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 | (I.R.S.
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| (Address of principal executive office) | (Zip Code) |
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Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
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).
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. ☐
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As of November 10, 2021, there were
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
| (Amounts in thousands, except share data) | September 30, 2021 | December 31, 2020 | ||||||
| ASSETS | (Unaudited) | |||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use-assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets – 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 | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Notes payable – related party | ||||||||
| Current portion of long-term debt, net of unamortized discounts and debt issuance costs | ||||||||
| Total Current Liabilities | ||||||||
| Debt – long term, net of unamortized discounts and debt issuance costs | ||||||||
| Contract liabilities – long term | ||||||||
| Accrued warranty liability – long term | ||||||||
| Operating lease liabilities – long term | ||||||||
| Finance lease liabilities – long term | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 17) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
1
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (Amounts in thousands, except share and per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Impairment expense | ||||||||||||||||
| Gain on the sale of assets | ( | ) | ( | ) | ||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Net Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain/(Loss) on extinguishment of debt | ( | ) | ( | ) | ( | ) | ||||||||||
| Foreign currency transaction gain/(loss) | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Total Other Expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share: | ||||||||||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average shares outstanding: | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
2
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| (Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other Comprehensive Loss: | ||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| Total Comprehensive Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
3
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three and Nine months ended September 30, 2021 and 2020
| (Amounts in thousands, except | Preferred Stock | Common Stock | Additional Paid-In | Accumulated Other Comprehensive | Treasury | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||
| share data) | Shares | Amount | Shares | Amount | Capital | Loss | Shares | Deficit | Equity | |||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock for exercise of options | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock as vendor compensation | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for public offering | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of debt and interest | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants for extinguishment of debt and interest | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for Sky Sapience Ltd. acquisition | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock for exercise of options | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock as vendor compensation | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for RVision, Inc. acquisition | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for Innovation Digital, LLC acquisition | ||||||||||||||||||||||||||||||||||||
| Issuance of Warrants for debt issuance costs | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for RF Engineering & Energy Resource, LLC acquisition | ||||||||||||||||||||||||||||||||||||
| Issuance of Warrants for debt issuance costs | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
4
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(Unaudited)
For the Three and Nine months ended September 30, 2021 and 2020
| (Amounts in thousands, except | Preferred Stock | Common Stock | Additional Paid-In | Accumulated Other Comprehensive | Treasury | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||
| share data) | Shares | Amount | Shares | Amount | Capital | Loss | Shares | Deficit | Equity | |||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Issuance of common stock for settlement of accounts payable | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for debt issue costs | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Issuance of common stock for exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for payment of accrued interest | ||||||||||||||||||||||||||||||||||||
| Warrants issued in conjunction with debt agreements | — | — | ||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Issuance of common stock for Virtual Network Communications Inc. acquisition | ||||||||||||||||||||||||||||||||||||
| Issuance of options for Virtual Network Communications Inc. acquisition | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of warrants for Virtual Network Communications Inc. acquisition | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for debt issue costs | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants for debt issue costs | — | — | ||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of warrants in conjunction with debt agreements | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of debt and interest | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock as vendor compensation | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants as vendor compensation | — | — | ||||||||||||||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||||||
| Non-cash contribution from Chief Executive Officer | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
5
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| (Amounts in thousands) | For the Nine Months Ended September 30, 2021 | For the Nine Months Ended September 30, 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Amortization of financing right-of-use asset | ||||||||
| Impairment Expense | ||||||||
| Operating lease expense | ||||||||
| Bad debt expense | ||||||||
| Gain on the sale of assets | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Amortization of debt discounts and debt issuance costs | ||||||||
| Share-based vendor payments | ||||||||
| Other, net | ||||||||
| Loss on extinguishment of debt | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaids | ( | ) | ||||||
| Other current assets | ( | ) | ( | ) | ||||
| Other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Accrued payroll | ( | ) | ||||||
| Accrued interest | ||||||||
| Contract liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| (Repayments)/advances from related party | ( | ) | ||||||
| Other current liabilities | ||||||||
| Accrued warranty | ||||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Business acquisitions, net of cash received | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of intangible assets | ( | ) | ||||||
| Proceeds from disposal of property and equipment | ||||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payment on finance lease | ( | ) | ( | ) | ||||
| Proceeds/(payments) on related party notes | ( | ) | ||||||
| Payment on line of credit | ( | ) | ||||||
| Proceeds from sale of common stock from offering | ||||||||
| Offering costs | ( | ) | ||||||
| Proceeds from issuance of debt | ||||||||
| Proceeds from exercise of options | ||||||||
| Debt issuance costs | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rates on cash | ||||||||
| Net increase /(decrease) in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period: | ||||||||
| Taxes | $ | $ | ||||||
| Interest | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Debt incurred to sellers for Skyline Partners Technology LLC | ||||||||
| Issuance of common stock for extinguishment of debt and interest | ||||||||
| Issuance of common stock for Sky Sapience Ltd. Acquisition | ||||||||
| Issuance of common stock for Innovation Digital, LLC | ||||||||
| Issuance of common stock for RVision, Inc. | ||||||||
| Issuance of common stock for RF Engineering & Energy Resource, LLC | ||||||||
| Acquisition of building with secured note payable | ||||||||
| Issuance of warrants for extinguishment of debt and interest | ||||||||
| Issuance of common stock for conversion of debt and interest | ||||||||
| Recognition of operating lease right-of-use asset and liability | ||||||||
| Issuance of Warrants as debt issuance costs | ||||||||
| Capital asset additions transferred from inventory and prepaid | ||||||||
| Debt incurred to sellers for Innovation Digital, LLC | ||||||||
| Lease deposits recognized from Sky Sapience Ltd. Acquisition | ||||||||
| Recognition of operating right-of-use asset and liability rent abatement | ||||||||
| Recognition of finance lease right-of-use asset and liability | ||||||||
| Debt incurred to sellers for Fast Plastics Parts LLC and Spring Creek Manufacturing, Inc. acquisition | ||||||||
| Issuance of common stock to settle interest | ||||||||
| Beneficial conversion feature | ||||||||
| Common stock issued for payment of accounts payable | ||||||||
| Common stock issued as debt issuance costs | ||||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
6
COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
COMSovereign Holding Corp. (“the “Company”), formerly known as Drone Aviation Holding Corp., is a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. The Company has assembled a portfolio of communications, power and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. The Company focuses on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency spectrum. The Company’s product solutions are complemented by a broad array of services including technical support, systems design and integration, and sophisticated research and development programs. The Company competes globally on the basis of its innovative technology, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of its global customer base and distribution. In addition, the Company believes it is in a unique position to rapidly increase its near-term domestic sales as it is among the few U.S.-based providers of telecommunications equipment and services.
Corporate History of the Company
The Company was incorporated under the laws of the State of Nevada on April 17, 2014. In November 2019, the Company entered into an Agreement and Plan of Merger with ComSovereign Corp., a Delaware corporation (“ComSovereign”). As a result, ComSovereign merged into a subsidiary of the Company and became a directly wholly-owned subsidiary of the Company.
7
On January 29, 2021, the Company completed the acquisition of Skyline Partners Technology LLC, a Colorado limited liability company that does business under the name Fastback Networks (“Fastback”). Fastback, is a manufacturer of intelligent backhaul radio (IBR) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight (NLOS) limitations. See Note 11 – Business Acquisitions for further discussion.
On February 25, 2021, the Company completed the acquisition of Sky Sapience Ltd., a company organized under the laws of the State of Israel (“SKS”). SKS is an Israeli-based manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications. See Note 11 – Business Acquisitions for further discussion.
On April 1, 2021, the Company completed the acquisition of RVision, Inc., a Nevada corporation (“RVision”). RVision is a developer of technologically-advanced video and communications products and physical security solutions designed for government and private sector commercial industries. See Note 11 – Business Acquisitions for further discussion.
On June 3, 2021, the Company completed the acquisition of Innovation Digital, LLC, a California limited liability company (“Innovation Digital”). Innovation Digital is a premier developer of “beyond state-of-the-art” mixed analog/digital signal processing solutions, intellectual property (IP) licensing, design and consulting services. See Note 11 – Business Acquisitions for further discussion.
On July 16, 2021, the Company completed the acquisition of RF Engineering & Energy Resource, LLC, a Michigan limited liability company (“RF Engineering”). RF Engineering is a specialist in the design, outsourced manufacturing and distribution of ultra-high performance microwave antennas and other branded solutions for the wireless and wireline industries in the United States and Latin America. See Note 11 – Business Acquisitions for further discussion.
On October 4, 2021, a Company completed the acquisition of SAGUNA Networks LTD, an Israeli-based software development company (“SAGUNA”). SAGUNA is a premier Multi-Access Edge Computing (“MEC”) cloud software developer. The acquisition significantly expanded the Company’s software technology offerings powering 5G wireless networks. See Note 19 – Business Acquisitions for further discussion.
Each of the Company’s subsidiaries was acquired to address a different opportunity or segment within the North American and international telecom infrastructure and service market.
Basis of Presentation
The accompanying financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Historical information is not necessarily indicative of the Company’s future results of operations, financial position or cash flows.
As described in Note 15 – Stockholders’ Equity, effective January 21, 2021, the Company enacted a 1-for-3 reverse stock split (the “Split”) of the Company’s common stock. The Condensed Consolidated Financial Statements and accompanying notes give effect to the Split as if it occurred at the beginning of the first period presented.
Principles of Consolidation
The results for the three
and nine months ended September 30, 2021 are not necessarily indicative of the Company’s results of operations, financial position
or cash flows that may be expected for the full fiscal year or future operating periods.
The unaudited Condensed Consolidated Financial Statements as of, and for the three and nine months ended, September 30, 2021 and 2020 include the accounts of the Company and its subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics, VNC, Fastback, SKS, AZCOMS, RVision, Innovation Digital and RF Engineering. All intercompany transactions and accounts have been eliminated.
8
Reclassifications
Certain immaterial September 30, 2020 amounts have been reclassified to be consistent with the current period presentation.
Use of Estimates
The preparation of unaudited 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. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, interest borrowing rates, valuation of equity securities in share-based payments, valuation of equity securities in debt issuances, valuation of acquired intangible assets, useful lives for depreciation and amortization of long-lived assets, valuation of future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the financial statements in any individual year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes in the Company’s significant accounting policies as of and for the nine months ended September 30, 2021, 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, 2020.
Acquisitions
The Company accounts for business combinations under the acquisition method of accounting, in accordance with ASC Topic 805, Business Combinations, which requires assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. Any excess of the fair value of purchase consideration over the fair value of the assets acquired less liabilities assumed is recorded as goodwill. The fair values of the assets acquired and liabilities assumed are determined based upon the valuation of the acquired business and involves management making significant estimates and assumptions.
Accounting Standards Not Yet Adopted
The Company applies the guidance of Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The Company recognizes the fair value of assets acquired and liabilities assumed in transactions; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; expenses transaction and restructuring costs; and discloses the information needed to evaluate and understand the nature and financial effect of the business combination.
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combination (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance amends ASC 805 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. As a public business entity, this standard will become effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the potential impact ASU 2021-08 will have on our Condensed Consolidated Financial Statements.
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) (ASU 2021-04). This guidance clarifies an issuer’s accounting for certain modifications of freestanding equity-classified written call options and provides a “principles-based” framework to determine whether an issuer should recognize the modification or exchange and an adjustment to equity or an expense. The Company is currently evaluating the potential impact ASU 2021-04 will have on our Condensed Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance simplifies the accounting for certain convertible instruments and contracts in an entity’s own equity. As a smaller reporting entity, this standard will become effective for fiscal years beginning after December 15, 2023, including interim periods within those years. The Company is currently evaluating the potential impact ASU 2020-06 will have on the Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This guidance provides optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments that use LIBOR as a reference rate and is effective upon issuance through December 31, 2022. The Company has performed an evaluation of and will continue to evaluate, through December 31, 2022, the impact of this ASU. This ASU does not currently and is not expected to have in the future, a material effect on the Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This standard will become effective for interim and annual periods beginning after December 15, 2022 and earlier adoption is permitted. The Company is currently evaluating the potential impact the adoption of this ASU will have on the Condensed Consolidated Financial Statements.
9
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 available to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments
is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether
the Company is in a period of net loss available to common shareholders. The following weighted-average potential common shares were excluded
from the diluted loss per common share as their effect was anti-dilutive as of September 30, 2021 and 2020, respectively: stock options
of
3. GOING CONCERN
U.S. GAAP requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.
The accompanying Unaudited
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, 2021, the Company generated negative cash flows from operations of $
Management anticipates that the Company will be dependent, for the near future, on additional debt facilities or investment capital to fund growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, including but not limited to, securing a line or lines of credit, the issuance of debt, and/or accessing the equity markets.
The Company’s fiscal operating results, negative working capital and accumulated deficit, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.
4. REVENUE
The following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| (Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| 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, 2021 and 2020:
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| (Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue by products and services: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
10
Revenue by geographic destination consisted of the following for the for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| (Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| 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, 2021, the Company did not have a contract assets balance.
The following table is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.
| (Amounts in thousands) | Total | |||
| Balance at December 31, 2020 | $ | |||
| Increase | ||||
| Balance at September 30, 2021 | $ | |||
The amount of revenue recognized
in the nine months ended September 30, 2021 that was included in the prior period contract liability balance was $
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of September 30, 2021 and December 31, 2020:
| (Amounts in US$’s) | September 30, 2021 | December 31, 2020 | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash in the Statement of Cash Flows | $ | $ | ||||||
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following as of September 30, 2021 and December 31, 2020:
| (Amounts in US$’s) | September 30, 2021 | December 31, 2020 | ||||||
| Account receivables | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total account receivables, net | $ | $ | ||||||
The Company recognized $
11
7. INVENTORY
Inventory consisted of the following as of September 30, 2021 and December 31, 2020:
| (Amounts in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventory | ||||||||
| Reserve | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
8. PREPAID
Prepaid expenses consisted of the following as of September 30, 2021 and December 31, 2020:
| (Amounts in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Prepaid products and services | $ | $ | ||||||
| Deferred offering expenses | ||||||||
| Prepaid rent and security deposit | ||||||||
| $ | $ | |||||||
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following as of September 30, 2021 and December 31, 2020:
| (Amounts in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Shop machinery and equipment | $ | $ | ||||||
| Computers and electronics | ||||||||
| Office furniture and fixtures | ||||||||
| Building | ||||||||
| Land | ||||||||
| Leasehold improvements | ||||||||
| Less - accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The Company recognized $
12
10. LEASES
Operating Leases
The Company has operating leases for office, manufacturing and warehouse space, office equipment, and vehicles.
As part of the SKS business
acquisition on February 25, 2021, the Company assumed a lease of flexible office space with a remaining term of approximately
As part of the SKS business
acquisition on February 25, 2021, the Company assumed vehicle leases with a remaining weighted average term of approximately
In April 2021, the Company entered into 60-month office equipment lease with monthly payments and no renewal options. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate based on other leases with similar terms.
In April 2021, SKS entered
into several vehicle leases with approximately 36-month terms.
In May 2021, DragonWave entered into an amendment to its existing facility lease to extend the expiration date through June 20, 2022 and to increase the annual base to $12 thousand per month. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate based on other leases with similar terms. The modification resulted in additional right-of-use asset and lease liability of $0.12 million
13
Other information related to the Company’s operating leases are as follows:
| (Amounts in thousands) | For the nine months ended September 30, 2021 | |||
| Operating lease ROU Asset – December 31, 2020 | $ | |||
| Increase | ||||
| Decrease | ||||
| Amortization | ( | ) | ||
| Operating lease ROU Asset – September 30, 2021 | $ | |||
| Operating lease liability – December 31, 2020 | $ | |||
| Increase | ||||
| Decrease | ( | ) | ||
| Amortization | ( | ) | ||
| Operating lease liability – September 30, 2021 | $ | |||
| Operating lease liability – short term | $ | |||
| Operating lease liability – long term | ||||
| Operating lease liability – total | $ | |||
| Operating lease cost | $ | |||
| Variable 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, 2021 and December 31, 2020, respectively:
| September 30, 2021 | December 31, 2020 | |||||||
| 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 Condensed Consolidated Balance Sheet as of September 30, 2021:
| (Amounts in thousands) | Operating Leases | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 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 | $ | |||
14
Finance Leases
The Company has finance leases for certain manufacturing and office equipment.
Information related to the Company’s finance leases are as follows:
| (Amounts in thousands) | For the nine months ended September 30, 2021 | |||
| Finance lease ROU Asset – December 31, 2020 | $ | |||
| Increase | ||||
| Decrease | ( | ) | ||
| Amortization | ( | ) | ||
| Finance lease ROU Asset – September 30, 2021 | $ | |||
| Finance lease liability – December 31, 2020 | $ | |||
| Increase | ||||
| Interest accretion | ||||
| Payment | ( | ) | ||
| Operating lease liability – September 30, 2021 | $ | |||
| Finance lease liability – short term | $ | |||
| Finance lease liability – long term | ||||
| Finance lease liability – total | $ | | ||
The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of September 30, 2021 and December 31, 2020, respectively:
| September 30, 2021 | December 31, 2020 | |||||||
| 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 finance lease liabilities recorded on the Condensed Consolidated Balance Sheet as of September 30, 2021:
| (Amounts in thousands) | Finance Leases | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 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 | $ | |||
15
11. BUSINESS ACQUISITIONS
Skyline Partners Technology LLC
On January 29, 2021, the Company
completed the acquisition of Skyline Partners Technology LLC, a Colorado limited liability company that does business under the name Fastback
Networks (“Fastback”), for cash consideration paid of $
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2021:
| (Amounts in thousands) | Fair Value | |||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaid expenses | ||||
| Property & equipment | ||||
| Intangible assets: | ||||
| Intellectual Property | ||||
| Software | ||||
| Goodwill | ||||
| Total assets | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Notes payable | ||||
| Contract liabilities, current | ||||
| Accrued warranty liability – long term | ||||
| Total purchase consideration | $ | |||
This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.
Sky Sapience Ltd.
On February 25, 2021, the
Company completed the acquisition of Sky Sapience Ltd., a company organized under the laws of the State of Israel (“SKS”).
The total preliminary purchase price consideration amounted to $
16
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2021:
| (Amounts in thousands) | Fair Value | |||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaid expenses | ||||
| Other current assets | ||||
| Property & equipment | ||||
| Operating lease right-of-use assets | ||||
| Intangible assets: | ||||
| Goodwill | ||||
| Total assets | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Contract liabilities, current | ||||
| Operating lease liabilities, current | ||||
| Operating lease liabilities - long term | ||||
| Total purchase consideration | $ | |||
RVision, Inc.
On April 1, 2021, the Company
completed the acquisition of RVision, Inc., a Nevada corporation. The Company acquired
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2021:
| (Amounts in thousands) | Fair Value | |||
| Cash | $ | |||
| Accounts receivable | ||||
| Prepaid expenses | ||||
| Inventory | ||||
| Property & equipment | ||||
| Operating lease right-of-use asset | ||||
| Intangible assets: | ||||
| Goodwill | ||||
| Total assets | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Operating lease liabilities, current | ||||
| Contract liabilities, current | ||||
| Notes payable | ||||
| Operating lease liabilities – long term | ||||
| Total purchase consideration | $ | |||
This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.
17
Innovation Digital, LLC
On June 3, 2021, the Company
completed the acquisition of Innovation Digital, LLC, a California limited liability company, for cash consideration paid of $
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2021:
| (Amounts in thousands) | Fair Value | |||
| Property & equipment | ||||
| Operating lease right-of-use asset | ||||
| Other Non-Current Assets | ||||
| Intangible assets: | ||||
| Goodwill | ||||
| Total assets | ||||
| Accounts payable | ||||
| Operating lease liabilities, current | ||||
| Notes payable | ||||
| Operating lease liabilities – long term | ||||
| Total purchase consideration | $ | |||
This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.
RF Engineering & Energy Resource, LLC
On July 16, 2021, the Company
completed the acquisition of RF Engineering& Energy Resource, LLC, a Michigan limited liability company, for cash consideration paid
of $
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2021:
| (Amounts in thousands) | Fair Value | |||
| Cash | $ | |||
| Accounts receivable | ||||
| Prepaid expenses | ||||
| Inventory | ||||
| Other Current Assets | ||||
| Property & equipment, net | ||||
| Intangible assets: | ||||
| Goodwill | ||||
| Total assets | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Contract liabilities, current | ||||
| Notes payable | ||||
| Total purchase consideration | $ | |||
This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.
18
12. GOODWILL
The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2021:
| (Amounts in thousands) | Total | |||
| Balance at December 31, 2020 | $ | |||
| 2021 Acquisitions | ||||
| Balance at September 30, 2021 | $ | |||
The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of September 30, 2021 and December 31, 2020:
| (Amounts in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Definite-lived intangible assets: | ||||||||||||
| Trade names | $ | $ | ( | ) | $ | |||||||
| Licenses | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Customer relationships | ( | ) | ||||||||||
| Intellectual property | ( | ) | ||||||||||
| Noncompete | ( | ) | ||||||||||
| Total definite-lived intangible assets at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| Trade names | $ | $ | ( | ) | $ | |||||||
| Licenses | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Customer relationships | ( | ) | ||||||||||
| Intellectual property | ( | ) | ||||||||||
| Noncompete | ( | ) | ||||||||||
| Capitalized software | ( | ) | ||||||||||
| Total definite-lived intangible assets at September 30, 2021 | $ | $ | ( | ) | $ | |||||||
Amortization
expense of intangible assets was $
| Asset Class | Weighted- Average Amortization period |
|||
| Trade names | ||||
| Licenses | ||||
| Technology | ||||
| Customer relationships | ||||
| Intellectual property | ||||
| Noncompete | ||||
| Capitalized software | ||||
| All Intangible assets | ||||
19
As of September, 30 2021, 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 | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
13. DEBT AGREEMENTS
Secured Notes Payable
In
August 2016, InduraPower entered into a promissory note not to exceed the principal amount of $
In
August 2016, InduraPower entered into a promissory note in the principal amount of $
In
August 2016, InduraPower entered into a promissory note in the principal amount of $
In November 2019, DragonWave
entered into a loan agreement under which it received $
20
On
February 26, 2020, the Company entered into a $
In
connection with the acquisition of the business by Sovereign Plastics on March 6, 2020,
On
March 19, 2020,
In connection with the acquisition
of the business by Sovereign Plastics on March 6, 2020, the Company assumed various equipment financing loans with aggregate principal
balances of approximately $
21
On
December 8, 2020, the Company entered into a secured loan agreement in the aggregate principal amount of $
On January 15, 2021,
22
Notes Payable
In connection with its acquisition
of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller on a promissory note in the principal amount
of $
In connection with its acquisition
of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of a promissory note in the principal amount
of $
In
October 2017, DragonWave entered into a 90-day promissory note in the principal amount of $
On November 7, 2019, ComSovereign
entered into several promissory notes in the aggregate principal amount of $
23
On
March 5, 2020,
In
connection with the acquisition of the business by Sovereign Plastics on March 6, 2020, the Company, entered into promissory notes or
agreed to pay the sellers an aggregate principal amount of $
In addition, the Company assumed
a note payable in the amount of $
On
May 29, 2020, the Company entered into a promissory note in the principal amount of $
Between
July 2, 2020 and August 21, 2020, the Company borrowed an aggregate of $
24
Between
November 4, 2020 and November 24, 2020, the Company borrowed an aggregate of $0.55 million from accredited investors and issued to such
investors promissory notes evidencing such loans.
In connection with its acquisition
of Fastback on January 29, 2021,
Various subsidiaries of the
Company received loan proceeds or the Company assumed in conjunction with various acquisitions an aggregate amount of $
In connection with the acquisition
of RVision by the Company, the Company assumed two notes payable with aggregate principal balances of $
25
Senior Debentures
Convertible Notes Payable
On
July 7, 2020,
On
August 21, 2020,
26
In connection with its acquisition of Fastback on January 29, 2021, the Company issued to the sellers $11.15 million aggregate principal amount of convertible promissory notes. The individual principal amounts of the notes ranged from $6 thousand to $5.58 million. These notes initially bear interest at the rate of 1.01% per annum, which is to be adjusted to the prime rate as published by the Wall Street Journal on each annual anniversary of the issuance date, and mature on January 29, 2026. Interest is payable in cash annually in arrears on each January 1. Commencing on January 29, 2022, the outstanding principal and accrued interest on these notes may be converted in full to shares of the Company’s common stock at a conversion price of $5.22 per share, subject to adjustment. Upon an event of default, the interest rate will automatically increase to 15% per annum compounded annually, and all unpaid principal and accrued interest may become due on-demand. Principal and any unpaid accrued interest are due on the maturity date. Upon maturity, the interest rate will automatically increase to 15% per annum compounded annually on any unpaid principal. As of September 30, 2021, an aggregate principal amount of $11.15 million was outstanding.
In connection with its acquisition
of Innovation Digital on June 3, 2021,
Senior Convertible Promissory Note
On May 27, 2021,
On August 25, 2021, the Company
sold a senior secured convertible promissory note in the principal amount of $
Senior Convertible Debentures
On September 24, 2019,
27
On
July 2, 2020,
Certain agreements governing the secured notes payable, notes payable and senior convertible debentures contain customary covenants, such as debt service coverage ratios, limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness.
All debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and is continuing, the lenders may accelerate the applicable amounts due.
Future maturities contractually required by the Company under long-term debt obligations are as follows for the years ending December 31:
| (Amounts in thousands) | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
| Less unamortized discounts and debt issuance costs | ( |
) | ||
| Total net debt | ||||
| Less current portion of long-term debt, net of unamortized discounts and debt issuance costs | ( |
) | ||
| Total long-term debt, net of unamortized discounts and debt issuance costs | ||||
14. RELATED PARTY TRANSACTIONS
Accrued Liabilities – Related Party
As of September 30, 2021 and
December 31, 2020, the accrued liabilities – related party balance was $
28
On
November 10, 2017, the Company and Global Security Innovative Strategies, LLC (“GSIS”), a company in which David Aguilar,
a member of the Company’s Board of Directors, is a principal, entered in an agreement (the “GSIS Agreement”) pursuant
to which GSIS agreed to provide business development support and general consulting services for sales opportunities with U.S. government
agencies and other identified prospects and consulting support services for the Company. The GSIS Agreement had an initial term of six
months beginning on November 1, 2017. On September 26, 2018, the parties amended the GSIS Agreement to extend the period of service through
September 2019 with monthly automatic renewals thereafter. The Company also agreed to issue an option to purchase
Notes Payable – Related Party
On
August 5, 2019, Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, and his wife, loaned DragonWave $
On
July 1, 2020,
Between
October 15, 2020 and December 28, 2020, the Company borrowed an aggregate of $0.6 million from Dr.
Between
November 13, 2020 and December 24, 2020,
29
15. SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2021
As of September 30, 2021,
the Company had
On May 26, 2020, the board of directors of the Company and stockholders holding a majority of the outstanding shares of the Company’s common stock approved resolutions authorizing the board of directors to effect the Split of the Company’s common stock at an exchange ratio of up to 1-for-3, with the board of directors retaining the discretion as to whether to implement the Split. On December 16, 2020, the Company’s board of directors approved a ratio for the Split of 1-for-3, which was effected on January 21, 2021. The Condensed Consolidated Financial Statements and accompanying notes give effect to this Split as if it occurred at the beginning of the first period presented.
Public Offerings
On January 26, 2021 (the “First
Offering Closing Date”), the Company sold an aggregate of
The common stock and the warrants of the First Offering were offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-248490), filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act, on August 28, 2020, as amended, and which became effective on January 21, 2021.
On
the First Offering Closing Date, the Company received gross proceeds of approximately $
On
January 27, 2021, the Representative exercised its over-allotment option for the First Offering to purchase
Pursuant
to the First Offering Underwriting Agreement, the Company also agreed to issue to the Representative warrants (the “Representative’s
First Offering Warrants”) to purchase up to a total of
The
total expenses of the First Offering were approximately $
30
On
February 10, 2021 (the “Second Offering Closing Date”), the Company sold an aggregate of
The common stock was offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-252780), filed by the Company with the SEC under the Securities Act, on February 5, 2021, and the Company’s registration statement on Form S-1 (File No. 333-252974), filed by the Company with the SEC under Rule 462(b) of the Securities Act on February 10, 2021, each of which became effective on February 10, 2021.
The Company received gross
proceeds of approximately $
Pursuant
to the Second Offering Underwriting Agreement, the Company also issued to the Representative warrants (the “Representative’s
Second Offering Warrants”) to purchase up to a total of
The
total expenses of the Second Offering were approximately $
Consulting Agreements and Settlements with Vendors
On January 31, 2020,
31
On
December 9, 2020, the Company entered into an agreement with a consultant that required the payment of
Dividends
The Company did not pay dividends to holders of its common stock during the nine months ended September 30, 2021. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on applicable laws and the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. In addition, current or future loan agreements may restrict the Company’s ability to pay dividends. The Company does not anticipate declaring or paying any cash dividends on common stock in the foreseeable future.
16. SHARE-BASED COMPENSATION
As described in Note 15 – Stockholders’ Equity, effective January 21, 2021, the Company enacted the Split of the Company’s common stock. As a result, the Company has given effect to the Split as if it occurred at the beginning of the first period presented for all share-based compensation.
2020 Long-Term Incentive Plan
On April 22, 2020, the Company’s Board of Directors adopted the 2020 Long-Term Incentive Plan (the “2020 Plan”), which was approved by the stockholders on or about May 6, 2020. Employees, officers, directors and consultants that provide services to the Company or one of its subsidiaries may be selected to receive awards under the 2020 Plan. Awards under the 2020 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards and performance-based awards.
As originally approved, a
total of
32
The
2020 Plan will terminate on
Restricted Stock Awards
On
December 2, 2019, the Company’s Board of Directors granted an aggregate of
On
January 26, 2021, the Company’s Board of Directors granted an aggregate of
For all RSAs that are currently
outstanding, if the Participant’s employment with, engagement by, or service to the Company terminates for any reason (other than
due to disability, retirement or death, or termination by employee for “Good Cause” as defined pursuant to a written employment
contract) prior to the vesting of all or any portion of the RSAs granted, such RSAs shall immediately be cancelled. If the Participant’s
employment with, engagement by, or service to the Company terminates due to the Participant’s death, disability or retirement, or
by termination by such employee for “Good Cause” as defined pursuant to a written employment contract, the Participant shall
become
Stock Options
On April 1, 2021, from shares
available to be issued under the 2020 Plan, the Board of Directors of the Company granted options to purchase an aggregate
Also, on April 1, 2021, the
Board of Directors of the Company authorized the issuance of options to purchase an aggregate of
33
On May 5, 2021, the Board
of Directors of the Company authorized the issuance of options to purchase an aggregate of
On June 29, 2021, the Board
of Directors approved the modification of
No options were granted during the three months ended September 30, 2020.
The following table summarizes the assumptions used to estimate the fair value of options granted during the nine months ended September 30, 2021:
| 2021 | ||||
| Expected dividend yield | % | |||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected life of options | ||||
The following tables represent stock option activity for the nine months ended September 30, 2021 and 2020:
| (Amounts in thousands except per share data) | Number of Options | Weighted- Average Exercise Price per Share | Weighted- Average Contractual Life in Years | Aggregate Intrinsic Value | ||||||||||||
| Outstanding – December 31, 2020 | $ | $ | ||||||||||||||
| Exercisable – December 31, 2020 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled or Expired | ( | ) | ||||||||||||||
| Outstanding – September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable – September 30, 2021 | $ | $ | ||||||||||||||
| (Amounts in thousands except per share data) | Number of Options | Weighted- Average Exercise Price per Share | Weighted- Average Contractual Life in Years | Aggregate Intrinsic Value | ||||||||||||
| Outstanding – December 31, 2019 | $ | $ | ||||||||||||||
| Exercisable – December 31, 2019 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled or Expired | ( | ) | ||||||||||||||
| Outstanding – September 30, 2020 | $ | $ | ||||||||||||||
| Exercisable – September 30, 2020 | $ | $ | ||||||||||||||
The Company recognized $
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Warrants
On
January 26, 2021, the Company issued warrants to purchase an aggregate of
On January 26, 2021, the Company
issued warrants to purchase an aggregate of
On January 26, 2021, the Company
issued warrants to purchase an aggregate of
On January 26, 2021, the Company
issued warrants to purchase an aggregate of
On February 12, 2021, the
Company issued warrants to purchase an aggregate of
On
May 27, 2021, the Company issued warrants to purchase an aggregate of
On August 25, 2021, the Company
issued warrants to purchase an aggregate of
All warrants are valued utilizing
the Black-Scholes pricing model using the assumptions listed below. The weighted average grant date fair value of all warrants issued
during the nine months ended September 30, 2021, was $
The following table summarizes the assumptions used to estimate the fair value of warrants granted during the nine months ended September 30, 2021:
| 2021 | ||||
| Expected dividend yield | % | |||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Contractual life of warrants | ||||
35
The following tables represents warrant activity for the nine months ended September 30, 2021 and 2020:
| (Amounts in thousands except per share data) | Number of Warrants | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | ||||||||||||
| Outstanding – December 31, 2020 | $ | $ | ||||||||||||||
| Exercisable – December 31, 2020 | $ | $ | ||||||||||||||
| Granted/Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or Expired | ( | ) | ||||||||||||||
| Outstanding – September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable – September 30, 2021 | $ | $ | ||||||||||||||
| (Amounts in thousands except per share data) | Number of Warrants | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | ||||||||||||
| Outstanding – December 31, 2019 | $ | $ | ||||||||||||||
| Exercisable – December 31, 2019 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding – September 30, 2020 | $ | $ | ||||||||||||||
| Exercisable – September 30, 2020 | $ | $ | ||||||||||||||
17. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Management does not believe that after the final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
36
18. CONCENTRATION
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs
ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable. At September
30, 2021, accounts receivable from customers comprised approximately
19. SUBSEQUENT EVENTS
Corporate Acquisition
On October 4, 2021, the Company
completed the acquisition of SAGUNA Networks LTD (“SAGUNA”), a Israeli company for total consideration of approximately $
Public Offering of Preferred Series A
On October 29, 2021 (the “Preferred
Series A Offering Closing Date”), the Company sold an aggregate of
The Series A Preferred Stock has been listed on The Nasdaq Capital Market under the symbol “COMSP”.
On the Preferred Series A
Offering Closing Date, the Company received gross proceeds of approximately $
The total expenses of the
Preferred Series A Offering were approximately $
The Company intends to use
$
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this Quarterly Report to “Company, “we”, “us” and “our” refer to the COMSovereign Holding Corp. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations,” contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. From time to time in the future, we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical fact, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2020 Annual Report on Form 10-K filed with the U. S. Securities and Exchange Commission (the “SEC”) on March 30, 2021 and Item 1A., Part II Risk Factors” of our quarterly report on Form 10-Q for the quarter ended June 30, 2021 filed with the SEC on August 16, 2021.
Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2021 and 2020 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 nine months ended September 30, 2021, compared to nine months ended September 30, 2020 unless otherwise indicated.
Business Overview
We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.
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Our Operating Units
Through a series of acquisitions, we and our operating subsidiaries have expanded our service offerings and geographic reach over the past two years. Our company is comprised of the following principal operating units:
| ● | DragonWave-X LLC. DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), 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. |
| ● | Virtual Network Communications Inc. Virtual Network Communications Inc. (“VNC”) is an edge compute focused wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world. We acquired VNC in July 2020. |
| ● | Fastback. Skyline Partners Technology LLC, which does business under the name Fastback Networks (“Fastback”), is a manufacturer of intelligent backhaul radio (IBR) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight (NLOS) limitations. Fastback’s advanced IBR products allow operators to economically add capacity and density to their macrocells and expand service coverage density with small cells. These solutions also allow operators to both provide temporary cellular and data service utilizing mobile/portable radio systems and provide wireless Ethernet connectivity. We acquired Fastback in January 2021. |
| ● | Drone Aviation. Lighter Than Air Systems Corp., which does business under the name Drone Aviation (“Drone Aviation”), is based in Jacksonville, Florida and develops and manufactures cost-effective, compact and enhanced tethered unmanned aerial vehicles (UAVs), including lighter-than-air aerostats and drones that support surveillance sensors and communications networks. We acquired Drone Aviation in June 2014. |
| ● | Sky Sapience Ltd. Sky Sapience Ltd. (“SKS”) is an Israeli-based manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications. Its innovative technologies include fiber optic tethers that enable secure, high-capacity communications, including support for commercial 4G and 5G wireless networks. SKS’s flagship HoverMast line of quadrotor-tethered drones feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while delivering dramatically-improved situational awareness and communications capabilities to users. We acquired SKS in March 2021. |
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| ● | InduraPower, Inc. InduraPower Inc. (“InduraPower”) is a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. ComSovereign acquired InduraPower in January 2019 prior to the ComSovereign Acquisition. |
| ● | Silver Bullet Technology, Inc. Silver Bullet Technology, Inc. (“Silver Bullet”) is a California-based engineering firm that designs and develops next generation network systems and components, including large-scale network protocol development, software-defined radio systems and wireless network designs. ComSovereign acquired Silver Bullet in March 2019 prior to the ComSovereign Acquisition. |
| ● | Lextrum, Inc. Lextrum, Inc. (“Lextrum”) is a Tucson, Arizona-based developer of full-duplex wireless technologies and components, including multi-reconfigurable radio frequency (RF) antennae and software programs. This technology enables the doubling of a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies. ComSovereign acquired Lextrum in April 2019 prior to the ComSovereign Acquisition. |
| ● | VEO Photonics, Inc. VEO Photonics, Inc. (“VEO”), based in San Diego, California, is a research and development company innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment. ComSovereign acquired VEO in January 2019 prior to the ComSovereign Acquisition. |
| ● | Sovereign Plastics LLC. Sovereign Plastics LLC (“Sovereign Plastics”), based in Colorado Springs, Colorado, operates as the material, component manufacturing and supply chain source for all of our subsidiaries, and also provides plastic and metal components to third-party manufacturers. Its ability to rapidly prototype new product offerings and machine moldings, metals and plastic castings has reduced the production cycle for many of our components from months to days. We acquired the business currently conducted by Sovereign Plastics in March 2020. |
| ● | 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.
| |
| ● | Innovation Digital, LLC. Innovation Digital, LLC (“Innovation Digital”) is a California-based developer of “beyond state-of-the-art” mixed analog/digital signal processing solutions, intellectual property (IP) licensing, design and consulting services. Its signal processing techniques and intellectual property have significantly enhanced the bandwidth and accuracy of RF transceiver systems and have provided enabling technologies in the fields of communications and RADAR systems, signals intelligence (SIGINT) and electronic warfare (EW), test and measurement systems, and semiconductor devices. We acquired Innovation Digital in June 2021.
| |
| ● | RF Engineering & Energy Resources, LLC. RF Engineering & Energy Resources, LLC (“RFEQ”) is a Michigan-based provider of high-quality microwave antennas and accessories. Providing the industry’s lowest cost of ownership, RFEQ has continued to innovate and expand recently announcing 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 RFEQ in July 2021. |
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Significant Components of Our Results of Operations
Revenues
Our revenues are generated primarily from the sale of our products, which consist primarily of backhaul telecom radios and tethered aerostats and drones. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met.
We expect our revenues for the year ending December 31, 2021 (“fiscal 2021”) to materially exceed those of fiscal 2020, primarily due to our availability of working capital, including from a portion of the net proceeds of the equity offerings we completed in 2021, for the purchase of parts and components and the manufacturing of products, primarily those of DragonWave, in quantities that greatly exceed the quantities that we were able to manufacture in 2020. Additionally, we expect to commence commercial production of new products in 2021 that we have previously produced in only limited quantities or as prototypes, including, among others, intelligent battery back-up power solutions for the telecom, aerospace and transportation industries and airborne high-bandwidth, LTE-Advanced and 5G aerostats.
During fiscal 2020, approximately 18% of our sales were to customers located outside of the United States. While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outside the United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.S. government and its agencies, even if such systems are for integration into foreign locations.
Cost of Goods Sold and Gross Profit
Our cost of goods sold is comprised primarily of the costs of manufacturing products, procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, shipping and handling costs and warranty costs. We presently outsource the manufacturing of DragonWave’s microwave products to a single third-party manufacturer, Benchmark, which manufactures our products from its facilities. Cost of goods sold also includes costs associated with supply operations, including personnel-related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to the services we provide. Additionally, cost of goods sold does not include any depreciation and amortization expenses as we separate depreciation and amortization expense into its own category within operating expenses.
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Gross profit has been and will continue to be affected by various factors, including changes in our supply chain and evolving product mix. The margin profile of our current products and future products will vary depending on operating performance, features, materials, manufacturer and supply chain. Gross margin will vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing, our production costs, costs of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.
Operating Expenses
We classify our operating 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, as well as share-based compensation expenses. 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. We expect our sales and marketing expense to increase materially in the year ending December 31, 2022 as we ramp up our sales and marketing efforts to correspond to our increased production efforts relating to certain of our telecom products.
General and Administrative
In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs. We expect general and administrative expense to increase in absolute dollars as we continue to expand our product offerings and expand into new markets.
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation related to fixed assets such as test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, as well as amortization related to definite-lived intangibles.
Share-Based Compensation
Share-based compensation consists of expense related to the issuance of 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.
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Interest Expense
Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense. As many of our debt instruments, were past due at various times during fiscal 2020 and, as a result, were accruing interest at increased interest rates, and as we have been able to refinance our debt or issue equity to reduce our outstanding debt in the first quarter of fiscal 2021, our interest expense is expected to decrease in fiscal 2021 due to lower interest rates on our debt or lower debt balances.
Provision for Income Taxes
Current and deferred income tax expense or benefit in any given period will depend upon a number of events and circumstances, one of which is the income tax net income or loss from operations for the period which is usually different from the U.S. GAAP net income from operations for the period due to differences in tax laws and timing differences. See Note 16 — Income Taxes in the Notes to our financial statements included elsewhere in this report for a reconciliation on U.S. GAAP income or loss and tax income or loss. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period.
Results of Operations
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (Amounts in thousands, except share and per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue | $ | 4,115 | $ | 2,018 | $ | 9,812 | $ | 7,513 | ||||||||
| Cost of Goods Sold | 1,819 | 859 | 4,706 | 3,473 | ||||||||||||
| Gross Profit | 2,296 | 1,159 | 5,106 | 4,040 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | 2,061 | 562 | 3,805 | 1,263 | ||||||||||||
| Sales and marketing | 247 | 1 | 449 | 31 | ||||||||||||
| General and administrative | 6,464 | 4,471 | 20,543 | 13,152 | ||||||||||||
| Depreciation and amortization | 3,834 | 2,909 | 11,034 | 8,654 | ||||||||||||
| Impairment expense | - | - | 281 | - | ||||||||||||
| Gain on the sale of assets | 48 | - | (83 | ) | (1 | ) | ||||||||||
| Total Operating Expenses | 12,654 | 7,943 | 36,029 | 23,099 | ||||||||||||
| Net Operating Loss | (10,358 | ) | (6,784 | ) | (30,923 | ) | (19,059 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (724 | ) | (3,350 | ) | (1,740 | ) | (5,707 | ) | ||||||||
| Other income (expense) | 1 | (129 | ) | (116 | ) | (129 | ) | |||||||||
| Gain/(Loss) on extinguishment of debt | 298 | (22 | ) | (4,725 | ) | (22 | ) | |||||||||
| Foreign currency transaction gain/(loss) | 94 | (46 | ) | 32 | (6 | ) | ||||||||||
| Interest income | - | - | - | 1 | ||||||||||||
| Total Other Expenses | (331 | ) | (3,547 | ) | (6,549 | ) | (5,863 | ) | ||||||||
| Net Loss | $ | (10,689 | ) | $ | (10,331 | ) | $ | (37,472 | ) | $ | (24,922 | ) | ||||
| Loss per common share: | ||||||||||||||||
| Basic and Diluted | $ | (0.15 | ) | $ | (0.23 | ) | $ | (0.56 | ) | $ | (0.56 | ) | ||||
| Weighted-average shares outstanding: | ||||||||||||||||
| Basic and Diluted | 71,994,529 | 44,216,540 | 66,388,447 | 44,155,510 | ||||||||||||
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Three and Nine months ended September 30, 2021 compared to Three and Nine months ended September 30, 2020
Total Revenues
For the three months ended September 30, 2021, total revenues were $4.1 million compared to $2.0 million for the same period in 2020, an increase of $2.1 million. This increase primarily consisted of our January 2021 acquisition of Fastback and their Tier 1, telecom sales of $2.2 million.
For the nine months ended September 30, 2021, total revenues were $9.8 million compared to $7.5 million for the same period in 2020, an increase of $2.3 million. This increase primarily consisted of our January 2021 acquisition of Fastback and their Tier 1, telecom sales of $2.2 million.
Cost of Goods Sold and Gross Profit
For the three months ended September 30, 2021, cost of goods sold were $1.8 million compared to $0.9 million for the same period in 2020, an increase of $0.9 million. This increase primarily consisted of our January 2021 acquisition of Fastback and their Tier 1, telecom sales of $0.9 million.
Gross profit for the three months ended September 30, 2021 was $2.3 million with a gross profit margin of 55% compared to $1.2 million for the same period in 2020 with a gross profit margin of 57%.
For the Nine months ended September 30, 2021, cost of goods sold were $4.7 million compared to $3.5 million for the same period in 2020, an increase of $1.2 million. This increase primarily consisted of our January 2021 acquisition of Fastback and their Tier 1, telecom sales of $0.9 million.
Gross profit for the nine months ended September 30, 2021 was $5.1 million with a gross profit margin of 52% compared to $4.0 million for the same period in 2020 with a gross profit margin of 54%.
These changes in gross profit margin resulted primarily from our January 2021 acquisition of Fastback and their Tier 1, telecom sales of $1.3 million, which was offset decrease in DragonWave of $0.4 million.
Research and Development Expense
For the three months ended September 30, 2021, research and development expenses were $2.1 million compared to $0.6 million for the same period in 2020, an increase of $1.5 million. This increase primarily consisted of new Acquisition in 2021 of Sky Sapience of $0.6 million and increased DragonWave of $0.7 million.
For the nine months ended September 30, 2021, research and development expenses were $3.8 million compared to $1.3 million for the same period in 2020, an increase of $2.5 million. This increase primarily consisted of a new acquisition in 2021 of Sky Sapience of $1.3 million. Increased R & D for DragonWave of $0.8 million, and VNC of $0.5 million.
Sales and Marketing Expense
For the three months ended September 30, 2021, sales and marketing expenses were $0.2 million compared to $0.0 million for the same period in 2020, an increase of $0.2 million. This increase primarily consisted of a new Acquisition in 2021 Sky Sapience of $0.1 million.
For the nine months ended September 30, 2021, sales and marketing expense was $0.4 million compared to $0.0 million for the same period in 2020, an increase of $0.4 million. This increase primarily consisted of a new Acquisitions in 2021 Sky Sapience of $0.2 million and RVision $0.1 million.
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General and Administrative Expenses
For the three months ended September 30, 2021, general and administrative expenses were $6.5 million compared to $4.5 million for the same period in 2020, an increase of $2.0 million. This increase primarily consisted of 5 acquisitions of $0.9 million.
For the nine months ended September 30, 2021, general and administrative expenses were $20.5 million compared to $13.2 million for the same period in 2020, an increase of $7.3 million. This increase primarily consisted of 5 acquisitions of $2.6 million, as well as the expense with 2 offerings in Q1 2021 of $5.3 million.
Depreciation and Amortization
For the three months ended September 30, 2021, depreciation and amortization were $3.8 million compared to $2.9 million for the same period in 2020, an increase of $0.9 million. This increase primarily consisted of increased amortization of 5 acquisitions in 2021.
For the nine months ended September 30, 2021, depreciation and amortization were $11.0 million compared to $8.7 million for the same period in 2020, an increase of $2.3 million. This increase primarily consisted of increased amortization of 5 acquisitions in 2021.
Other Income and Expenses
For the three months ended September 30, 2021, other income and expenses were $0.3 million compared to $3.5 million for the same period in 2020, a decrease of $3.2 million. This decrease primarily consisted of lower interest expense of $2.7 million.
For the nine months ended September 30, 2021, other income and expenses were $6.5 million compared to $5.9 million for the same period in 2020 an increase of $0.6 million.
Provision for Income Taxes
For the three and nine months ended September 30, 2021 and 2020, there was no provision for income taxes due to an increase in the valuation allowance recorded on the total tax provision, because we believe that it is more likely than not that the tax asset will not be utilized during the next year.
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Net Loss
For the three months ended September 30, 2021, we had a net loss of $10.7 million compared to a net loss of $10.3 million for the same period in 2020, related to the items described above.
For the nine months ended September 30, 2021, we had net loss of $37.5 million compared to a net loss of $24.9 million for the period same period in 2020, related to the items described above.
Going Concern
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, 2021, the Company generated negative cash flows from operations of $33.4 million and had an accumulated deficit of $102.1 million.
Management anticipates that the Company will be dependent, for the near future, on additional debt facilities or investment capital to fund growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, including but not limited to, securing a line or lines of credit, the issuance of debt, and/or accessing the equity markets.
The Company’s fiscal operating results and accumulated deficit, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of September 30, 2021, we had $2.87 million in cash compared to $0.73 million at December 31, 2020, an increase of $2.14 million resulting primarily from net proceeds of two public offerings and debt financings. As of September 30, 2021, we had $1.94 million in accounts receivable compared to $0.79 million at December 31, 2020, an increase of $1.15 resulting primarily from receivables gained through business acquisitions during the quarter.
As of September 30, 2021, we had total current assets of $22.8 million and total current liabilities of $23.6 million, or negative working capital of $0.8 million, compared to total current assets of $7.68 million and total current liabilities of $34.26 million, or negative working capital of $26.6 million at December 31, 2020. This is an increase in working capital of $26.0 million over the working capital balance at the end of 2020 driven primarily by the two public offerings completed during the year.
As of September 30, 2021, we had undiscounted obligations relating to the payment of indebtedness as follows:
| ● | $2.5 million related to accrued liabilities and accounts payable that were past due; | |
| ● | $0.0 million related to notes payable that were past due; |
| ● | $2.9 million related to indebtedness that is due in the fourth quarter of 2021; | |
| ● | $5.7 million related to indebtedness that is due in the first quarter of 2022; |
| ● | $1.4 million related to indebtedness that is due in the second quarter of 2022; |
| ● | $5.8 million related to indebtedness that is due from the third quarter through the end of 2022; |
| ● | $3.7 million related to indebtedness that is due in 2023; and | |
| ● | $9 million related to indebtedness that is due in 2024; and | |
| ● | $9 million related to indebtedness that is due in 2025; and | |
| ● | $11.4 million related to indebtedness that is due after 2025. |
We anticipate meeting our cash obligations on our indebtedness that is payable on or prior to September 30, 2022, primarily from liquidity management tools such as a line of credit, from earnings from operations, including, in particular, the operations of DragonWave, Fastback, VNC and Drone Aviation, and possibly from the proceeds of additional indebtedness or equity raises.
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Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of our operations. We have been investing in research and development in anticipation of increasing revenue opportunities in our cellular network solutions business, which has contributed to our losses from operations.
We plan to generate positive cash flow from our recently-completed acquisitions to address some of our liquidity needs. However, to execute our business plan, service our existing indebtedness, finance our proposed acquisitions and implement our business strategy, we anticipate that we may need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership in us and could also result in a decrease in the market price of our common stock. The terms of those securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in their current form.
We had capital expenditures of $3.09 million and $96.85 million during the nine months ended September 30, 2021 and 2020. We expect our capital expenditures for next 12 months will be consistent with our prior spending. These capital expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment. We expect to fund such capital expenditures out of our working capital.
Line of Credit and Debt Agreements
Summary information with respect to our debt agreements or other credit facilities is set forth in Notes 15 and 23 of the Notes to the Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report.
Sources and Uses of Cash
| For the Nine Months Ended September 30, | ||||||||
| (Amounts in thousands) | 2021 | 2020 | ||||||
| Cash flows (used in) operating activities | $ | (33,736 | ) | $ | (4,463 | ) | ||
| Cash flows (used in) investing activities | (8,732 | ) | (3,242 | ) | ||||
| Cash flows provided by financing activities | 44,606 | 7,375 | ||||||
| Effect of exchange rate | - | 23 | ||||||
| Net increase/(decrease) in cash and cash equivalents | $ | 2,138 | $ | (307 | ) | |||
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Operating Activities
For the nine months ended September 30, 2021, net cash used in operating activities was $33.7 million. Net cash used in operating activities primarily consisted of the net operating loss of $37.47 million, which was partially offset by depreciation and amortization of $11.03 million, loss on extinguishment of debt of $4.73 million, and share-based compensation to employees and vendors of $2.71 million. Additionally, working capital changes used $115.78 million in cash during the period.
For the nine months ended September 30, 2020, net cash used in operating activities was $4.46 million. Net cash used in operating activities primarily consisted of the net operating loss of $24.92 million, which was partially offset by depreciation and amortization of $8.65 million, and amortized discounts and debt issuance costs on our outstanding debt of $4.29 million. Additionally, working capital changes provided $4.63 million in cash during the period.
Investing Activities
For nine months ended September 30, 2021, net cash used in investing activities was $8.73 million. Investing activities primarily consisted of business acquisitions with direct cashflow impact of $4.5 million and the acquisition of property and equipment and intangible assets of $4.32 million.
For the nine months ended September 30, 2020, net cash used in investing activities was $3.24 million. Investing activities primarily consisted of business acquisitions with direct cashflow impact of $3.15 million.
Financing Activities
For the nine months ended September 30, 2021, financing activities provided cash of $44.61 million. Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of $39.66 million and net proceeds of borrowings of $114.3 million, which was offset by the repayment of debt of $8.48 million and the repayment of related party notes of $0.85 million.
For the nine months ended September 30, 2020, financing activities provided cash of $7.37 million. Financing activities primarily consisted of proceeds from the issuance of debt of $8.01 million, which was offset by the payment on the line of credit of $2.0 and the repayment of debt 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required under Regulation S-K for smaller reporting companies.
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Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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 did not effectively segregate certain accounting duties due to the small size of our accounting staff; |
| ● | a lack of timely reconciliations of the account balances affected by the improperly recorded or omitted transactions; and |
| ● | there is a lack of documented and tested internal controls to meet the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002. |
Our remediation of the material weaknesses in our internal control over financial reporting is ongoing.
(b) Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting as of and for the nine months ended September 30, 2021, 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, 2020 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in any of the legal proceedings discussed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 1A. Risk Factors
There have been no material changes to the risk factors included under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 30, 2021 and under “Part II Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 filed with the SEC on August 16, 2021. Our business involves significant risks. You should carefully consider the risks and uncertainties described in our filed reports, together with all of the other information in this Quarterly Report on Form 10-Q. The risks and uncertainties described in our filed reports are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives.
Item 2. Unregistered Securities Sales of Equity Securities and Use of Proceeds
There have been no sales of unregistered securities within the period covered by this report that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:
On January 22, 2021 and April 24, 2021, respectively, we issued to a consulting firm for services rendered, 8,169 shares of our common stock that were valued at $2.00 per share and 7,571 shares of our common stock that were valued at $2.67 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder, and the certificate representing such shares has a legend imprinted on it stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration.
On April 24, 2021, we issued 50,000 shares of our common stock in the exercise of previously issued options. Such shares were issued by us in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder, and the certificate representing such shares has a legend imprinted on it stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration.
On June 17, 2021, we issued 10,000 shares of our common stock in the exercise of previously issued options. Such shares were issued by us in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder, and the certificate representing such shares has a legend imprinted on it stating that the shares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or pursuant to an exemption from such registration.
Item 3. Default Upon Senior Securities Sales of Equity Securities and Use of Proceeds
None
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
The following documents are filed as a part of this report or incorporated herein by reference:
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMSovereign Holding Corp. | |
| Date: November 15, 2021 | /s/ Daniel L. Hodges |
| Daniel L. Hodges | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 15, 2021 | /s/ Fran Jandjel |
| Fran Jandjel | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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