on lease abandonment | ||||||||
| Gain on the sale of assets | ( | ) | ||||||
| Share-based compensation | ( | ) | ||||||
| Amortization of debt discounts and debt issuance costs | ||||||||
| Default interest charge | ||||||||
| Share-based vendor payments | ||||||||
| Loss on extinguishment of debt | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventory, net | ( | ) | ||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Note receivable | ( | ) | ( | ) | ||||
| Other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued interest | ||||||||
| Accrued liabilities | ||||||||
| Contract liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Related party notes | ( | ) | ||||||
| Other current liabilities | ||||||||
| Total Adjustments | ||||||||
| Net Cash Used In Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Business acquisitions, net of cash received | ( | ) | ||||||
| Proceeds from building sale, net of transaction costs | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of intangible assets | ( | ) | ||||||
| Proceeds from disposal of property and equipment | - | |||||||
| Net Cash Provided By (Used In) Investing Activities | ( | ) | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from issuance of related party notes | ( | ) | ||||||
| Proceeds from sale of common stock from offering | ||||||||
| Proceeds from issuance of debt | ||||||||
| Proceeds from exercise of options | ||||||||
| Offering costs | ( | ) | ||||||
| Preferred stock dividend | ( | ) | ||||||
| Debt issuance costs | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided By Financing Activities | ( | ) | ||||||
| Net Cash Provided By (Used In) Discontinued Operations | ( | ) | ||||||
| Net (Decrease) Increase In Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| (1) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| (Amounts in thousands, except share data) | 2022 | 2021 | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Issuance of common stock for debt placement agent | $ | $ | ||||||
| Accrual of preferred dividends not paid yet | $ | $ | ||||||
| Debt incurred to sellers for Skyline Partners Technology LLC | $ | $ | ||||||
| Issuance of common stock for Sky Sapience Ltd. acquisition | $ | $ | ||||||
| Issuance of common stock for Innovation Digital, LLC | $ | $ | ||||||
| Debt incurred to sellers for Innovation Digital, LLC | $ | $ | ||||||
| Issuance of common stock for RVision, Inc. | $ | $ | ||||||
| Issuance of common stock for RF Engineering & Energy Resource, LLC | $ | $ | ||||||
| Issuance of common stock for extinguishment of debt and interest | $ | $ | ||||||
| Issuance of warrants for extinguishment of debt and interest | $ | $ | ||||||
| Issuance of common stock for conversion of debt and interest | $ | $ | ||||||
| Issuance of warrants as debt issuance costs | $ | $ | ||||||
| Recognition of operating lease right-of-use asset and liability | $ | $ | ||||||
| Acquisition of building with secured note payable | $ | $ | ||||||
| Prepaid deposits transferred to inventory | $ | $ | ||||||
| Lease deposits recognized from Sky Sapience Ltd. Acquisition | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 1 DESCRIPTION OF BUSINESS
COMSovereign Holding Corp. (“COMSovereign”) and subsidiaries (collectively the “Company”) a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S. based providers of telecommunications equipment and services.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes in the Company’s significant accounting policies as of and for the three and nine months ended September 30, 2022, as compared to the significant accounting policies described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021.
Basis of Presentation
The accompanying financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations and financial position for the three and nine months ended September 30, 2022 and cash flows for the nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. The amounts reported in the unaudited condensed consolidated financial statements, and the tables in the notes hereto, of the Quarterly Report on Form 10-Q as of September 30, 2022 and for the three months and nine months ended September 30, 2022 and 2021, are presented in United States dollars and are rounded in thousands with the exception of share and per share data. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2021 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on August 16, 2022.
Effective January 21, 2021, the Company enacted a 1-for-3 reverse stock split (the “Split”) of the Company’s common stock. These condensed consolidated financial statements and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
Effective February 10, 2023, the Company enacted a 1-for-100 reverse stock split (the “2023 Split”) of the Company’s common stock. These condensed consolidated financial statements and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
Out-of-Period Adjustment (Error Correction)
See Note 12 – Goodwill and Other Intangible Assets for details related to an out-of-period adjustment (error correction).
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported results of operations or loss per share.
Principles of Consolidation
The unaudited condensed consolidated financial statements as of September 30, 2022 and December 31, 2021, and for the three and nine months ended September 30, 2022 and 2021, include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates consist of the valuation of stock-based compensation; the valuation of the assets and liabilities acquired; the valuation of the Company’s equity securities issued in transactions; the valuation of inventory; the allowance for credit losses; the valuation of equity securities; the valuation allowance for deferred tax assets; and impairment of long-lived assets and goodwill.
7
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. As of June 30, 2022, the Company determined that it was more likely than not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due to a decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2022. See Note 12 – Goodwill and Other Intangible Assets. As of September 30, 2022, the Company determined that it was not more likely than not that certain reporting units’ fair value was below their reporting units’ carrying amount and, therefore, no interim impairment testing was required as of September 30, 2022.
In determining whether a quantitative assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the quantitative impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more than likely that the fair value is less than the carrying amount, the quantitative impairment test is not required. The Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition projections, and its expectations. The only reporting unit with a pre-impairment negative carrying value is Virtual NetCom, LLC.
The Company calculates the estimated fair value of a reporting unit using the income approach. In evaluating the recoverability of goodwill, the Company estimates the fair value of its reporting units, which is determined using the income approach, and compares it to the carrying value. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:
Level 1 – Observable inputs that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs may be used with standard pricing models or other valuation or internally-developed methodologies that result in management’s best estimate of fair value.
The Company utilizes fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized.
As allowed by applicable FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently eligible financial assets or liabilities. The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of September 30, 2022 and December 31, 2021 approximated their fair value due to their short-term nature.
8
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Discontinued Operations
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $
Recently Adopted Accounting Standards
In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies the accounting for convertible instruments by eliminating certain accounting models when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. Under this ASU, certain debt instruments with embedded conversion features will be accounted for as a single liability measured at its amortized cost. Additionally, this ASU eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments. The new guidance is effective for smaller reporting companies during annual periods beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company early adopted ASU 2020-06 effective January 1, 2022 which eliminates the need on a go forward basis to assess whether a beneficial conversion feature needs to be recognized upon either (a) the issuance of new convertible securities; or (b) the resolution of any prior period contingent beneficial conversion features.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Companies should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. This standard was adopted on January 1, 2022 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
Recently Issued Accounting Standards
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The guidance is effective for annual periods beginning after December 15, 2023, with early adoption permitted. The Company is evaluating ASU 2022-03 and the impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems.
NOTE 3 DISCONTINUED OPERATIONS
Sovereign Plastics LLC
Sovereign Plastics LLC (“Sovereign Plastics”) is a manufacturer of plastic and metal components to third-party manufacturers based out of Colorado Springs, Colorado. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sovereign Plastics in the future as compared to the opportunities available to Sovereign Plastics in the future, and the availability of strategic alternatives. On June 13, 2022, after careful consideration, the Board of Directors unanimously approved the sale.
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $
9
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Results of Discontinued Operations
The results and net loss of Sovereign Plastics’ discontinued operations were as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | - | |||||||||||||||
| Gross profit | - | |||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | - | |||||||||||||||
| Depreciation and amortization | - | |||||||||||||||
| Gain on sale of Sovereign Plastics | - | ( | ) | |||||||||||||
| Total operating expenses, net | - | ( | ) | |||||||||||||
| Income from operations | - | ( | ) | ( | ) | |||||||||||
| Other expense | ||||||||||||||||
| Interest expense | - | ( | ) | ( | ) | ( | ) | |||||||||
| Other income | - | |||||||||||||||
| Loss on extinguishment of debt | - | ( | ) | |||||||||||||
| Total other expense | - | ( | ) | ( | ) | ( | ) | |||||||||
Income (loss) from discontinued operations, net of tax | $ | - | $ | ( | ) | $ | $ | ( | ) | |||||||
Assets and liabilities of discontinued operations as of December 31, 2021 were classified as current because the sale transaction closed during the following twelve months during the period ended September 30, 2022. The details are as follows:
| Sovereign Plastics | ||||
| December 31, | ||||
| (Amounts in thousands, except share and per share data) | 2021 | |||
| Assets | ||||
| Cash | $ | |||
| Accounts receivable, net | ||||
| Inventory, net | ||||
| Prepaid and deferred expenses | ||||
| Assets of discontinued operations – current | ||||
| Property and equipment, net | ||||
| Operating lease right-of-use assets | ||||
| Goodwill | ||||
| Other assets – long term | ||||
| Assets of discontinued operations – long-term | ||||
| Total assets of discontinued operations | $ | |||
| Liabilities | ||||
| Accounts payable | $ | |||
| Accrued liabilities | ||||
| Accrued payroll | ||||
| Contract liabilities, current | ||||
| Operating lease liabilities, current | ||||
| Current portion of long-term debt, net of unamortized discounts and debt issuance costs | ||||
| Liabilities of discontinued operations – current | ||||
| Contract liabilities – long term | ||||
| Operating lease liabilities – long term | ||||
| Liabilities of discontinued operations – long-term | ||||
| Total liabilities of discontinued operations | $ | |||
10
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 4 GOING CONCERN
U.S. GAAP requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.
The accompanying unaudited condensed consolidated
financial statements and notes have been prepared assuming the Company will continue as a going concern. For the nine months ended September
30, 2022, the Company used cash flows in operating activities of $
The Company’s fiscal operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. Based on current cash on hand and subsequent activity as described herein (see Note 21 – Subsequent Events – Business Developments and Debt and Equity Developments), the Company presently only has enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of the Company’s limited cash availability, its operations have been scaled back to the extent possible (see Note 21 – Subsequent Events – Business Developments). Management continues to explore opportunities with third parties and related parties to provide additional capital and/or sell assets; however, it has not entered into any agreement to provide the necessary additional capital, except as disclosed herein. In the near term, there may be limited opportunities to raise capital of significance due to the Company’s Nasdaq compliance issues, as discussed in Note 21 – Subsequent Events – Nasdaq Compliance Developments.
The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake. If the Company is not able to obtain additional financing on a timely basis, it may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on its business, financial condition and results of operations, and ultimately, it could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.
NOTE 5 REVENUE
The following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2022 and 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Timing of revenue recognition: | ||||||||||||||||
| Services and products transferred at a point in time | $ | $ | $ | $ | ||||||||||||
| Services and products transferred over time | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
The Company disaggregates revenue by source and geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenue by source consisted of the following for the three and nine months ended September 30, 2022 and 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenue by products and services: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
11
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Revenue by geographic destination consisted of the following for the three and nine months ended September 30, 2022 and 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenue by geography: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Contract Balances
The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of September 30, 2022 and December 31, 2021, the Company did not have a material contract assets balance.
The following table is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.
| (Amounts in thousands) | Total | |||
| Balance at December 31, 2021 | $ | |||
| New invoices not yet earned | ||||
| Old invoices earned | ( | ) | ||
| Balance at September 30, 2022 | $ | |||
NOTE 6 EARNINGS (LOSS) PER SHARE
The Company accounts for earnings or loss per share pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which requires disclosure on the financial statements of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period.
There were no adjustments to net loss, the numerator, or the denominator for purposes of computing basic earnings per share.
Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss attributable to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss attributable to common shareholders.
The following weighted-average potential common shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of September 30, 2022 and 2021, respectively:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Options | ||||||||
| Unvested restricted stock | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
12
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 7 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash, cash equivalents and restricted cash consisted of the following as of September 30, 2022, and December 31, 2021:
| (Amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
Cash,
cash equivalents, and restricted cash are represented by operating accounts or money market accounts maintained with insured financial
institutions, including cash equivalents, defined as all short-term, highly-liquid investments with maturities of three months or less
when purchased. The Company had no cash equivalents as of September 30, 2022 and December 31, 2021, respectively. During the nine months
ended September 30, 2022, restricted cash decreased by $
NOTE 8 ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following as of September 30, 2022 and December 31, 2021:
| (Amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
Bad
debt expense totaled $
NOTE 9 INVENTORY, NET
Inventory consisted of the following as of September 30, 2022 and December 31, 2021:
| (Amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventory | ||||||||
| Reserve | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
The Company maintains a perpetual inventory system which is supplemented by periodic reviews of inventory quantities on hand. The Company records an impairment for excess and obsolete inventory, when necessary, based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question.
NOTE 10 PREPAID EXPENSES
Prepaid expenses consisted of the following as of September 30, 2022 and December 31, 2021:
| (Amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Prepaid products and services | $ | $ | ||||||
| Prepaid rent and security deposit | ||||||||
| Total prepaid expenses | $ | $ | ||||||
13
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 11 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following as of September 30, 2022 and December 31, 2021:
| (Amounts in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Shop machinery and equipment | $ | $ | ||||||
| Computers and electronics | ||||||||
| Office furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Building | ||||||||
| Land | ||||||||
| Building improvements | ||||||||
| Total property and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
On
January 31, 2022, the Company sold its Tucson, Arizona office building (the “Tucson Building”) for $
During the nine months ended September 30, 2022, the Company derecognized the property and equipment in connection with the following transactions (see Note 20 – Other Business Developments for additional information):
| a) | Sale
of DragonWave-X Canada, Inc. assets – gross assets of $ |
| b) | Abandonment
of Tucson Building lease – gross assets of $ |
| c) | Transfer
of Innovation Digital, LLC assets – gross assets of $ |
The
Company recognized $
NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill activity during the nine months ended September 30, 2022 was as follows:
| (Amounts in thousands) | Total | |||
| Balance at December 31, 2021 | $ | |||
| Derecognition | ( | ) | ||
| Impairments | ( | ) | ||
| Balance at September 30, 2022 | $ | |||
14
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
The following table sets forth the net carrying amount activity of the Company’s intangible assets for the nine months ended September 30, 2022.
| (Amounts in thousands) | Technology | Intellectual Property | Software | Total | ||||||||||||
| Net balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Sale of assets | ( | ) | ( | ) | ||||||||||||
| Impairments | ( | ) | ( | ) | ||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||
On June 23, 2022, the Company executed an agreement to return fifteen patents and five pending or provisional patents to the former owners of Innovation Digital, LLC (“Innovation Digital”) which resulted in the derecognition of goodwill and intangible assets shown in the tables above. See Note 20 – Other Business Developments for additional information.
As of June 30, 2022, the Company determined that
it was more likely than not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due
to a decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June
30, 2022.
During the three and nine months ended September
30, 2022, the Company recorded amortization expense of intangible assets of $
The following table sets forth the weighted-average amortization period, in total and by major intangible asset class:
| Asset Class | Weighted- Average Amortization Period | |||
| Technology | ||||
| Intellectual property | ||||
| Software | ||||
| All intangible assets |
15
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
As of September 30, 2022, assuming no additional amortizable intangible assets, the expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter was as follows:
| (Amounts in thousands) | Estimated | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| All intangible assets | $ | |||
As part of the Company’s restructuring, commencing January 1, 2023, the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer intends to manage the Company and make decisions based on the Company’s consolidated operating results.
Out-of-Period Adjustment (Error Correction)
During the review of the Company’s condensed
consolidated financial statements for the three and nine month periods ended September 30, 2022, the Company identified a $
Because the correction of these errors was not deemed to be material to the results for the three and six months ended June 30, 2022, to correct these errors, the Company recorded the corrections as out-of-period adjustments in the three-month period ended September 30, 2022. See the table below for details of the correction:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
| September 30, 2022 | September 30, 2022 | |||||||||||||||||||||||
| Before Adjustment |
Adjustment | As Reported | Before Adjustment |
Adjustment | As Reported | |||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impairment | $ | - | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Basic and diluted net loss per share: | ||||||||||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
NOTE 13 LEASES
Operating Leases
The Company has operating leases for office, manufacturing and warehouse space, along with office equipment. The carrying values of operating lease right-of-use (“ROU”) assets and operating lease liabilities as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, | December 31, | |||||||
| (Amounts in thousands) | 2022 | 2021 | ||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liability | $ | $ | ||||||
On February 1, 2022, the Company entered into
a lease agreement with the new owners of the Tucson Building (see Note 11 – Property and Equipment, Net), for a term of
16
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
In May 2022, the Company abandoned its lease of
the Tucson Building after previously defaulting on the lease. In June 2022, ComSovereign Corp. abandoned its Dallas, TX office lease and
VEO Photonics, Inc. abandoned its San Diego, CA office lease. In July 2022, the Company abandoned its Chantilly, VA office lease. In connection
with the lease abandonments for the three and nine months ended September 30, 2022, the Company recognized a $
Other information related to the Company’s operating leases are as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | $ | $ | $ | $ | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | | $ | $ | |||||||||||
The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of September 30, 2022, and December 31, 2021:
| September 30, | December 31 | |||||||
| (Amounts in thousands) | 2022 | 2021 | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the consolidated balance sheet as of September 30, 2022:
| Operating | ||||
| (Amounts in thousands) | Leases | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: effect of discounting | ( | ) | ||
| Present value of future minimum lease payments | ||||
| Less: current obligations under leases | ( | ) | ||
| Long-term lease obligations | $ | |||
17
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 14 DEBT
Debt consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||
| (Amounts in thousands) | Note Reference | Original Maturity Date | Amount Outstanding | Interest Rate | Amount Outstanding | Interest Rate | ||||||||||||||
| Secured Notes Payable | ||||||||||||||||||||
| Secured senior convertible note payable | A | $ | % | $ | % | |||||||||||||||
| Secured senior convertible note payable | B | % | % | |||||||||||||||||
| Secured senior convertible note payable | C | % | - | % | ||||||||||||||||
| Secured note payable | D | % | % | |||||||||||||||||
| Secured note payable | E | % | > | |||||||||||||||||
| Total secured notes payable | ||||||||||||||||||||
| Notes Payable | ||||||||||||||||||||
| Notes payable | F | % | % | |||||||||||||||||
| Notes payable | G | % | % | |||||||||||||||||
| PPP loans | H | % | % | |||||||||||||||||
| SBA loan | I | % | % | |||||||||||||||||
| Total notes payable | ||||||||||||||||||||
| Convertible Notes Payable | ||||||||||||||||||||
| Convertible note payable | J | % | % | |||||||||||||||||
| Convertible note payable | K | % | % | |||||||||||||||||
| Total convertible notes payable | ||||||||||||||||||||
| Total debt | ||||||||||||||||||||
| Less: unamortized discounts and debt issuance costs | ( | ) | ( | ) | ||||||||||||||||
| Total long-term debt, less discounts and debt issuance costs | ||||||||||||||||||||
| Less: current portion of long-term debt | ( | ) | ( | ) | ||||||||||||||||
| Debt classified as long-term debt | $ | $ | ||||||||||||||||||
Lind Debt
For Notes A and B (the “Original Lind Debt”),
on or about April 15, 2022, as a result of the Company not filing its Annual Report on Form 10-K for the year ended December 31, 2021
on a timely basis, the Original Lind Debt entered into default, which resulted in a
For the Original Lind Debt, during the nine months
ended September 30, 2022,
See Note 21 – Subsequent Events –
Debt and Equity Developments for information related to subsequent Note Holder Conversions. The subsequent Note Holder Conversions
enabled $
For Note C, on July 29, 2022, the Company sold
a promissory note in the principal amount of $
18
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Other Debt
For Note D, during the nine months ended September
30, 2022, past due principal of $
For Note E (the Tucson building mortgage), during
the nine months ended September 30, 2022, the principal of $
For Note F, on April 1, 2022, the Company entered
into a note agreement with a related party who is an Executive Officer of the Company for cash proceeds of $
For Note G, on or about April 29, 2022, the Company
sold an original issue discount note with a face value of $
For Note H, during the nine months ended September
30, 2022, principal of $
For Note I, during the nine months ended September
30, 2022, no principal was repaid (but interest of $
For Note J, on June 23, 2022, the Company reached
an agreement to cancel the note comprised of principal of $
For Note K, on May 24, 2022, the Company received
notice from counsel for holders of $
Future maturities contractually required by the Company under debt obligations are as follows as of September 30, 2022:
| (Amounts in thousands) | Total | |||
| Remaining 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
During the three and nine months ended September
30, 2022, the Company recognized $
NOTE 15 STOCKHOLDERS’ EQUITY
See Note 14 – Debt and Note 21 – Subsequent Events – Debt and Equity Developments for additional information related to debt conversions.
19
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Preferred Stock – Liquidation Preference
Upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, before any distribution or payment shall be made to holders of shares of our common stock or
any other class or series of our capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding
up of our affairs, junior to the Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”),
holders of shares of Series A Preferred Stock will be entitled to be paid out of our assets legally available for distribution to our
stockholders, after payment of or provision for our debts and other liabilities and any class or series of our capital stock ranking,
as to rights upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, senior to the Series A Preferred
Stock, a liquidation preference of $
Dividends
During the three and nine months ended September
30, 2022, the Company recorded $
On or about May 25, 2022, the Company announced
that it had suspended the payment of dividends on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the
Series A Preferred Stock are accruing at the rate of approximately $
NOTE 16 SHARE-BASED COMPENSATION
Restricted Stock Awards
A summary of the restricted stock unit (“RSU”) activity during the nine months ended September 30, 2022 is presented below:
| Weighted- | |||||||
| Average | |||||||
| Number of | Grant Date Value | ||||||
| RSU’s | Per Share | ||||||
| RSU’s non-vested – January 1, 2022 | $ | ||||||
| Forfeited | ( | ) | |||||
| Vested | ( | ) | |||||
| RSU’s non-vested – September 30, 2022 | $ | ||||||
During the three and nine months ended September
30, 2022, the Company recognized $(
Stock Options
There were no stock options issued during the three and nine months ended September 30, 2022. The following table summarizes the assumptions used to estimate the fair value of options granted during the nine months ended September 30, 2021.
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Expected dividend yield | ||||||||
| Expected volatility | ||||||||
| Risk-free interest rate | ||||||||
| Expected life of options | ||||||||
20
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
The following table presents stock option activity for the nine months ended September 30, 2022:
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise Price | Contractual | Intrinsic | |||||||||||||
| Options | Per Share | Life in Years | Value | |||||||||||||
| Outstanding – December 31, 2021 | $ | |||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Cancelled or Expired | ( |
) | ||||||||||||||
| Outstanding – September 30, 2022 | $ | |
||||||||||||||
| Exercisable – September 30, 2022 | $ | |||||||||||||||
The following table presents information related to stock options as of September 30, 2022:
| Options Outstanding | Options Exercisable | |||||||||||
| Weighted | ||||||||||||
| Average | ||||||||||||
| Exercise Price | Outstanding Number of | Remaining Life | Exercisable Number of | |||||||||
| Per Share | Options | In Years | Options | |||||||||
| $ 0.01 - $ 50.00 | ||||||||||||
| $ 50.01 - $100.00 | ||||||||||||
| $ 100.01 - $ 150.00 | ||||||||||||
| $ 150.01 - $ 200.00 | ||||||||||||
| $ 200.01 - $ 250.00 | ||||||||||||
| $ 250.01 - $ 300.00 | ||||||||||||
| $ 300.01 - $ 350.00 | ||||||||||||
The Company recognized $(
Warrants
All warrants are valued utilizing the Black-Scholes
pricing model using the assumptions listed below. There were no warrants issued during the three and nine months ended September 30, 2022.
The weighted average grant date fair value of all warrants issued during the nine months ended September 30, 2021 was $
The following tables summarize the assumptions used to estimate the fair value of warrants granted during the nine months ended September 30, 2022 and 2021:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Expected dividend yield | ||||||||
| Expected volatility | ||||||||
| Risk-free interest rate | ||||||||
| Contractual life of warrants | ||||||||
21
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
The following table presents activity for the nine months ended September 30, 2022:
| Weighted- | Weighted- | |||||||||||
| Average | Average | |||||||||||
| Number of | Exercise Price | Contractual | ||||||||||
| Warrants | Per Share | Life in Years | ||||||||||
| Outstanding – December 31, 2021 | $ | |||||||||||
| Forfeited or Expired | ( |
) | ||||||||||
| Outstanding – September 30, 2022 | $ | |||||||||||
| Exercisable – September 30, 2022 | $ | |
|
|||||||||
The following table presents information related to warrants as of September 30, 2022:
| Warrants Outstanding | Warrants Exercisable | |||||||||||
| Weighted | ||||||||||||
| Average | ||||||||||||
| Exercise Price | Outstanding Number of | Remaining Life | Exercisable Number of | |||||||||
| Per Share | Warrants | In Years | Warrants | |||||||||
| $ 0.01 - $ 1.00 | ||||||||||||
| $ 1.01 - $ 2.00 | ||||||||||||
| $ 2.01 - $ 3.00 | ||||||||||||
| $ 3.01 - $ 4.00 | ||||||||||||
| $ 4.01 - $ 5.00 | ||||||||||||
| $ 5.01 - $ 6.00 | ||||||||||||
NOTE 17 COMMITMENTS AND CONTINGENCIES
On June 16, 2022, the Company received notice
from certain former shareholders of SAGUNA claiming breaches of the SAGUNA stock purchase agreement and claiming that all of the former
shareholders of SAGUNA have suffered damages totaling approximately $
By notice dated July 14, 2022, the Company received
notice from a distributor that has a distribution agreement with InduraPower claiming that InduraPower, and the Company as guarantor,
has breached the distribution agreement, and are claiming approximately $
On or about July 17, 2022, the former employees
of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $
22
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
On or about July 28, 2022, a former employee
filed suit against the Company, Dustin McIntire, and Daniel Hodges in the San Diego County California Superior Court, Case No. 37-2022-00028083-CU-BC-CTL
(“RVI Claim #1”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company
failed to issue him stock options, and that he is owed future amounts. He claimed damages of no
less than $
On or about August 22, 2022, two former Fastback
employees filed suit against the Company, DragonWave and Fastback in the Alameda County Superior Court, California, Case No. 22CV016666.
The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times,
failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff claimed damages of no less than $
On or about August 23, 2022, a former employee
filed suit against the Company in the Clark County District Court, Nevada, Case No. 3 A-22-857361-C (“RVI Claim #2”). The
plaintiff alleged that his wages were not paid, that he was constructively discharged, that the
Company failed to issue him stock options, and that he is owed future amounts. He claimed damages of no less than $
On or about September 20, 2022, the Company was
served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory
note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806.
The plaintiff alleges that for $
See Note 21 – Subsequent Events – Litigation, Claims and Contingencies Developments for post-September 30, 2022 developments.
NOTE 18 CONCENTRATIONS
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral related to its trade accounts receivable. At September 30, 2022, accounts receivable
from three customers comprised an aggregate of approximately
In addition, for the three months ended September
30, 2022, revenue from two customers individually exceeded
NOTE 19 BUSINESS ACQUISITIONS
During 2021, the Company completed the acquisitions of Fastback Networks, a telecommunications provider, Sky Sapience Ltd., a tethered drone provider, Rvision, Inc., a video and communications developer, Innovation Digital, a developer of signal processing solutions, RF Engineering and Energy Resource, an antenna and accessories provider, and SAGUNA Networks, a software developer to expand the Company’s product offerings and developments.
The following information represents the unaudited pro forma combined results of operations, giving effect to the acquisitions as if they occurred at the beginning of the period ended September 30, 2021.
| For the Three Months Ended | For the Nine Months Ended | |||||||
| (Amounts in thousands) | September 30, 2021 | September 30, 2021 | ||||||
| Revenue | $ | $ | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | ||
| Weighted-average common shares outstanding | $ | |||||||
23
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
NOTE 20 OTHER BUSINESS DEVELOPMENTS
Executive Officer and Board of Director Developments
On April 21, 2022, the Company’s Chief Financial Officer resigned from the Company for personal family commitments.
On May 2, 2022, a member of the Board of Directors of the Company (the “Board”) announced their resignation from the Board and all committees thereof, effective immediately. The resignation allowed that former member of the Board to focus on personal and other professional commitments.
On September 1, 2022, the Company’s then Chief Executive Officer and the Company’s then President resigned from the Company as part of the Company’s ongoing transition. David A. Knight was appointed Interim Chief Executive Officer by the Board.
Business Developments
Commencing in May 2022, the Company embarked on
a reduction of over
In May 2022, InduraPower idled the employees.
On
May 23, 2022, a third party acquired certain assets and employees from the Canadian subsidiary of DragonWave-X, LLC (“DragonWave
Canada”), in return for assuming DragonWave Canada’s potential employment liabilities and assuming DragonWave Canada’s
lease in Kanata, Ontario, Canada, through an Asset Purchase Agreement. The Company recognized a $
In June 2022, the Company idled the employees of SAGUNA Networks Ltd. (“SAGUNA”), Sky Sapience Ltd. (“SKS”) and VEO Photonics, Inc. (“VEO”).
On
June 23, 2022, the Company reached an agreement to return fifteen patents and five pending or provisional patents to the former owners
of Innovation Digital, LLC (“Innovation Digital”), resulting in the derecognition of an outstanding promissory note of an
aggregate $
NOTE 21 SUBSEQUENT EVENTS
Executive Officer and Board of Director Developments
On October 10, 2022, a member of the Board announced their resignation from the Board and all committees thereof. The resignation allowed that former member of the Board to focus on personal and other professional commitments.
On
November 23, 2022, the Board appointed David A. Knight as the Company’s Chief Executive Officer, President, Acting Principal Financial
and Accounting Officer, and a Director of the Board. Mr. Knight is entitled to receive (i) an annual base salary of $
Business Developments
On
December 21, 2022, the Company entered into a Share Purchase Agreement (the “SKS Sale Agreement”) with Titan Innovations
Ltd., an Israeli corporation (“Titan”), pursuant to which we agreed to sell our Israel-based tethered drone unit Sky Sapience
Ltd. (“SKS”) to Titan. The total consideration for the sale is $
On
December 29, 2022, the Company entered into a Settlement Agreement (“Settlement Agreement”) to resolve RVI Claim #1 and RVI
Claim #2 (see the Litigation, Claims and Contingencies Developments section in the Note for additional information). As
required by the terms of the Settlement Agreement, we entered into a Stock Purchase Agreement (the “RVI Sale Agreement”)
with the plaintiffs in the two lawsuits (“Buyers”), pursuant to which, and subject to the terms and conditions of the RVI
Sale Agreement, we agreed to sell Rvision, Inc. (“RVI”) to Buyers. The consideration for the sale was the dismissal of the
two lawsuits and $
In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC.
24
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(unaudited)
Debt and Equity Developments
Subsequent
to September 30, 2022 and through the filing date of this Form 10-Q, there were Note Holder Conversions of $
On
October 17, 2022, the Company sold a promissory note in the principal amount of $
On
November 8, 2022, the Company sold a promissory note in the principal amount of $
On
or about December 8, 2022, the Company canceled
On January 17, 2023 and February 1, 2023,
the Company sold unsecured promissory notes in the principal amounts of $
During
January 2023, pursuant to a limited time offer, certain Note K convertible note holders agreed to amend their note and convert an aggregate
of $
Litigation, Claims and Contingencies Developments
On or about November 14, 2022, an intellectual
property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego.
The plaintiff alleges that they performed work for the Company and its subsidiaries subsequent to September 30, 2022 and are owed approximately
$
On or about November 15, 2022, the Company resolved
the claims of former employees of SAGUNA who had, on or about July 17, 2022, filed an insolvency request against SAGUNA in the Nazareth
District Court, Israel, No. 27624-07-22. The approximately $
On
or about January 10, 2023, a recruiting and staffing company obtained a default judgment against the Company in County Court, Collin
County, Texas, Case No. 004-01539-2022, for principal of $
On January 9, 2023, a former employee of a subsidiary of InduraPower, filed suit against COMSovereign, Daniel Hodges, and David Knight, in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount of damages. COMSovereign strongly disputes plaintiff’s allegations, has not accrued for the claim, and intends to vigorously defend the lawsuit.
Nasdaq Compliance Developments
As
previously disclosed in the Company’s Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, the Company is not
in compliance with Nasdaq Listing Rule 5550(a)(2), the $
On November 17, 2022, a hearing was held before the Nasdaq Hearings Panel (the “Panel”) regarding the Company’s request for continued listing on The Nasdaq Capital Market of the Company’s common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the Panel issued its determination, granting the Company’s request for the continued listing of the Company’s common stock, subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq’s filing requirement by getting the Company’s remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other conditions. Upon the filing on or before February 24, 2023, of this Quarterly Report on Form10-Q for the quarter ended September 30, 2022, the Company will be compliant with the filing requirements. The Nasdaq Panel granted the Company’s request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with minimum bid price requirement by February 24, 2023.
The Company is working to demonstrate compliance with the minimum bid price requirement by February 24, 2023 for continued listing on Nasdaq. The Company put forth a reverse split proposal to our stockholders, which was approved at the Company’s Annual Stockholders meeting on February 8, 2023. On February 8, 2023, the Board of Directors of the Company set the reverse stock split ratio at one-for-one hundred, and approved and adopted a Certificate of Amendment to our Amended and Restated Articles of Incorporation which became effective at 11:59 p.m. Eastern Time on February 9, 2023, to effect the reverse stock split. The Company’s common stock commenced trading on the post-split basis on February 10, 2023, on the Nasdaq Capital Market under the same symbol “COMS” with a new CUSIP number, 205650401. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this Quarterly Report to “Company, “we”, “us” and “our” refer to the COMSovereign Holding Corp. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations,” contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. From time to time in the future, we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical fact, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Readers should carefully review the risk factors included under “Item 1A. Risk Factors” that are included in Part II of this Quarterly Report as well as our fiscal 2021 Annual Report on Form 10-K filed with the U. S. Securities and Exchange Commission (the “SEC”) on August 16, 2022.
Overview of Business; Operating Environment and Key Factors Impacting Our Operating Results
The following MD&A is intended to help readers understand the results of our operations and financial condition and is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes (“Notes”) in Part 1 of this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, unless otherwise indicated.
Business Overview
We are a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S. based providers of telecommunications equipment and services.
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 products for telecom network operators, mobile device carriers and other enterprises, including the following: |
| ● | Wireless Transport Solutions. We offer a line of high-capacity packet microwave solutions that drive next-generation intellectual property (“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. |
26
| ● | Edge Compute Capable Small Cell 4G LTE and 5G Access Radios. We offer both 4G/LTE and 5G New Radio (“NR”) based 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 Internet-of-things devices. Recently, we developed we believe 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. |
| ● | 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 tactical communications. We focus primarily on a suite of tethered aerostats known as the Winch Aerostat Small Platform, 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 optical 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 design and verification, SiP design and integration, system software development, hardware design, high-speed electronics design and network planning, installation, maintenance, and servicing. We believe 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 Business
Through a series of acquisitions, we have expanded our service offerings and geographic reach over the past three years. On November 27, 2019, we completed the acquisition of ComSovereign Corp. (“ComSovereign”) in a stock-for-stock transaction with a total purchase price of approximately $80 million (the “ComSovereign Acquisition”). 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 businesses, each of which was acquired to address a different opportunity or sector of the telecom infrastructure and service market. These acquired entities are designated as CORE and Noncore businesses. Our CORE business is comprised of our network hardware and software products and services solutions, and our Noncore business is comprised the Drone and related products. Our Power division employees have been idled.
Our CORE business is comprised of the following acquisitions:
| ● | 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. On May 23, 2022, the Company sold the assets of DragonWave’s Canadian subsidiary, and transferred the related employees and assigned the Canadian lease of DragonWave’s Canadian subsidiary, to a third party. |
| ● | Virtual NetCom, LLC. Virtual NetCom, LLC (“VNC”) is an edge compute focused wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G NR 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. We acquired VNC in July 2020. |
| ● | Fastback. Skyline Partners Technology LLC, which conducted 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 limitations. Fastback’s advanced IBR products allow operators to economically add capacity and density to their existing cellular networks 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. |
| ● | 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. |
27
| ● | 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. In order to conserve cash, VEO idled the employees in June 2022. |
| ● | RF Engineering & Energy Resource, LLC. RF Engineering & Energy Resource, LLC (“RF Engineering”) is a Michigan-based provider of high-quality microwave antennas and accessories. By providing one of the industry’s lowest cost of ownership, RF Engineering has continued to innovate and expand, and it recently announced the industry’s first Universal Licensed Microwave Antenna. Supporting frequencies from (6-42 GHz), customers can now reduce sparing costs and safely future-proof their networks by leveraging this new Universal plug and play architecture. We acquired RF Engineering in July 2021. In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC. |
| ● | SAGUNA Networks Ltd. SAGUNA Networks Ltd. (“SAGUNA”) based in Yokneam, Israel, is the software developer behind the award-winning SAGUNA Edge Cloud, which transforms communication networks into powerful cloud-computing infrastructures for applications and services, including augmented and virtual reality, Internet of Things (“IoT”), edge analytics, high-definition video, connected cars, autonomous drones and more. SAGUNA allows these next-generation applications to run closer to the user in a wireless network, dramatically cutting down on latency, which is a fundamental and critical requirement of 5G networks. SAGUNA’s Edge Cloud operates on general purpose computing hardware but can be optimized to support the latest artificial intelligence and machine learning features through dedicated accelerators. We acquired SAGUNA in October 2021. In order to conserve cash, SAGUNA idled the employees in June 2022. |
Our NONCORE business is comprised of the following:
| ● | 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, 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 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. In order to conserve cash, SKS idled the employees in June 2022. On December 21, 2022, we agreed to sell SKS, subject to closing conditions and there are no assurances that the transaction will close. |
| ● | Rvision, Inc. Rvision, Inc. (“Rvision”) is a California-based 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. We acquired Rvision in April 2021. On December 29, 2022, we sold Rvision in order to settle two lawsuits. |
As part of the Company’s restructuring, commencing January 1, 2023, the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer intends to manage the Company and make decisions based on the Company’s consolidated operating results.
Discontinued Operations
On June 21, 2022, the Company sold its Sovereign Plastics business unit for total consideration of $2.0 million to TheLandersCompanies LLC.
The historical operating results of Sovereign Plastics are reported as loss from discontinued operations.
Nasdaq Compliance Developments
As previously disclosed in our Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, we are not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of our common stock. Additionally, because we were late with filing our Quarterly Reports on Form10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 (collectively the “Delinquent Reports”), we are not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”).
On November 17, 2022, a hearing was held before the Nasdaq Hearings Panel (the “Panel”) regarding our request for continued listing on The Nasdaq Capital Market of our common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the Panel issued its determination, granting our request for the continued listing of our common stock, subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq’s filing requirement by getting our remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other conditions. Upon the filing on or before February 24, 2023, of this Quarterly Report on Form10-Q for the quarter ended September 30, 2022, the Company will be compliant with the filing requirements. The Nasdaq Panel granted the Company’s request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with minimum bid price requirement by February 24, 2023.
28
The Company is working to demonstrate compliance with the minimum bid price requirement by February 24, 2023 for continued listing on Nasdaq. The Company put forth a reverse split proposal to our stockholders, which was approved at the Company’s Annual Stockholders meeting on February 8, 2023. On February 8, 2023, the Board of Directors of the Company set the reverse stock split ratio at one-for-one hundred, and approved and adopted a Certificate of Amendment to our Amended and Restated Articles of Incorporation which became effective at 11:59 p.m. Eastern Time on February 9, 2023, to effect the reverse stock split. The Company’s common stock commenced trading on the post-split basis on February 10, 2023, on the Nasdaq Capital Market under the same symbol “COMS” with a new CUSIP number, 205650401. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.
Significant Components of Our Results of Operations
Revenues
Our revenues are generated primarily from the sale of our products, which consist primarily of telcom hardware, repairs, support and maintenance, drones, tooling, consulting, warranties and others. 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.
During the three and nine months ended September 30, 2022, approximately 0% and 8%, respectively, of our revenues were derived from sales outside of North America. During the three and nine months ended September 30, 2021, approximately 14% and 28%, respectively, of our revenues were derived from sales outside of North America. 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 our Fastback and DragonWave products to SMC for Fastback products and Benchmark for DragonWave products. 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.
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.
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.
29
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.
Share-Based Compensation
Share-based compensation consists of expense related to the issuance of equity instruments, which can be in many forms, such as incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including performance-based awards under our long-term incentive plans or outside of such plans. The expense related to any share-based compensation grant is allocated to specific groupings in the condensed consolidated statement of operations in the same manner as the grantee’s normal compensation expense and will vary depending upon the number of underlying shares of common stock, the fair value of the common stock on the date of grant and the vesting period.
Results of Operations
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Amounts in thousands, except share and per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenue | $ | 3,796 | $ | 3,268 | $ | 7,937 | $ | 6,770 | ||||||||
| Cost of goods sold | 1,795 | 1,252 | 6,259 | 3,125 | ||||||||||||
| Gross profit | 2,001 | 2,016 | 1,678 | 3,645 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development (1) | 74 | 2,058 | 1,782 | 3,805 | ||||||||||||
| Sales and marketing (1) | 27 | 292 | 105 | 449 | ||||||||||||
| General and administrative (1) | 2,672 | 6,075 | 13,848 | 19,486 | ||||||||||||
| Depreciation and amortization | 702 | 3,593 | 1,705 | 10,548 | ||||||||||||
| Impairment (2) | (1,090 | ) | - | 14,685 | 281 | |||||||||||
| Loss on sales (ID, DWXC) (3) | - | - | 2,564 | - | ||||||||||||
| Loss on lease abandonment | 305 | - | 11,634 | - | ||||||||||||
| Gain on the sale of assets | - | - | (8,441 | ) | (83 | ) | ||||||||||
| Total operating expenses, net | 2,690 | 12,018 | 37,882 | 34,486 | ||||||||||||
| Loss from operations | (689 | ) | (10,002 | ) | (36,204 | ) | (30,841 | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | (755 | ) | (723 | ) | (2,982 | ) | (1,705 | ) | ||||||||
| Other expense | - | (116 | ) | - | (116 | ) | ||||||||||
| Gain (loss) on extinguishment of debt | (512 | ) | 300 | (1,130 | ) | (4,479 | ) | |||||||||
| Foreign currency transaction loss | - | 94 | - | 32 | ||||||||||||
| Total other expense | (1,267 | ) | (445 | ) | (4,112 | ) | (6,268 | ) | ||||||||
| Loss from continuing operations | (1,956 | ) | (10,447 | ) | (40,316 | ) | (37,109 | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | - | (242 | ) | 747 | (363 | ) | ||||||||||
| Net loss | $ | (1,956 | ) | $ | (10,689 | ) | $ | (39,569 | ) | $ | (37,472 | ) | ||||
| (1) | These are exclusive of depreciation and amortization |
| (2) | See Note 12 – Goodwill and other Intangible Assets in the accompanying financial statements for out-of-period adjustment. |
| (3) | InnovationDigital (“ID”), DragonWave-X Canada (“DWXC”) |
30
Three and Nine Months Ended September 30, 2022 Compared to Three and Nine Months Ended September 30, 2021
Total Revenues
For the three months ended September 30, 2022, total revenues were $3.8 million compared to $3.3 million for the three months ended September 30, 2021. The increase of $0.5 million, or 15%, primarily consisted of increased sales of our aerostat products and accessories offset by decreases in our mobile network backhaul products.
For the nine months ended September 30, 2022, total revenues were $7.9 million compared to $6.8 million for the nine months ended September 30, 2021. The increase of $1.1 million, or 16%, primarily consisted of increased sales of mobile network backhaul products, the sale of our aerostat products and accessories and one-time sales of inventory.
Cost of Goods Sold and Gross Profit
For the three months ended September 30, 2022, cost of goods sold was $1.8 million compared to $1.3 million for the three months ended September 30, 2021. The increase of $0.5 million, or 38%, primarily the sale of our aerostat products and accessories and payment to our contract manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities.
For the nine months ended September 30, 2022, cost of goods sold were $6.2 million compared to $3.1 million for the nine months ended September 30, 2021. The increase of $3.1 million, or 100%, primarily consisted of the one-time sale of inventory, the sale of our aerostat products and accessories and the payment to our contract manufacturer, including increases in purchase price variances for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities.
Gross profit for the three months ended September 30, 2022 was $1.8 million compared to $2.0 million for the three months ended September 30, 2021. The decrease in gross profit margin of $0.2 million, or 10%, was driven primarily by products that were lower margin during the current quarter as compared to the corresponding period in fiscal year 2021 and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers, resulting from current macro supply chain constraints.
Gross profit for the nine months ended September 30, 2022 was $1.5 million compared to $3.6 million for the nine months ended September 30, 2021. The decrease in gross profit margin of $2.1 million, or 58%, was driven primarily by the one-time sale of DragonWave inventory of approximately $1.8 million at a loss of $1.6 million due to the challenges related to the Company’s liquidity. In addition, it was impacted by products that were lower margin during the nine months as compared to the corresponding period in fiscal year 2021, and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers resulting from current macro supply chain constraints.
Research and Development Expense
For the three months ended September 30, 2022, research and development expense was $0.1 million compared to $2.1 million for the three months ended September 30, 2021. The decrease of $2.0 million consisted primarily of contract labor and payroll related costs due to the suspension of research and development activity as a result of liquidity challenges.
For the nine months ended September 30, 2022, research and development expense was $1.8 million compared to $3.8 million for the nine months ended September 30, 2021. The decrease of $2.0 million consisted primarily of contract labor and payroll related costs due to the suspension of research and development activity as a result of liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Sales and Marketing Expense
For the three months ended September 30, 2022, sales and marketing expense was $0.0 million compared to $0.3 million for the three months ended September 30, 2021. The decrease of $0.3 million primarily consisted of decreases in sales costs and cutbacks due to the Company’s liquidity challenges.
For the nine months ended September 30, 2022, sales and marketing expense was $0.1 million compared to $0.4 million for the nine months ended September 30, 2021. The decrease of $0.3 million primarily consisted of decreases in sales costs and cutbacks due to the Company’s liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
31
General and Administrative Expenses
For the three months ended September 30, 2022, general and administrative expense was $2.7 million compared to $6.1 million for the three months ended September 30, 2021. The decrease of $3.4 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges.
For the nine months ended September 30, 2022, general and administrative expense was $13.8 million compared to $19.5 million for the nine months ended September 30, 2021. The decrease of $5.7 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Depreciation and Amortization
For the three months ended September 30, 2022, depreciation and amortization was $0.7 million compared to $3.6 million for the three months ended September 30, 2021. The decrease of $2.9 million was primarily due to the sale of our Tucson Building (see below) and equipment, partially offset by $0.4 million of additional amortization that was recorded in order to correct an understatement of intangible asset amortization during the three months ended June 30, 2022.
For the nine months ended September 30, 2022, depreciation and amortization was $1.7 million compared to $10.5 million for the nine months ended September 30, 2021. The decrease of $8.8 million was primarily due to the sale of our Tucson Building and equipment.
Impairment
For the three months ended September 30, 2022, impairment was a credit of $1.1 million compared to $0.0 million for the three months ended September 30, 2021. The credit of $1.1 million was due to the correction of the second quarter 2022 overstatement of intangible asset impairment.
For the nine months ended September 30, 2022, impairment was $14.7 million compared to $0.3 million for the nine months ended September 30, 2021. The increase of $14.4 million primarily arose out arose out of:
| ● | $7.5 million impairment of intangibles from re-calendarization of revenue into later periods; and |
| ● | $7.2 million impairment of goodwill from a decrease in the Company’s market capitalization. |
Loss on Sales of Innovation Digital and DragonWave-X Canada Assets
For the three months ended September 30, 2022 and 2021, there was no loss on the sales of Innovation Digital and DragonWave-X Canada assets.
For the nine months ended September 30, 2022, the loss on the sales of Innovation Digital and DragonWave-X Canada assets was $2.6 million compared to $0.0 million for the nine months ended September 30, 2021. The increase is primarily due to the transfer of $2.0 million of finished goods inventory to the purchaser of DragonWave-X Canada and the $0.6 million of intellectual property returned to the original owners of Innovation Digital.
Loss on Lease Abandonment
For the three months ended September 30, 2022, the loss on lease abandonment was $0.3 million compared to $0.0 million for the three months ended September 30, 2021, which was due to the 2022 abandonment of our Virginia location.
For the nine months ended September 30, 2022, the loss on lease abandonment was $11.6 million compared to $0.0 million for the nine months ended September 30, 2021. The increase of $11.6 million primarily consisted of $10.0 million related to the abandonment of the Tucson Building lease and related leasehold improvements and inventory, $1.0 million related to the abandonment of the Dallas Texas office space and related leasehold improvements, $0.3 million related to the abandonment of the Chantilly Virginia lease and related leasehold improvements and inventory, $0.2 million related to the abandonment of the San Diego California lease, and $0.2 million related to the return of various pieces of operating lease equipment and abandonment of small offices or airport hangers used for drone storage.
Gain on the Sale of Assets
For the three months ended September 30, 2022, the gain on the sale of assets was $0.0 million compared to $0.0 million for the three months ended September 30, 2021.
For the nine months ended September 30, 2022, the gain on the sale of assets was $8.4 million compared to $0.1 million for the nine months ended September 30, 2021. The increase of $8.3 million is primarily due to the January 31, 2022 sale of our Tucson Building for $15.8 million of cash. The Tucson Building had a carrying value of $6.7 million. The Company recognized an $8.5 million gain on sale of assets, which is net of $0.7 million of related transaction costs.
32
Other Expenses
For the three months ended September 30, 2022, other expense was $1.3 million compared to other expense of $0.4 million for the three months ended September 30, 2021. The increase of $0.9 million primarily consisted of increases in the gain (loss) on extinguishment of debt of $0.8 million, and foreign currency transaction gain (loss) of $0.1 million, partially offset by a decrease in interest expense of $0.3 million.
For the nine months ended September 30, 2022, other expense was $4.1 million compared to other expense of $6.3 million for the nine months ended September 30, 2021. The decrease of $2.2 million primarily consisted of a decrease in the gain (loss) on extinguishment of debt of $3.3 million, partially offset by increases in interest expense of $1.3 million.
Loss from Continuing Operations
For the three and nine months ended September 30, 2022, we had a net loss from continuing operations of $2.0 million and $40.3 million, respectively, compared to a net loss from continuing operations of $10.4 million and $37.1 million for the three and nine months ended September 30, 2021, related to the items described above.
Loss from Discontinued Operations
For the three and nine months ended September 30, 2022, we had net income from discontinued operations of $0.0 million and $0.7 million, respectively, compared to a net loss from discontinued operations of $0.2 million and $0.4 million for the three and nine months ended September 30, 2021. The income in the nine months ended September 30, 2022 included a $1.1 million gain on the sale of Sovereign Plastics.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its cash requirements. As of September 30, 2022, we had $0.6 million in cash compared to $1.9 million on December 31, 2021, a decrease of $1.3 million resulting primarily from $10.7 million of cash used in operating activities and $7.6 million of debt repayments, partially offset by $15.1 million of cash proceeds from the sale of the Tucson Building on or about January 31, 2022. See Note 11 – Property and Equipment, Net in the notes to the condensed consolidated financial statements for more information related to the sale of the Tucson Building.
As of September 30, 2022, we had a working capital deficit of $10.5 million compared to working capital deficit of $3.6 million as of December 31, 2021.
As of September 30, 2022, we had undiscounted obligations relating to the payment of indebtedness as follows:
| ● | $14.2 million related to indebtedness that is due during the remainder of 2022; |
| ● | $0.1 million related to indebtedness that is due during 2023; and |
| ● | $3.9 million related to indebtedness that is due after 2026. |
Subsequent to September 30, 2022, the following developments should be noted:
| ● | of the $18.2 million of indebtedness that is outstanding, $7.0 million was converted into common stock; and |
| ● | additional promissory notes with a face value of $7.0 million were issued. |
Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, and the costs of our operations. We cannot be sure that any additional funding, if needed, will be available. Any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership and could also result in a decrease in the market price of our common stock. Debt financing, if available, may subject us to restrictive covenants and significant interest costs.
Going Concern
The accompanying unaudited condensed consolidated financial statements and notes have been prepared assuming that we will continue as a going concern. For the nine months ended September 30, 2022, we used cash flows in operating activities of $10.7 million, and at September 30, 2022 we had an accumulated deficit of $257.4 million and we had working capital deficit of $10.5 million.
Our fiscal operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about our ability to continue as a going concern. Based on our current cash on hand and subsequent activity as described herein, we presently only have enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of our limited cash availability, our operations have been scaled back to the extent possible. We continue to explore opportunities with third parties and related parties to provide additional capital; however, we have not entered into any agreement to provide the necessary capital. In the near term, there will be limited opportunities to raise capital of significance until our Nasdaq compliance issues are resolved, as discussed in Nasdaq Compliance Developments herein.
33
We will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet our future liquidity requirements. However, there can be no assurance that we will be successful in any capital-raising efforts that we may undertake. If we are not able to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.
Lines of Credit and Debt
Summary information with respect to our debt or other credit facilities is set forth in Note 14 – Debt of the notes to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report.
Sources and Uses of Cash
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| (Amounts in thousands) | 2022 | 2021 | ||||||
| Cash flows used in operating activities | $ | (10,706 | ) | $ | (33,121 | ) | ||
| Cash flows provided by (used in) investing activities | 14,935 | (8,699 | ) | |||||
| Cash flows used in (provided by) financing activities | (7,163 | ) | 46,747 | |||||
| Cash flows provided by discontinued operations | 1,632 | (2,857 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (1,302 | ) | $ | 2,070 | |||
Operating Activities
For the nine months ended September 30, 2022, net cash used in operating activities was $10.7 million. Net cash used in operating activities primarily consisted of the net loss from continuing operations of $40.3 million, which was partially offset by adjustments for non-cash expenses of $27.3 million and net cash generated by changes in the levels of operating assets and liabilities of $2.3 million.
For the nine months ended September 30, 2021, net cash used in operating activities was $33.1 million. Net cash used in operating activities primarily consisted of the net operating loss from continuing operations of $37.1 million, which was partially offset by adjustments for non-cash expenses of $19.1 million, and net cash used to fund changes in the levels of operating assets and liabilities of $15.1 million.
Investing Activities
For the nine months ended September 30, 2022, net cash provided by investing activities was $14.9 million. Investing activities primarily consisted of proceeds from the building sale of $15.1 million, which was partially offset by the acquisition of property and equipment of $0.2 million.
For the nine months ended September 30, 2021, net cash used in investing activities was $8.7 million. Investing activities primarily consisted of net cash used to fund business acquisitions of $4.5 million, acquire property and equipment of $3.1 million, and acquire intangible assets of $1.2 million, which was partially offset by proceeds from disposal of property and equipment of $0.1 million.
Financing Activities
For the nine months ended September 30, 2022, net cash used in financing activities was $7.2 million. Financing activities primarily consisted of repayment of debt of $7.6 million and preferred stock dividends paid of $0.2 million, which was partially offset by $0.6 million proceeds of debt.
For the nine months ended September 30, 2021, net cash provided by financing activities was $46.7 million. Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of $45.0 million and net proceeds of borrowings of $14.2 million, which was offset by the repayment of debt of $6.4 million, offering costs of $5.3 million, and the repayment of related party notes of $0.9 million.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.
34
However, it should be noted that business developments commencing in the second quarter of 2022 (see Note 3 – Discontinued Operations and Note 20 – Other Business Developments) in the footnotes to the unaudited consolidated financial statements herein, included discussions of selling or exiting of certain businesses and/or assets and of idling of employees. The Company recognized $11.6 million of impairment expense during the three months ended June 30, 2022. During the current quarter, the Company determined that it was not more likely than not that any reporting unit’s fair value was below that reporting unit’s carrying amount. Accordingly, it was not necessary to perform interim impairment testing as of September 30, 2022, but the Company may need to recognize additional impairment expense in the near future.
Consequently, for the purpose of emphasis, we are again disclosing below our accounting policy related to long-lived assets and goodwill.
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
As of June 30, 2022, due to a sustained decline in the Company’s market capitalization, the Company recognized $11.6 million of impairment expense. As of September 30, 2022, because there were no new significant Company developments, the Company determined that it was not necessary to perform interim impairment testing because it was not more likely than not that any intangible assets’ or reporting unit’s fair value was below its carrying amount. As of December 31, 2022, the Company will perform its annual impairment testing and the Company may need to recognize additional impairment expense at that time, if there are unfavorable events or changes in circumstances (e.g. deterioration in general economic conditions, limitation on accessing capital, deterioration in the environment in which an entity operates, etc.) which lead to quantitative impairment testing and possibly a conclusion that the carrying value of certain intangibles or reporting units exceeds their fair value.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required under Regulation S-K for smaller reporting companies.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our Chief Executive Officer and Acting Principal Financial and Accounting Officer has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Acting Principal Financial and Accounting Officer has concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, management has identified the following material weaknesses in our disclosure controls and procedures:
| ● | While improvements were made in the segregation of duties and controls over cash and accounts payable, we have not effectively segregated certain accounting duties due to the now smaller 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 remediation of the material weaknesses in our internal control over financial reporting is ongoing.
(b) Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting during the three months ended September 30, 2022, as compared to the internal control over financial reporting weaknesses described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in any of the legal proceedings discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2021, except as follows.
On or about November 14, 2022, an intellectual property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego. The plaintiff alleges that they performed work for the Company and its subsidiaries and are owed approximately $75,000.
On or about November 15, 2022, the Company resolved the claims of former employees of SAGUNA who had, on or about July 17, 2022, filed an insolvency request against SAGUNA in the Nazareth District Court, Israel, No. 27624-07-22. The approximately $200,000 of post-September 30, 2022 claims of the former employees were resolved and the action was dismissed on or about November 17, 2022.
On or about January 10, 2023, a recruiting and staffing company obtained default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for principal of $134,650, prejudgment interest of $4,542, court costs of $425, attorney’s fees of $6,300, and post judgment interest at 7%.
On January 9, 2023, a former employee of a subsidiary of InduraPower, filed suit against our Company in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. We dispute plaintiff’s allegations, and we intend to vigorously defend the lawsuit.
Item 1A. Risk Factors
Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2021 Annual Report on Form 10-K filed with the SEC on August 16, 2022. However, due to recent activities of the Company, the following additional risk factor has been identified:
The Company May Be Delisted From Nasdaq
| ● | Minimum Bid Price. The Company is not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of our common stock. The Company requested continued listing on The Nasdaq Capital Market of its common stock and additional time to regain compliance with the minimum bid price requirement. After a hearing before the Nasdaq Hearings Panel (the “Panel”) the Panel granted the Company’s request for continued listing subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2022. The Panel granted the Company’s request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with Listing Rule 5550(a)(2) by February 24, 2023. In order to reach that goal, the Company put forth a reverse split proposal to its stockholders that was approved at its Annual Stockholders meeting on February 8, 2023. Also on February 8, 2023, the Board of Directors of the Company set the reverse stock split ratio at one-for-one hundred, and approved and adopted a Certificate of Amendment to our Amended and Restated Articles of Incorporation which became effective at 11:59 p.m. Eastern Time on February 9, 2023, to effect the reverse stock split. The Company’s common stock commenced trading on the post-split basis on February 10, 2023, on the Nasdaq Capital Market under the same symbol “COMS” with a new CUSIP number, 205650401. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules. |
As of the time of this filing, the prior day’s closing bid price for our common stock was approximately $3.16 per share.
| ● | Filing Requirement. The Company is not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”). The Company is delinquent with filing its Quarterly Reports on Form10-Q for the quarters ended September 30, 2022. The Company requested continued listing on The Nasdaq Capital Market of its common stock and additional time to regain compliance with the filing requirement. After the hearing, the Panel granted the Company’s request for continued listing subject to evidencing compliance with Nasdaq’s filing requirement by getting the delinquent Form 10-Qs filed, including the filing of the Form10-Q for the quarter ended September 30, 2022 by February 24, 2023, and certain other conditions. Upon the filing on or before February 24, 2023, of this Quarterly Report on Form10-Q for the quarter ended September 30, 2022, the Company should be compliant with the filing requirements. There can be no assurances, however, that the Company will meet the deadlines for filing its delinquent Form 10-Q, or that the Company will be able to gain or maintain compliance with the Nasdaq Listing Rules. |
There is no assurance that the Company will regain compliance during the grace periods or be able to maintain compliance with Nasdaq’s listing requirements in the future. If we are not able to regain compliance during the grace period, Nasdaq will notify us that our common stock, our Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”), and our warrants will be delisted from The Nasdaq Capital Market.
If our securities were delisted from Nasdaq, among other things, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common and preferred stock, greater difficulty in obtaining financing, potential loss of confidence by employees, loss of institutional investor interest and fewer business development opportunities.
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There have been no sales of unregistered securities within the within the reporting period that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:
Between July 22, 2022 and September 23, 2022, we issued to two accredited investors an aggregate of 165,358 shares of our common stock upon the conversion of certain principal of outstanding senior secured convertible promissory notes at a weighted average conversion price of $9.34 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.
Between October 4, 2022 and December 9, 2022, we issued to two accredited investors an aggregate of 1,310,911 shares of our common stock upon the conversion of certain principal and interest of outstanding senior secured convertible promissory notes at a weighted average conversion price of $4.40 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.
Item 3. Default Upon Senior Securities
(a) Defaults Upon Senior Securities
In connection with our acquisition of Fastback on January 29, 2021, we issued to the sellers $11.2 million aggregate principal amount of convertible promissory notes that mature on January 29, 2026. There is a provision in the convertible promissory notes that an event of default could be declared if the Company fails to file its requisite its securities filings timely. The Company was delinquent with its Form 10-Q filings. To date, while the convertible promissory note holders have reserved their rights, the convertible promissory notes have not been declared in default, and the Company has a plan to regain compliance with such filings. Upon the filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, the Company will be compliant with the filing requirement. No adverse actions have been taken against the Company and we expect none insofar as filing compliance is regained. During January 2023, pursuant to a limited time offer, certain Fastback convertible promissory note holders agreed to amend their notes and convert an aggregate of $1.3 million principal of their notes and $0.3 million of accrued interest into 280,625 shares of the Company’s common stock.
On May 27, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $11.0 million and warrants to purchase up to 18,200 shares of our common stock, par value $0.0001 per share, for a purchase price of $10.0 million (representing an original issue discount of 10.0% on the note), of which we received $5.0 million on May 28, 2021 and $5.0 million on June 2, 2021. On August 25, 2021, we entered into a first amendment and limited waiver to the securities purchase agreement dated as of May 27, 2021 and amended and restated the convertible note.
The amended note bears interest at the rate of 6% per annum from the date of funding and matures on May 27, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $611,000 each, commencing in November 2021. We had the right to make interest and principal payments in the form of shares of common stock, which shares will be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of September 30, 2022, an aggregate principal amount of approximately $3.0 million was outstanding under this note. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $50,000.
On August 25, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $5.8 million and warrants to purchase up to 13,158 shares of our common stock, par value $0.0001 per share (the “Common Stock”), for a purchase price of $5.0 million (representing an original issue discount of 16.0% on the note), which $5.0 million was received on August 26, 2021.
The note bears interest at the rate of 6% per annum from the date of funding and matures on August 25, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $322,000 each, commencing in November 2021. So long as shares of our common stock are registered for resale under the Securities Act of 1933, as amended, or may be sold without restriction on the number of shares or manner of sale, we had the right to make interest and principal payments in the form of additional shares of common stock, which shares would be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of September 30, 2022, an aggregate principal amount of approximately $2.8 million was outstanding under this note. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $180,000.
37
In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2.0 million loan that bears interest at the rate of 9% per annum and originally matured 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 was 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 Corp. In January 2021, a total of $1.0 million 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. In January 2022, a total of $500,000 was paid to the note holder. As of the date of this filing, this note had a remaining principal balance of $500,000.
On or about April 29, 2022, the Company sold an original issue discount note in the amount of $550,000 to an investor for the purchase price of $500,000. This note was due approximately July 29, 2022 and bears a default interest rate of 12% after the maturity date. As of the date of this filing, this note had a remaining principal balance of $550,000.
(b) Material Arrearage in the Payment of Dividends.
On October 29, 2021, the Company sold in a public offering 320,000 shares of the Company’s newly-designated 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), at a public offering price of $25.00 per share, which is the initial liquidation preference of the Series A Preferred Stock.
The Series A Preferred Stock has been listed on The Nasdaq Capital Market under the symbol “COMSP”.
Dividends at the rate of 9.25% per annum of the $25.00 liquidation preference per share (equivalent to an annual rate of $2.3125) on the Series A Preferred Stock are payable monthly in arrears on or about the twentieth (20th) day of each month. Dividends on the Series A Preferred Stock are cumulative. The Company paid dividends commencing on or about November 20, 2021, and paid the monthly dividend through May 20, 2022.
On or about May 25, 2022, the Company announced that it had suspended the payment on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $554,976.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
None
38
Item 6. Exhibits
The following documents are filed as a part of this report or incorporated herein by reference:
39
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMSovereign Holding Corp. | |
| Date: February 24, 2023 | /s/ David A. Knight |
| David A. Knight | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: February 24, 2023 | /s/ David A. Knight |
| David A. Knight | |
| Acting Principal Financial and Accounting Officer |
40