UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2022 

 

or 

 

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

 

For the transition period from ______________ to ______________

 

Commission File No. 001-39379

 

COMSOVEREIGN HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   46-5538504

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

6890 E Sunrise Drive, Suite 120-506, Tucson, AZ   85750
(Address of principal executive office)   (Zip Code)

 

(904) 834-4400

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   COMS   The Nasdaq Stock Market LLC
         
Warrants to purchase Common Stock   COMSW   The Nasdaq Stock Market LLC
         
9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share    COMSP   The Nasdaq Stock Market LLC

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of January 27, 2023, there were 258,583,436 shares of registrant’s common stock outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

      PAGE
PART I FINANCIAL INFORMATION    
Item 1. Financial Statements (unaudited)   1
  Condensed Consolidated Balance Sheets as of June 30 2022 and December 31, 2021   1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30 2022 and 2021.   2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30 2022 and 2021.   3
  Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30 2022 and 2021.   4 - 5
  Notes to the Condensed Consolidated Financial Statements   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   24
Item 3. Quantitative and Qualitative Disclosures about Market Risk   35
Item 4. Controls and Procedures   35
       
PART II OTHER INFORMATION    
Item 1. Legal Proceedings   36
Item 1A. Risk Factors   37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   37
Item 3. Default Upon Senior Securities   38
Item 4. Mine Safety Disclosures   39
Item 5. Other Information   39
Item 6. Exhibits   40
  Signatures   41

 

i

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
(Amounts in thousands, except share and per share data)  2022   2021 
   (unaudited)     
Assets        
Current assets:        
Cash  $161   $1,873 
Accounts receivable, net   2,109    1,376 
Inventory, net   7,476    10,249 
Prepaid expenses   4,869    6,936 
Other current assets   365    342 
Assets of discontinued operations - current   
-
    809 
Total current assets   14,980    21,585 
Property and equipment, net   1,384    8,752 
Operating lease right-of-use assets   1,305    3,000 
Intangible assets, net   5,941    15,460 
Goodwill   30,033    37,943 
Other assets – long term   47    215 
Note receivable   2,000    - 
Assets of discontinued operations - long term   -    1,574 
Total assets  $55,690   $88,529 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $3,703   $3,610 
Accrued interest   373    288 
Accrued liabilities   1,492    1,048 
Accrued liabilities – related party   
-
    206 
Accrued payroll   1,366    875 
Contract liabilities, current   4,578    3,341 
Accrued warranty liability - current   473    473 
Operating lease liabilities - current   734    908 
Notes payable – related party   100    
-
 
Current portion of long-term debt; net of unamortized discounts and debt issuance costs   11,367    13,566 
Liabilities of discontinued operations - current   
-
    911 
Total current liabilities   24,186    25,226 
Debt – long term   5,909    12,273 
Contract liabilities – long term   118    74 
Operating lease liabilities – long term   10,884    2,218 
Liabilities of discontinued operations - long-term   -    587 
Total liabilities   41,097    40,378 
           
Commitments and contingencies (Note 17)   
 
    
 
 
Stockholders’ Equity          
Preferred stock, $0.0001 par value, 100,000,000 shares authorized; Series A Cumulative Redeemable Perpetual Preferred Stock, 690,000 shares designated, 320,000 shares issued and outstanding as of June 30, 2022 and December 2021   
-
    
-
 
Common stock, $0.0001 par value, 300,000,000 shares authorized; 90,553,333 and 81,985,140 shares issued and 90,519,999 and 81,951,806 shares outstanding as of June 30, 2022 and December 2021, respectively   9    8 
Additional paid-in capital   270,067    266,013 
Treasury stock, at cost, 33,334 shares as of June 30, 2022 and December 2021   (50)   (50)
Accumulated deficit   (255,456)   (217,843)
Accumulated other comprehensive income   23    23 
Total Stockholders’ Equity   14,593    48,151 
Total Liabilities and Stockholders’ Equity  $55,690   $88,529 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

1

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands, except share and per share data)  2022   2021   2022   2021 
                 
Revenue  $2,088   $2,401   $4,141   $3,502 
Cost of goods sold   2,981    1,270    4,464    1,873 
Gross profit (loss)   (893)   1,131    (323)   1,629 
Operating expenses                    
Research and development (1)   536    1,199    1,708    1,747 
Sales and marketing (1)   12    109    78    157 
General and administrative (1)   5,396    6,624    11,176    13,411 
Depreciation and amortization   262    3,455    1,003    6,955 
Impairment expense   15,775    281    15,775    281 
Loss on sales (ID, DWXC) (2)   2,564    
-
    2,564    
-
 
Loss on lease abandonment   11,329    
-
    11,329    
-
 
Gain on the sale of assets   (0)   
-
    (8,441)   (83)
Total operating expenses, net   35,873    11,668    35,191    22,468 
Loss from operations   (36,766)   (10,537)   (35,514)   (20,839)
Other expense                    
Interest expense   (1,348)   (546)   (2,227)   (982)
Other expense   
-
    5    
-
    
-
 
Gain (loss) on extinguishment of debt   (445)   323    (618)   (4,779)
Foreign currency transaction loss   (1)   18    (1)   (62)
Total other expense   (1,794)   (200)   (2,846)   (5,823)
Loss from continuing operations   (38,560)   (10,737)   (38,360)   (26,662)
Income (loss) from discontinued operations, net of tax   811    160    747    (121)
Net loss   (37,749)   (10,577)   (37,613)   (26,783)
Dividend on preferred stock   (185)   
-
    (308)   
-
 
Net loss attributable to common stockholders  $(37,934)  $(10,577)  $(37,921)  $(26,783)
Net income (loss) per share                    
- Basic and diluted from continuing operations
  $(0.45)  $(0.16)  $(0.45)  $(0.42)
- Basic and diluted from discontinued operations
  $0.01   $0.00   $0.01   $(0.00)
                     
Weighted average number of common shares outstanding                    
- Basic and diluted
   86,126,377    68,770,644    84,846,657    63,538,782 

 

(1)These are exclusive of depreciation and amortization
(2)InnovationDigital (“ID”), DragonWave-X Canada (“DWXC”)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

 

   FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 
                       Accumulated                 
                   Additional   Other               Total 
(Amounts in thousands,  Preferred Stock   Common Stock   Paid-In   Comprehensive   Treasury Stock   Accumulated   Stockholders’ 
except share data)  Shares   Amount   Shares   Amount   Capital   Income   Shares   Amount   Deficit   Equity 
Balance - January 1, 2022   320,000   $      -    81,985,140   $      8   $266,013   $      23    33,334   $(50)  $(217,843)  $48,151 
Issuance of common stock for conversion of debt   -    -    1,576,058    -    1,150    -    -    -    -    1,150 
Issuance of common stock for exercise of options   -    -    209,741    -    31    -    -    -    -    31 
Preferred dividend   -    -    -    -    (123)   -    -    -    -    (123)
Share-based compensation   -    -    -    -    535    -    -    -    -    535 
Net loss   -    -    -    -    -    -    -    -    136    136 
Balance - March 31, 2022   320,000    -    83,770,939    8    267,606    23    33,334    (50)   (217,707)   49,880 
Issuance of common stock for conversion of debt   -    -    6,542,394    1    2,155         -    -    -    2,156 
Issuance of common stock for the debt placement agent   -    -    240,000    -    81    -    -    -    -    81 
Preferred dividend   -    -    -    -    (185)   -    -    -    -    (185)
Share-based compensation   -    -    -    -    410    -    -    -    -    410 
Net loss   -    -    -    -    -    -    -    -    (37,749)   (37,749)
Balance - June 30, 2022   320,000   $-    90,553,333   $9   $270,067   $23    33,334   $(50)  $(255,456)  $14,593 

 

   FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 
                       Accumulated                 
                   Additional   Other               Total 
(Amounts in thousands,  Preferred Stock   Common Stock   Paid-In   Comprehensive   Treasury Stock   Accumulated   Stockholders’ 
except share data)  Shares   Amount   Shares   Amount   Capital   Income   Shares   Amount   Deficit   Equity 
Balance - January 1, 2021   -   $-    49,444,689   $5   $158,220   $-    33,334   $(50)  $(64,627)  $93,548 
Common stock issued for exercise of options   -    -    3,334    -    1    -    -    -    -    1 
Common stock issued as vendor compensation   -    -    227,169    -    1,171    -    -    -    -    1,171 
Common stock issued for conversion of debt   -    -    580,199    -    1,602    -    -    -    -    1,602 
Common stock issued for public offering   -    -    10,679,354    1    39,655    -    -    -    -    39,656 
Share-based compensation   -    -    66,667    -    356    -    -    -    -    356 
Common stock issuance for extinguishment of debt and interest   -    -    2,751,556    1    12,382    -    -    -    -    12,383 
Warrant issuance for extinguishment of debt and interest   -    -    -    -    4,394    -    -    -    -    4,394 
Common stock issued for Sky Sapience Ltd. acquisition   -    -    2,555,209    -    9,071    -    -    -    -    9,071 
Net loss   -    -    -    -    -    -    -    -    (16,206)   (16,206)
Balance - March 31, 2021   -    -    66,308,177    7    226,852    -    33,334    (50)   (80,833)   145,976 
Common stock issued for exercise of options   -    -    60,000         16    -    -    -    -    16 
Common stock issued as vendor compensation   -    -    7,571    -    -    -    -    -    -    - 
Share-based compensation   -    -         -    526    -    -    -    -    526 
Common stock issuance for Rvision, Inc. acquisition   -    -    2,000,000    -    5,500    -    -    -    -    5,500 
Common stock issuance for Innovation Digital, LLC acquisition   -    -    3,165,322    -    7,343    -    -    -    -    7,343 
Warrant issuance for debt issuance costs   -    -    -    -    919    -    -    -    -    919 
Net loss   -    -    -    -    -    -    -    -    (10,577)   (10,577)
Balance - June 30, 2021   -   $-    71,541,070   $7   $241,156   $-    33,334   $(50)  $(91,410)  $149,703 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Six Months Ended 
   June 30, 
(Amounts in thousands, except share data)  2022   2021 
Cash Flows From Operating Activities:        
Net loss  $(37,613)  $(26,783)
Adjustments to reconcile net loss to net cash used in operating activities:          
(Income) loss from discontinued operations, net of tax   (747)   121 
Depreciation   632    509 
Amortization   371    6,446 
Impairment expense   15,775    281 
Operating lease expense   241    437 
Bad debt expense   51    197 
Loss on sales (ID, DWXC) (1)   2,604    
-
 
Loss on lease abandonment   11,329    
-
 
Gain on the sale of assets   (8,441)   (83)
Share-based compensation   945    882 
Amortization of debt discounts and debt issuance costs   1,289    249 
Default interest charge   376    
-
 
Share-based vendor payments   
-
    1,171 
Loss on extinguishment of debt   618    5,025 
Changes in operating assets and liabilities:          
Accounts receivable, net   (702)   (626)
Inventory, net   3,056    1,825 
Prepaid expenses   (378)   (6,114)
Other current assets   (23)   125 
Note receivable   (2,000)   
-
 
Other non-current assets   339    (70)
Accounts payable   94    (7,956)
Accrued interest   173    
-
 
Accrued liabilities   382    
-
 
Contract liabilities   1,281    (1,400)
Operating lease liabilities   (1,386)   (389)
Related party notes   (206)   1 
Other current liabilities   856    (1)
Total Adjustments   26,529    630 
Net Cash Used In Operating Activities   (11,084)   (26,153)
Cash Flows From Investing Activities:          
Business acquisitions, net of cash received   
-
    (4,248)
Proceeds from building sale, net of transaction costs   15,102    
-
 
Purchases of property and equipment   (167)   (2,534)
Acquisition of intangible assets   
-
    (1,233)
Proceeds from disposal of property and equipment   
-
    83 
Net Cash Provided By (Used In) Investing Activities   14,935    (7,932)
Cash Flows From Financing Activities:          
Proceeds from issuance of related party notes   100    (850)
Proceeds from sale of common stock from offering   
-
    44,971 
Proceeds from debt   500    9,345 
Offering costs   
-
    (5,315)
Preferred stock dividend   (246)   
-
 
Proceeds from exercise of options   31    17 
Debt issuance costs   
-
    (186)
Repayment of debt   (7,580)   (6,379)
Net Cash (Used In) Provided By Financing Activities   (7,195)   41,603 
Net Cash Provided by (Used In) Discontinued Operations   1,632    (3,213)
Net (Decrease) Increase In Cash   (1,712)   4,305 
Cash - Beginning of Period   1,873    690 
Cash - End of Period  $161   $4,995 

 

(1)InnovationDigital (“ID”), DragonWave-X Canada (“DWXC”)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(unaudited)

 

   For the Six Months Ended 
   June 30, 
   2022   2021 
(Amounts in thousands, except share data)        
Supplemental Disclosures of Cash Flow Information:        
         
Cash paid during the period for:        
Interest  $107   $436 
Non-cash investing and financing activities:          
Issuance of common stock for debt placement agent  $81   $
-
 
Accrual of preferred dividends not paid yet  $62   $
-
 
Debt incurred to sellers for Skyline Partners Technology LLC  $
-
   $12,650 
Issuance of common stock for Sky Sapience Ltd. acquisition  $
-
   $9,071 
Issuance of common stock for Innovation Digital, LLC  $
-
   $7,344 
Debt incurred to sellers for Innovation Digital, LLC  $
-
   $600 
Issuance of common stock for RVision, Inc.  $
-
   $5,500 
Issuance of common stock for extinguishment of debt and interest  $
-
   $12,383 
Issuance of warrants for extinguishment of debt and interest  $
-
   $4,394 
Issuance of common stock for conversion of debt and interest  $3,306   $1,602 
Original issue discount and non-cash debt issuance costs  $
-
   $1,655 
Issuance of warrants as debt issuance costs  $
-
   $919 
Recognition of operating lease right-of-use asset and liability  $10,052   $1,217 
Acquisition of building with secured note payable  $
-
   $4,480 
Prepaid deposits transferred to inventory  $2,445   $862 
Lease deposits recognized from Sky Sapience Ltd. Acquisition  $
-
   $11 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

NOTE 1 DESCRIPTION OF BUSINESS

 

COMSovereign Holding Corp. (“COMSovereign”) and subsidiaries (collectively the “Company”) a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S. based providers of telecommunications equipment and services.

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There have been no material changes in the Company’s significant accounting policies as of and for the three and six months ended June 30, 2022, as compared to the significant accounting policies described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021.

 

Basis of Presentation

 

The accompanying financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations and financial position for the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. The amounts reported in the unaudited condensed consolidated financial statements, and the tables in the notes hereto, of the Quarterly Report on Form 10-Q as of June 30, 2022 and for the three months and six months ended June 30, 2022 and 2021, are presented in United States dollars and are rounded in thousands with the exception of share and per share data. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2021 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on August 16, 2022.

 

Effective January 21, 2021, the Company enacted a 1-for-3 reverse stock split (the “Split”) of the Company’s common stock. These condensed consolidated financial statements and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented. 

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported results of operations or loss per share.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements as of June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021, include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.  

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates consist of the valuation of stock-based compensation; the valuation of the assets and liabilities acquired; the valuation of the Company’s equity securities issued in transactions; the valuation of inventory; the allowance for credit losses; the valuation of equity securities; the valuation allowance for deferred tax assets; and impairment of long-lived assets and goodwill.

 

Long-Lived Assets and Goodwill

 

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

6

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. As of June 30, 2022, the Company determined that it was more likely than not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due to a decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2022. See Note 12 – Goodwill and Other Intangible Assets.

 

The Company calculates the estimated fair value of a reporting unit using the income approach. In evaluating the recoverability of goodwill, the Company estimates the fair value of its reporting units, which is determined using the income approach, and compares it to the carrying value. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.

 

In determining whether a qualitative assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the two-step goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more than likely that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required. The Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition projections, and its expectations. The only reporting unit with a pre-impairment negative carrying value is Virtual Network Communications, Inc.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:

 

Level 1 – Observable inputs that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.

 

Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs may be used with standard pricing models or other valuation or internally-developed methodologies that result in management’s best estimate of fair value.

  

The Company utilizes fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized.

 

As allowed by applicable FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently eligible financial assets or liabilities. The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of June 30, 2022 and December 31, 2021 approximated their fair value due to their short-term nature.

 

Discontinued Operations

 

On June 21, 2022, the Company completed the sale of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest of 5% and a maturity date of May 31, 2025. The assets and liabilities of Sovereign Plastics are reflected in the accompanying condensed consolidated balance sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations”, respectively. The results of operations of Sovereign Plastics are included in “Income (loss) from discontinued operations, net of tax provision” in the accompanying condensed consolidated statements of operations and comprehensive loss. For comparative purposes, all prior periods presented have been reclassified to reflect the classifications on a consistent basis. See Note 3 – Discontinued Operations for additional information. 

 

7

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

Recently Adopted Accounting Standards

 

In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies the accounting for convertible instruments by eliminating certain accounting models when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. Under this ASU, certain debt instruments with embedded conversion features will be accounted for as a single liability measured at its amortized cost. Additionally, this ASU eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments. The new guidance is effective for smaller reporting companies during annual periods beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company early adopted ASU 2020-06 effective January 1, 2022 which eliminates the need on a go forward basis to assess whether a beneficial conversion feature needs to be recognized upon either (a) the issuance of new convertible securities; or (b) the resolution of any prior period contingent beneficial conversion features.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Companies should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. This standard was adopted on January 1, 2022 and did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

NOTE 3 DISCONTINUED OPERATIONS

 

Sovereign Plastics LLC

 

Sovereign Plastics LLC (“Sovereign Plastics”) is a manufacturer of plastic and metal components to third-party manufacturers based out of Colorado Springs, Colorado. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sovereign Plastics in the future as compared to the opportunities available to Sovereign Plastics in the future, and the availability of strategic alternatives. On June 13, 2022, after careful consideration, the Board of Directors unanimously approved the sale.

 

On June 21, 2022, the Company completed the sale of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $2.0 million in a secured note with interest of 5% and a maturity date of May 31, 2025.

 

Results of Discontinued Operations

 

The results and net loss of Sovereign Plastics’ discontinued operations were as follows:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands, except share and per share data)  2022   2021   2022   2021 
Revenue   $542   $1,210   $1,718   $2,196 
Cost of goods sold    352    543    1,065    1,014 
Gross profit    190    667    653    1,182 
Operating expenses                     
General and administrative    314    352    691    700 
Depreciation and amortization    134    162    283    323 
Gain on sale of Sovereign Plastics    (1,074)   
-
    (1,074)   
-
 
Total operating expenses, net    (626)   514    (100)   1,023 
Income from operations    816    153    753    159 
Other income (expense)                     
Interest expense    (5)   (1)   (6)   (34)
Other income    
-
    8    
-
    
-
 
Loss on extinguishment of debt    
-
    
-
    
-
    (246)
Total other income (expense)   (5)   7    (6)   (280)
Income (loss) from discontinued operations, net of tax     $811   $160   $747   $(121)

8

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

Assets and liabilities of discontinued operations as of December 31, 2021 were classified as current because the sale transaction closed during the following twelve months during the period ended June 30, 2022. The details are as follows:

 

   Sovereign Plastics 
   December 31, 
(Amounts in thousands, except share and per share data)  2021 
Assets    
Cash   $26 
Accounts receivable, net    222 
Inventory, net    295 
Prepaid and deferred expenses    266 
Assets of discontinued operations - current    809 
Property and equipment, net    736 
Operating lease right-of-use assets    717 
Goodwill      48 
Other assets – long term      73 
Assets of discontinued operations - long-term    1,574 
Total assets of discontinued operations   $2,383 
      
Liabilities        
Accounts payable   $129 
Accrued liabilities    50 
Accrued payroll    52 
Contract liabilities, current    475 
Operating lease liabilities, current      194 
Current portion of long-term debt, net of unamortized discounts and debt issuance costs    11 
Liabilities of discontinued operations - current    911 
Contract liabilities – long term    34 
Operating lease liabilities – long term    553 
Liabilities of discontinued operations - long-term    587 
Total liabilities of discontinued operations   $1,498 

 

NOTE 4 GOING CONCERN

 

U.S. GAAP requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.

 

The accompanying unaudited condensed consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the six months ended June 30, 2022, the Company used cash flows in operating activities of $11.1 million, and at June 30, 2022 had cash of $0.2 million, had an accumulated deficit of $255.5 million, and had a working capital deficit of $9.2 million.

 

The Company’s fiscal operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. Based on current cash on hand and subsequent activity as described herein (see Note 21 – Subsequent Events - Business Developments and Debt and Equity Developments), the Company presently only has enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of the Company’s limited cash availability, its operations have been scaled back to the extent possible (see Note 21 – Subsequent Events - Business Developments). Management continues to explore opportunities with third parties and related parties to provide additional capital and/or sell assets; however, it has not entered into any agreement to provide the necessary additional capital, except as disclosed herein. In the near term, there may be limited opportunities to raise capital of significance due to the Company’s Nasdaq compliance issues, as discussed in Note 21 – Subsequent Events - Nasdaq Compliance Developments.

 

The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake. If the Company is not able to obtain additional financing on a timely basis, it may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on its business, financial condition and results of operations, and ultimately, it could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.

 

9

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

NOTE 5 REVENUE

 

The following table is a summary of the Company’s timing of revenue recognition for the three and six months ended June 30, 2022 and 2021:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands)  2022   2021   2022   2021 
Timing of revenue recognition:                
Services and products transferred at a point in time  $2,037   $2,263   $3,992   $3,174 
Services and products transferred over time   51    138    149    328 
Total revenue  $2,088   $2,401   $4,141   $3,502 

 

The Company disaggregates revenue by source and geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Revenue by source consisted of the following for the three and six months ended June 30, 2022 and 2021:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands)  2022   2021   2022   2021 
Revenue by products and services:                
Products  $2,037   $2,040   $3,992   $2,671 
Services   51    361    149    831 
Total revenue  $2,088   $2,401   $4,141   $3,502 

 

Revenue by geographic destination consisted of the following for the three and six months ended June 30, 2022 and 2021:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands)  2022   2021   2022   2021 
Revenue by geography:                
North America  $1,944   $1,340   $3,493   $2,085 
International   144    1,061    648    1,417 
Total revenue  $2,088   $2,401   $4,141   $3,502 

 

Contract Balances

 

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of June 30, 2022 and December 31, 2021, the Company did not have a material contract assets balance.

 

The following table is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.

 

(Amounts in thousands)  Total 
Balance at December 31, 2021  $3,415 
New invoices not yet earned   1,880 
Old invoices earned   (599)
Balance at June 30, 2022  $4,696 

 

10

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

NOTE 6 EARNINGS (LOSS) PER SHARE

 

The Company accounts for earnings or loss per share pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which requires disclosure on the financial statements of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period.

 

There were no adjustments to net loss, the numerator, or the denominator for purposes of computing basic earnings per share.

 

Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss attributable to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss attributable to common shareholders.

 

The following weighted-average potential common shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of June 30, 2022 and 2021, respectively:

 

   June 30, 
   2022   2021 
Options   6,334,103    3,320,181 
Unvested restricted stock   99,998    328,543 
Warrants   12,814,923    775,362 
Convertible notes   4,566,849    4,835,781 
    23,815,873    9,259,867 

 

NOTE 7 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

Cash, cash equivalents and restricted cash consisted of the following as of June 30, 2022, and December 31, 2021:

 

(Amounts in thousands)  June 30,
2022
   December 31,
2021
 
Cash and cash equivalents  $126   $1,596 
Restricted cash   35    277 
Total  $161   $1,873 

 

Cash, cash equivalents, and restricted cash are represented by operating accounts or money market accounts maintained with insured financial institutions, including cash equivalents, defined as all short-term, highly-liquid investments with maturities of three months or less when purchased. The Company had no cash equivalents as of June 30, 2022 and December 31, 2021, respectively. During the six months ended June 30, 2022, restricted cash decreased by $242,000, including $195,000 of restricted cash which was released upon the sale of a building. The remainder of the restricted cash will be released as overseas leases expire in January and July of 2023. See Note 11 – Property and Equipment, Net for additional information related to the sale of the building.

 

NOTE 8 ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following as of June 30, 2022 and December 31, 2021:

 

(Amounts in thousands)  June 30,
2022
   December 31,
2021
 
Accounts receivable  $3,173   $2,391 
Less: allowance for doubtful accounts   (1,064)   (1,014)
Total accounts receivable, net  $2,109   $1,376 

  

Bad debt expense totaled $0.1 million and $0.1 million, respectively, for the three and six months ended June 30, 2022, compared to $0.2 million and $0.2 million for the three and six months ended June 30, 2021, respectively.

 

11

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

NOTE 9 INVENTORY, NET

 

Inventory consisted of the following as of June 30, 2022 and December 31, 2021:

 

(Amounts in thousands)  June 30,
2022
   December 31,
2021
 
Raw materials  $5,999   $6,587 
Work in progress   1,043    1,202 
Finished goods   1,039    3,592 
Total inventory   8,081    11,381 
Reserve   (605)   (1,132)
Total inventory, net  $7,476   $10,249 

 

The Company maintains a perpetual inventory system which is supplemented by periodic reviews of inventory quantities on hand. The Company records an impairment for excess and obsolete inventory, when necessary, based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question. 

 

NOTE 10 PREPAID EXPENSES

 

Prepaid expenses consisted of the following as of June 30, 2022 and December 31, 2021:

 

(Amounts in thousands)  June 30,
2022
   December 31,
2021
 
Prepaid products and services  $4,839   $6,840 
Prepaid rent and security deposit   30    96 
Total prepaid expenses  $4,869   $6,936 

 

NOTE 11 PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following as of June 30, 2022 and December 31, 2021:

 

(Amounts in thousands)  June 30,
2022
   December 31,
2021
 
Shop machinery and equipment  $2,081   $10,103 
Computers and electronics   992    1,436 
Office furniture and fixtures   317    744 
Leasehold improvements   301    543 
Building   
-
    4,801 
Land   
-
    1,330 
Building improvements   
-
    755 
Total property and equipment   3,691    19,712 
Less: accumulated depreciation   (2,307)   (10,960)
Total property and equipment, net  $1,384   $8,752 

 

12

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

On January 31, 2022, the Company sold its Tucson, Arizona office building (the “Tucson Building”) for $15.8 million of cash. The Tucson Building had a carrying value of $6.7 million, including the $4.8 million cost basis of the building, the $1.3 million cost basis of the land, and the $0.8 million related to building improvements, partially offset by $0.2 million of accumulated depreciation. The Company recognized an $8.4 million gain on sale of assets, which is net of $0.7 million of related transaction costs. See Note 13 – Leases for additional information about the subsequent leaseback of the office building.

 

During the three months ended June 30, 2022, the Company derecognized the property and equipment in connection with the following transactions (see Note 20 – Other Business Developments for additional information):

 

a)Sale of DragonWave-X Canada, Inc. assets – gross assets of $8.5 million with a net book value of $0.0 million;

 

b)Idling of InduraPower – gross assets of $0.6 million with a net book value of $0.1 million; and

 

c)Transfer of Innovation Digital, LLC assets – gross assets of $0.1 million with a net book value of $0.1 million.

 

The Company recognized $0.5 million and $0.6 million of depreciation expense for the three and six months ended June 30, 2022, respectively, compared to $0.3 million and $0.5 million of depreciation expense for the three and six months ended June 30, 2021, respectively.

 

NOTE 12 GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill activity during the six months ended June 30, 2022 was as follows:

 

(Amounts in thousands)  Total 
Balance at December 31, 2021  $37,943 
Derecognition   (710)
Impairments   (7,200)
Balance at June 30, 2022  $30,033 

 

The following table sets forth the gross carrying amount activity during the six months ended June 30, 2022, plus the accumulated amortization of the Company’s intangible assets as of June 30, 2022.

 

(Amounts in thousands)  Gross Carrying
Amount
  

Derecognition
of Patents

   Impairment   Accumulated
Amortization
   Net Carrying
Amount
 
Definite-lived intangible assets:                    
Technology   14,196    (561)   (8,575)   (194)   4,866 
Intellectual property   591    
-
    
-
    (71)   520 
Software   673    
-
    
-
    (118)   555 
Total definite-lived intangible assets at June 30, 2022  $15,460   $(561)  $(8,575)  $(383)  $5,941 

 

On June 23, 2022, the Company executed an agreement to return fifteen patents and five pending or provisional patents to the former owners of Innovation Digital, LLC (“Innovation Digital”) which resulted in the derecognition of goodwill and intangible assets shown in the tables above. See Note 20 – Other Business Developments for additional information.

 

As of June 30, 2022, the Company determined that it was more likely than not that certain reporting unit’s fair value was below their reporting unit’s carrying amount due to a decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2022. For the three and six months ended June 30, 2022, the Company, utilizing a 10% revenue growth rate and a weighted-average cost of capital range of 13-25%, recorded an impairment charge for goodwill in the amount of $7.2 million and an impairment charge for other definite-lived intangible assets of $8.6 million. The Company calculates the estimated fair value of a reporting unit and the definite-lived intangible assets using the income approach and compares it to the carrying value. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.

 

In determining whether a qualitative assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the two-step goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more than likely that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required. The Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition projections, and its expectations. The only reporting unit with a pre-impairment negative carrying value is Virtual Network Communications, Inc.

 

13

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

During the three and six months ended June 30, 2022, the Company recorded amortization expense of intangible assets of $0.4 million and $0.8 million, respectively. During the three and six months ended June 30, 2021, the Company recorded amortization expense of intangible assets of $3.2 million and $6.5 million, respectively. The Company’s amortization is based on no residual value using the straight-line amortization method as it best represents the benefit of the intangible assets.

 

The following table sets forth the weighted-average amortization period, in total and by major intangible asset class:

 

Asset Class   Weighted-
Average
Amortization
Period
 
Technology   10.0 years  
Intellectual property   10.0 years  
Software   10.0 years  
All intangible assets   10.0 years  

 

As of June 30, 2022, assuming no additional amortizable intangible assets, the expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter was as follows:

 

(Amounts in thousands)  Estimated 
2022  $297 
2023   594 
2024   594 
2025   594 
2026   594 
Thereafter   3,268 
All intangible assets  $5,941 

 

As part of the Company’s restructuring, commencing January 1, 2023, the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer intends to manage the Company and make decisions based on the Company’s consolidated operating results.

 

NOTE 13 LEASES 

 

Operating Leases

 

The Company has operating leases for office, manufacturing and warehouse space, along with office equipment. The carrying values of operating lease right-of-use (“ROU”) assets and operating lease liabilities as of June 30, 2022 and December 31, 2021 were as follows:

 

   June 30,   December 31, 
(Amounts in thousands)  2022   2021 
Operating lease ROU assets  $1,305   $3,000 
Operating lease liability  $11,618   $3,126 

 

On February 1, 2022, the Company entered into a lease agreement with the new owners of the Tucson Building (see Note 11 - Property and Equipment, Net), for a term of 10 years with no option to renew. Monthly rent increases annually from $98,300 per month in year one to $128,200 a month in the final year of the lease. The Company posted a $1.0 million security deposit in connection with the commencement of the lease, which is classified within other assets – long term on the balance sheet. The Company determined that the transactions represented a sale and leaseback and, accordingly, established a new operating lease ROU asset and operating lease liability of $10.1 million. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate based on other leases with similar terms.

 

In May 2022, the Company abandoned its lease of the Tucson Building after previously defaulting on the lease. In June 2022, ComSovereign Corp. abandoned its Dallas, TX office lease and VEO Photonics, Inc. abandoned its San Diego, CA office lease. In connection with the lease abandonments, the Company recognized an $11.3 million loss due to the write-offs of the ROU-assets and applied its security deposit assets against its operating lease liabilities.

 

14

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

Other information related to the Company’s operating leases are as follows:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands)  2022   2021   2022   2021 
Operating lease cost  $535   $343   $1,088   $595 
Short-term lease cost  $19   $63   $28   $102 
                     
Cash paid for amounts included in the measurement of lease liabilities:                    
Operating cash flows from operating leases  $24   $339   $517   $598 

 

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of June 30, 2022, and December 31, 2021:

 

   June 30   December 31 
(Amounts in thousands)  2022   2021 
Weighted average remaining lease term   4.19 years    5.37 years 
Weighted average discount rate   5.95%   5.97%

 

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the consolidated balance sheet as of June 30, 2022:

 

   Operating
 
(Amounts in thousands)  Leases 
2022  $1,240 
2023   2,026 
2024   1,768 
2025   1,625 
2026   1,386 
Thereafter   8,285 
Total minimum lease payments   16,330 
Less: effect of discounting   (4,712)
Present value of future minimum lease payments   11,618 
Less: current obligations under leases   (734)
Long-term lease obligations  $10,884 

 

15

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

NOTE 14 DEBT

 

Debt consisted of the following as of June 30, 2022 and December 31, 2021:

 

         June 30, 2022   December 31, 2021 
(Amounts in thousands)  Note
Reference
  Original
Maturity
Date
  Amount
Outstanding
   Interest
Rate
   Amount
Outstanding
   Interest
Rate
 
Secured Notes Payable                          
Secured senior convertible note payable  A  5/27/23  $3,571    6.0%  $6,417    6.0%
Secured senior convertible note payable  B  8/25/23   3,722    6.0%   4,833    6.0%
Secured note payable  C  11/26/21   500    9.0%   1,000    9.0%
Secured note payable  D  1/29/22   
-
    0.0%   5,205    >8% or Libor +6.75%
Total secured notes payable         7,793         17,455      
                           
Notes Payable                          
Notes payable  E  3/31/23   100    3.0%   
-
    3.0%
Notes payable  F  7/29/22   550    0.0%   
-
    0.0%
PPP loans  G  5/5/22   
-
    1.0%   2    1.0%
SBA loan  H  5/15/50   143    3.8%   150    3.8%
Total notes payable         793         152      
                           
Convertible Notes Payable                          
Convertible note payable  I  6/3/22   
-
    5.0%   600    5.0%
Convertible note payable  J  1/29/26   11,150    3.3%   11,150    1.0%
Total convertible notes payable         11,150         11,750      
                           
Total long-term debt         19,736         29,357      
Less: unamortized discounts and debt issuance costs         (2,360)        (3,518)     
Total long-term debt, less discounts and debt issuance costs         17,376         25,839      
Less: current portion of long-term debt         (11,467)        (13,566)     
Debt classified as long-term debt        $5,909        $12,273      

   

Lind Debt

 

For Notes A and B (the “Lind Debt”), on or about April 15, 2022, as a result of the Company not filing its Annual Report on Form 10-K for the year ended December 31, 2021 on a timely basis, the Lind Debt entered into default, which resulted in a 5% or $0.4 million increase in the principal value, pursuant to the terms of the Lind Debt. The default also enabled the note holders, upon notice to the Company, to periodically convert a portion of the associated principal and accrued interest into common stock at a 20% discount to the three lowest daily volume-weighted-average-prices during the prior twenty trading days (“Note Holder Conversions”).

 

For the Lind Debt, during the six months ended June 30, 2022, the principal amount was reduced by an aggregate of $4.0 million, which was comprised of (a) a reduction of an aggregate of $1.9 million (plus interest) due to pre-default scheduled cash payments; (b) a reduction of an aggregate of $1.9 million (plus interest) due to pre-default scheduled equity payments (at the Company’s discretion, in lieu of cash) comprising 3,530,042 shares of common stock; (c) an increase of an aggregate of $0.4 million (as discussed above) due to the debt’s contractual default provisions; and (d) a reduction of an aggregate of $0.6 million of principal due to Note Holder Conversions into an aggregate of 4,586,835 shares of the Company’s common stock.

 

See Note 21 – Subsequent EventsDebt and Equity Developments for information related to subsequent Note Holder Conversions. The subsequent Note Holder Conversions enabled the June 30, 2022 outstanding principal of the Lind Debt (and the related debt discounts) and $0.9 million of Note J to be fully reclassified from current to long term.

 

Other Debt

 

For Note C, during the six months ended June 30, 2022, past due principal of $0.5 million was repaid in cash.

 

For Note D (the Tucson building mortgage), during the six months ended June 30, 2022, the principal of $5.2 million was repaid in cash from the proceeds of the January 31, 2022 building sale.

 

16

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

For Note E, on April 1, 2022, the Company entered into a note agreement with a related party who is an Executive Officer of the Company for cash proceeds of $100,000 with a maturity date of March 31, 2023 and an interest rate of 3%. As of June 30, 2022, the proceeds were recorded as a related party note in current liabilities.

 

For Note F, on or about April 29, 2022, the Company sold an original issue discount note with a face value of $550,000 to an investor for the purchase price of $500,000. This note was due approximately July 29, 2022 and bears a default rate of 12% after the maturity date. On July 26, 2022, the Company received notice from the promissory note holder that the promissory note in the principal amount of $550,000 was due. As of the date of this filing, this note remains outstanding. On May 9, 2022, in connection with the note issuance, the Company issued 240,000 shares of common stock to an advisor pursuant to an advisory agreement dated April 29, 2022.

 

For Note G, during the six months ended June 30, 2022, principal of $2,000 was repaid in cash.

 

For Note H, during the six months ended June 30, 2022, principal of $7,000 was repaid in cash.

 

For Note I, on June 23, 2022, the Company reached an agreement to cancel the note comprised of principal of $600,000 and interest of $40,000 in exchange for the return of certain patents. See Note 20 – Other Business Developments for additional information.

 

For Note J, on May 24, 2022, the Company received notice from counsel for holders of $11.2 million of convertible promissory notes issued in connection with the acquisition of Fastback that the Company had failed to file its Annual Report on Form 10-K in a timely manner, as required by the terms of the convertible promissory notes. While the note holders have the right to accelerate the maturity of the principal, the notice simply indicated that the holders were reserving their rights.

 

Future maturities contractually required by the Company under debt obligations are as follows as of June 30, 2022:

 

(Amounts in thousands)   Total 
Remaining 2022   $19,493 
2023    100 
2024    
-
 
2025    
-
 
2026    
-
 
Thereafter    143 
Total   $19,736 

 

During the three and six months ended June 30, 2022, the Company recognized $1.3 million and $2.2 million of interest expense in connection with the aforementioned indebtedness, which includes the $0.4 million Lind Debt default charge during both periods. During the three and six months ended June 30, 2021, the Company recognized $0.5 million and $1.0 million of interest expense in connection with the aforementioned indebtedness.

 

NOTE 15 STOCKHOLDERS’ EQUITY

 

See Note 14 – Debt and Note 21 – Subsequent Events – Debt and Equity Developments for additional information related to debt conversions.

 

Preferred Stock - Liquidation Preference

 

Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, before any distribution or payment shall be made to holders of shares of our common stock or any other class or series of our capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, junior to the Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”), holders of shares of Series A Preferred Stock will be entitled to be paid out of our assets legally available for distribution to our stockholders, after payment of or provision for our debts and other liabilities and any class or series of our capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, senior to the Series A Preferred Stock, a liquidation preference of $25.00 per share of the Series A Preferred Stock (approximately $8.0 million), plus an amount equal to any accrued and unpaid dividends (whether or not authorized or declared) up to, but excluding, the date of payment. If, upon our voluntary or involuntary liquidation, dissolution or winding up, our available assets are insufficient to pay the full amount of the liquidating distributions on all outstanding shares of Series A Preferred Stock and the corresponding amounts payable on all shares of each other class or series of capital stock ranking, as to rights upon liquidation, dissolution or winding up, on parity with the Series A Preferred Stock in the distribution of assets, then holders of shares of Series A Preferred Stock and each such other class or series of capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding up, on parity with the Series A Preferred Stock will share ratably in any distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.

 

17

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

Dividends

 

During the three and six months ended June 30, 2022, the Company recorded $184,992 and $308,320, respectively, of dividends paid or payable to the holders of the 9.25% Series A Preferred Stock.

 

On or about May 25, 2022, the Company announced that it had suspended the payment of dividends on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $493,312.

 

NOTE 16 SHARE-BASED COMPENSATION

 

Restricted Stock Awards

 

A summary of the restricted stock unit (“RSU”) activity during the six months ended June 30, 2022 is presented below:

 

       Weighted- 
       Average 
   Number of   Grant Date
Value
 
   RSU’s   Per Share 
RSU’s non-vested - January 1, 2022   133,331   $2.67 
Vested   (33,334)   1.03 
RSU’s non-vested - June 30, 2022   99,998   $2.05 

 

During the three and six months ended June 30, 2022, the Company recognized $78,496 and $156,996, respectively, of share-based compensation expense associated with RSUs. During the three and six months ended June 30, 2021, the Company recognized $180,993 and $530,073, respectively, of share-based compensation expense associated with RSUs. Compensation expense related to RSUs is recorded in general and administrative expense in the condensed consolidated statement of operations. As of June 30, 2022, there was $114,834 of unrecognized stock-based compensation expense related to RSUs that will be recognized over the weighted average remaining vesting period of 0.48 years.

 

Stock Options

 

There were no stock options issued during the three and six months ended June 30, 2022. The following table summarizes the assumptions used to estimate the fair value of options granted during the six months ended June 30, 2021.

 

   For the Six Months Ended 
   June 30, 
   2022   2021 
Expected dividend yield   N/A    0.00%
Expected volatility   N/A    46.50 - 53.02%
Risk-free interest rate   N/A    0.48 - 0.89%
Expected life of options   N/A    3.00 - 5.00 years 

 

The following table presents stock option activity for the six months ended June 30, 2022:

 

       Weighted   Weighted     
       Average   Average    
      Exercise    Contractual   Aggregate 
   Number of
Options
   Price
Per Share
   Life in
Years
   Intrinsic
Value
 
Outstanding - December 31, 2021   7,040,511   $2.33         
         
 
Exercised   (209,741)   0.15         
 
 
Cancelled or Expired   (496,667)   2.27         
 
 
Outstanding - June 30, 2022   6,334,103   $2.41    2.89    
-
 
                     
Exercisable - June 30, 2022   2,801,270   $1.96    1.79    
-
 

 

18

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

The following table presents information related to stock options as of June 30, 2022:

 

Options Outstanding   Options Exercisable 
        Weighted     
Exercise   Outstanding   Average   Exercisable 
Price   Number of   Remaining Life   Number of 
Per Share   Options   In Years   Options 
 $ 0.01 - $ 0.50    
-
    
-
    
-
 
 $ 0.51 - $ 1.00    568,763    3.02    568,763 
 $ 1.01 - $ 1.50    
-
    
-
    
-
 
 $ 1.51 - $ 2.00    1,356,671    0.30    1,356,671 
 $ 2.01 - $ 2.50    
-
    
-
    
-
 
 $ 2.51 - $ 3.00    4,116,992    3.60    782,501 
 $ 3.01 - $ 3.50    291,677    0.96    93,335 
      6,334,103    1.79    2,801,270 

 

The Company recognized $321,248 and $777,852 of share-based compensation expense related to options for the three and six months ended June 30, 2022, respectively, compared to $344,638 and $352,012 of share-based compensation expense related to options for the three and six months ended June 30, 2021, respectively. Compensation expense related to stock options is recorded in general and administrative expense in the condensed consolidated statement of operations. At June 30, 2022, the Company had $465,322 of unrecognized compensation expense related to options.

 

Warrants

 

All warrants are valued utilizing the Black-Scholes pricing model using the assumptions listed below. There were no warrants issued during the three and six months ended June 30, 2022. The weighted average grant date fair value of all warrants issued during the six months ended June 30, 2021 was $1.39 per share.

 

The following tables summarize the assumptions used to estimate the fair value of warrants granted during the six months ended June 30, 2022 and 2021: 

 

   For the Six Months Ended 
   June 30, 
   2022   2021 
Expected dividend yield   N/A    0%
Expected volatility   N/A    39.94 - 46.33%
Risk-free interest rate   N/A    0.42- 0.81%
Contractual life of warrants   N/A    5.0 years 

 

The following table presents activity for the six months ended June 30, 2022:

 

       Weighted-     
      Average   Weighted- 
   Number of
Warrants
   Exercise
Price
Per Share
   Average
Contractual
Life in Years
 
             
Outstanding - December 31, 2021   12,831,593   $3.72     
Forfeited or Expired   (16,670)   1.50      
Outstanding - June 30, 2022   12,814,923   $3.72    3.63 
Exercisable - June 30, 2022   12,814,923   $3.72    3.63 

 

19

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

The following table presents information related to warrants as of June 30, 2022:

 

Warrants Outstanding   Warrants Exercisable 
        Weighted     
Exercise   Outstanding   Average   Exercisable 
Price   Number of   Remaining Life   Number of 
Per Share   Warrants   In Years   Warrants 
 $ 0.01 - $ 1.00    560,192    3.02    560,192 
 $ 1.01 - $ 2.00    
-
    
-
    
-
 
 $ 2.01 - $ 3.00    4,556,001    3.81    4,556,001 
 $ 3.01 - $ 4.00    33,342    2.79    33,342 
 $ 4.01 - $ 5.00    7,285,290    3.58    7,285,290 
 $ 5.01 - $ 6.00    380,098    3.60    380,098 
      12,814,923    3.63    12,814,923 

 

NOTE 17 COMMITMENTS AND CONTINGENCIES

 

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Management does not believe that after the final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

 

On January 27, 2022, a former employee filed suit against the Company in the Tulsa County Oklahoma District Court, Case No. CJ-2022-00221. The plaintiff has alleged that she was entitled to six months of severance pay after her employment contract was not renewed, and that her option agreements did not expire thirty days after cessation of her employment, and claims she is owed approximately $75,000 in severance and $250,000 in damages for her options. The Company filed an Answer on or about March 18, 2022. The Company disputes the plaintiff’s allegations, has not accrued for any contingent losses, and intends to vigorously defend the lawsuit.

 

On June 16, 2022, the Company received notice from certain former shareholders of SAGUNA claiming breaches of the SAGUNA stock purchase agreement and claiming that all of the former shareholders of SAGUNA have suffered damages totaling approximately $13.9 million, which they calculated as the value related to the consideration issued to those former shareholder for the acquisition of SAGUNA. The Company denies those claims and has not accrued for any contingent loss. However, the Company may face legal claims or proceedings regarding those claims.

 

See Note 21 – Subsequent Events – Litigation, Claims and Contingencies Developments for post-June 30, 2022 developments.

 

NOTE 18 CONCENTRATIONS

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable. At June 30, 2022, accounts receivable from two customers comprised an aggregate of approximately 40% of the Company’s total trade accounts receivable, and none of these balances were characterized as uncollectible.

 

In addition, for the three months ended June 30, 2022, revenue from three customers individually exceeded 10% of revenue and, in total, comprised approximately 41% of the Company’s total revenue. For the six months ended June 30, 2022, revenue from one customer individually exceeded 10% of revenue and, in total, comprised approximately 11% of the Company’s total revenue. At June 30, 2022, accounts payable from one vendor accounted for 16% of the Company’s total expenses.

 

NOTE 19 BUSINESS ACQUISITIONS

 

During 2021, the Company completed the acquisitions of Fastback Networks, a telecommunications provider, Sky Sapience Ltd., a tethered drone provider, Rvision, Inc., a video and communications developer, Innovation Digital, a developer of signal processing solutions, RF Engineering and Energy Resource, an antenna and accessories provider, and SAGUNA Networks, a software developer to expand the Company’s product offerings and developments.

 

20

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

The following information represents the unaudited pro forma combined results of operations, giving effect to the acquisitions as if they occurred at the beginning of the period ended June 30, 2021.

 

   For the
Three Months Ended
   For the
Six Months Ended
 
(Amounts in thousands)  June 30,
2021
   June 30,
2021
 
         
Revenue from continuing operations  $2,585   $4,416 
           
Net loss from continuing operations  $(11,409)  $(28,790)
           
Basic and diluted loss per common share  $(0.15)  $(0.38)
           
Weighted-average common shares outstanding   78,433,662   $75,442,895 

 

NOTE 20 OTHER BUSINESS DEVELOPMENTS

 

Executive Officer and Board of Director Developments

 

On April 21, 2022, the Company’s Chief Financial Officer resigned from the Company for personal family commitments.

 

On May 2, 2022, a member of the Board of Directors of the Company (the “Board”) announced their resignation from the Board and all committees thereof, effective immediately. The resignation allowed that former member of the Board to focus on personal and other professional commitments.

 

Business Developments

 

Commencing in May 2022, the Company embarked on a restructuring, including a reduction of over 70% of overhead and personnel costs through the divestment of non-core assets in favor of a refocus on our true core competencies in 5G and beyond technology.

 

In May 2022, InduraPower idled the employees.

 

On May 23, 2022, a third party acquired certain assets and employees from the Canadian subsidiary of DragonWave-X, LLC (“DragonWave Canada”), in return for assuming DragonWave Canada’s potential employment liabilities and assuming DragonWave Canada’s lease in Kanata, Ontario, Canada, through an Asset Purchase Agreement. The Company recognized a $2.0 million loss on the aforementioned sale.

 

In June 2022, the Company idled the employees of SAGUNA Networks Ltd. (“SAGUNA”), Sky Sapience Ltd. (“SKS”) and VEO Photonics, Inc. (“VEO”).

 

On June 23, 2022, the Company reached an agreement to return fifteen patents and five pending or provisional patents to the former owners of Innovation Digital, LLC (“Innovation Digital”), resulting in the derecognition of an outstanding promissory note of an aggregate $640,000, comprised of $600,000 of principal and $40,000 of interest, the return of 500,000 shares of common stock, and the waiver of certain severance payments. The Company recognized a $0.6 million loss on the aforementioned sale.

 

NOTE 21 SUBSEQUENT EVENTS

 

Executive Officer and Board of Director Developments

 

On September 1, 2022, the Company’s then Chief Executive Officer and the Company’s then President resigned from the Company as part of the Company’s ongoing transition. David A. Knight was appointed Interim Chief Executive Officer by the Board.

 

On October 10, 2022, a member of the Board announced their resignation from the Board and all committees thereof. The resignation allowed that former member of the Board to focus on personal and other professional commitments.

 

On November 23, 2022, the Board appointed David A. Knight as the Company’s Chief Executive Officer, President, Acting Principal Financial and Accounting Officer, and a Director of the Board. Mr. Knight is entitled to receive (i) an annual base salary of $180,000 which will be increased to $250,000 upon the Board’s Compensation Committee’s determination of adequate funding; (ii) eligibility to participate in a cash bonus program for meeting quarterly and annual goals, milestones, and metrics, as established by the Compensation Committee; (iii) eligibility to receive grants under the terms of the Company’s 2020 Long-Term Incentive Plan; (iv) the right to participate in all benefit plans offered to the Company’s senior executive officers; and (v) severance payments of three months of salary, benefits, and prorated bonus (the “Severance”) if terminated without cause before completion of one year of service, and six months of Severance if terminated without cause after reaching one year of service.

 

21

 

 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

Business Developments

 

On December 21, 2022, the Company entered into a Share Purchase Agreement (the “SKS Sale Agreement”) with Titan Innovations Ltd., an Israeli corporation (“Titan”), pursuant to which we agreed to sell our Israel-based tethered drone unit Sky Sapience Ltd. (“SKS”) to Titan. The total consideration for the sale is $1.8 million. From that consideration, the first two tranches totaling $750,000 would be utilized to eliminate outstanding liabilities and debt of SKS. Post-closing, the next tranche of $450,000 would be paid to the Company, less any remaining SKS outstanding liabilities and debt. The final $600,000 is due to be paid within two years of closing, subject to potential reductions for further claims of SKS debt, which are capped at $300,000. The SKS Sale Agreement contains closing conditions and there are no assurances that the transaction will close.

 

On December 29, 2022, the Company entered into a Settlement Agreement (“Settlement Agreement”) to resolve RVI Claim #1 and RVI Claim #2 (see the Litigation, Claims and Contingencies Developments section in the Note for additional information). As required by the terms of the Settlement Agreement, we entered into a Stock Purchase Agreement (the “RVI Sale Agreement”) with the plaintiffs in the two lawsuits (“Buyers”), pursuant to which, and subject to the terms and conditions of the RVI Sale Agreement, we agreed to sell Rvision, Inc. (“RVI”) to Buyers. The consideration for the sale was the dismissal of the two lawsuits and $100.

 

In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC.

 

Debt and Equity Developments

 

Subsequent to June 30, 2022 and through the filing date of this Form 10-Q, there were Note Holder Conversions of $7.5 million of Lind Debt principal and $0.1 million of related interest into an aggregate of 150,007,860 shares of the Company’s common stock. As of the filing date, the remaining combined principal and interest balance of the Lind Debt was approximately $228,000.

 

On July 29, 2022, the Company sold a promissory note in the principal amount of $26,250 to the Company’s senior secured lenders. This note bears interest at 15% per annum and is due July 29, 2023.

 

On October 17, 2022, the Company sold a promissory note in the principal amount of $367,500 to the Company’s senior secured lenders. This note bears interest at 6% per annum, is due October 17, 2023, and is secured by the August 25, 2021 Amended and Restated Security Agreement between the Company and its senior secured lenders.

 

On November 8, 2022, the Company sold a promissory note in the principal amount of $262,500 to the Company’s senior secured lenders for proceeds of $250,000. That note bears interest at 6% per annum, is due November 8, 2023, and also is secured by the August 25, 2021 Amended and Restated Security Agreement between the Company and its senior secured lenders.

 

On or about December 8, 2022, the Company canceled 66,666 shares of outstanding common stock due to the non-vesting of certain restricted stock awards.

 

On January 17, 2023, the Company sold an unsecured promissory note in the principal amount of $90,000, which pays 8% interest per annum and is due on or before July 30, 2023.

 

During January 2023, pursuant to a limited time offer, certain Note J convertible note holders agreed to amend their note and convert an aggregate of $0.9 million principal of their notes and $0.2 million of accrued interest into 20,469,861 shares of the Company’s common stock.

 

Lease Developments

 

In July 2022, the Company abandoned its Chantilly, VA office lease.

 

Litigation, Claims and Contingencies Developments

 

By notice dated July 14, 2022, the Company received notice from a distributor that has a distribution agreement with InduraPower claiming that InduraPower, and the Company as guarantor, has breached the distribution agreement, and are claiming approximately $2.0 million in damages, which includes a claim for $0.5 million of foregone profit, which is not accrued because the Company denies that claim. The Company had received $1.5 million in cash as a deposit against future product deliveries, of which $0.2 million has been recognized as revenue (resulting from product deliveries) through June 30, 2022 and the other $1.3 million is included in contract liabilities – current in the June 30, 2022 balance sheet.

 

On or about July 17, 2022, the former employees of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $400,000 of post- June 30, 2022 claims of the former employees. The approximately $400,000 of post-June 30, 2022 claims of the former employees were resolved pursuant to the SKS Sale Agreement and the action was dismissed on or about January 9, 2023. See the Business Development section in this Note for additional information.

 

On or about July 28, 2022, a former employee filed suit against the Company, Dustin McIntire, and Daniel Hodges in the San Diego County California Superior Court, Case No. 37-2022-00028083-CU-BC-CTL (“RVI Claim #1”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company failed to issue him stock options, and that he is owed future amounts. He is claiming damages of no less than $238,000. As of June 30, 2022, the Company had accrued for the wage claims for services provided, but had not accrued for the claims associated with future services. On December 29, 2022, the Company resolved this lawsuit. See the Business Development section in this Note for additional information. 

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COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(unaudited)

 

On or about August 22, 2022, two former Fastback employees filed suit against the Company, DragonWave and Fastback in the Alameda County Superior Court, California, Case No. 22CV016666. The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times, failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff is claiming damages of no less than $66,500. The Company has accrued for the wage claims for services provided, but has not accrued for penalties. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit.

 

On or about August 23, 2022, a former employee filed suit against the Company in the Clark County District Court, Nevada, Case No. 3 A-22-857361-C (“RVI Claim #2”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company failed to issue him stock options, and that he is owed future amounts. He is claiming damages of no less than $184,000. As of June 30, 2022, the Company had accrued for the wage claims for services provided, but had not accrued for the claims associated with future services. On December 29, 2022, the Company resolved this lawsuit. See the Business Development section in this Note for additional information.

 

On or about September 20, 2022, the Company was served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806. The plaintiff alleges that for $125,000 he purchased an 8% promissory note in 2018 from Transform-X which has not been paid. Plaintiff alleges that the Company is also liable under the Transform-X promissory note. This lawsuit was removed to the United States District of South Carolina, Civil Action No.:3:22-cv-03645-MGL. The Company strongly disputes the plaintiff’s allegations, has not accrued for any contingent losses, and intends to vigorously defend the lawsuit.

 

On or about November 14, 2022, an intellectual property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego. The plaintiff alleges that they performed work for the Company and its subsidiaries subsequent to June 30, 2022 and are owed approximately $75,000.

 

On or about November 15, 2022, the Company resolved the claims of former employees of SAGUNA who had, on or about July 17, 2022, filed an insolvency request against SAGUNA in the Nazareth District Court, Israel, No. 27624-07-22. The approximately $200,000 of post- June 30, 2022 claims of the former employees were resolved and the action was dismissed on or about November 17, 2022.

 

On or about January 10, 2023, a recruiting and staffing company obtained default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for principal of $134,650, prejudgment interest of $4,542.24, court costs of $425, attorney’s fees of $6,300, and post judgment interest at 7%.

 

On January 9, 2023, a former employee of Elitise, LLC, filed suit against our Company in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount of damages. The Company disputes plaintiff’s allegations and intends to vigorously defend the lawsuit.

 

Nasdaq Compliance Developments

 

As previously disclosed in the Company’s Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, the Company is not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of the Company’s common stock. Additionally, because the Company was late with filing its Quarterly Reports on Form10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 (collectively the “Delinquent Reports”), the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”).

 

On November 17, 2022, a hearing was held before the Nasdaq Hearings Panel (the “Panel”) regarding the Company’s request for continued listing on The Nasdaq Capital Market of the Company’s common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the Panel issued its determination, granting the Company’s request for the continued listing of the Company’s common stock, subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq’s filing requirement by getting the Company’s remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other conditions.

 

The Company is working to file its Delinquent Reports with the SEC as soon as practicable and is otherwise taking definitive steps to evidence compliance with all other applicable criteria for continued listing on Nasdaq. The Company had put forth a reverse split proposal to our stockholders to be voted on at the Company’s Annual Stockholders meeting on January 18, 2023, as part of the Company’s efforts to gain compliance with the minimum bid price requirement. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.

 

Because the Company did not reach a quorum, the Annual Meeting could not conduct business on January 18, 2023, and the vote of the Reverse Stock Split Proposal (referred to as “Proposal 1”) could not proceed in time for compliance with Nasdaq’s minimum bid price requirement in Nasdaq Listing Rule 5550(a)(1) on or before February 2, 2023. The Nasdaq Panel granted the Company’s request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with Listing Rule 5550(a)(2) by February 24, 2023.

 

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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” that are included in Part II of this Quarterly Report as well as our fiscal 2021 Annual Report on Form 10-K filed with the U. S. Securities and Exchange Commission (the “SEC”) on August 16, 2022.

 

Overview of Business; Operating Environment and Key Factors Impacting Our Operating Results 

 

The following MD&A is intended to help readers understand the results of our operations and financial condition and is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes (“Notes”) in Part 1 of this Quarterly Report on Form 10-Q.

 

Growth and percentage comparisons made herein generally refer to the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, unless otherwise indicated.

 

Business Overview

 

We are a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S. based providers of telecommunications equipment and services.

 

We provide the following categories of product offerings and solutions to our customers: 

 

  Telecom and Network Products and SolutionsWe design, develop, market and sell products for telecom network operators, mobile device carriers and other enterprises, including the following:

 

 

Wireless Transport Solutions. We offer a line of high-capacity packet microwave solutions that drive next-generation intellectual property (“IP”) networks. Our carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data. Our solutions enable service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product portfolio is wireless network transport, including a range of products ideally suited to support the emergence of underlying small cell networks. Additional solutions include leased-line replacement, last mile fiber extension and enterprise networks.

 

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  In-Band Full-Duplex Technologies. We have developed proprietary wireless transmission technologies that alleviate the performance limitations of the principal transmission technologies used by most networks today. Time Division Duplex (“TDD”) transmission technology used by many communications systems utilizes a single channel for transmission of data alternating between downlink or uplink, which limits capacity/throughput. Frequency Division Duplex (“FDD”) technologies in the marketplace today use two independent channels for downlink and uplink but require twice the spectrum. Neither TDD nor FDD can simultaneously transmit and receive on a single channel — a limitation that network advancements and 5G will require for optimal performance.

 

  Edge Compute Capable Small Cell 4G LTE and 5G Access Radios. We offer both 4G/LTE and 5G New Radio (“NR”) based small cell radios that are designed to connect to other access radios or to connect directly to mobile devices such as mobile phones and other Internet-of-things devices. Recently, we developed we believe the world’s first fully-virtualized 5G core network on a microcomputer the size of a credit card, enabling, for the first time, the ability to have the 5G network collocated on the network edge with the small cell communicating with the devices themselves. The small cells support edge-based application hosting and enable third-party service integration.

 

  Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications such as intelligence, surveillance, and reconnaissance (“ISR”) and tactical communications. We focus primarily on a suite of tethered aerostats known as the Winch Aerostat Small Platform, which are principally designed for military and security applications and provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high-strength armored tether. Our recently-acquired HoverMast line of quadrotor-tethered drones feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while delivering dramatically-improved situational awareness and communications capabilities to users.

 

We are also developing processes that we believe will significantly advance the state-of-the-art in silicon photonic (“SiP”) devices for use in advanced data interconnects, communication networks and computing systems. We believe our novel approach will allow us to overcome the limitations of current SiP optical modulators, dramatically increase computing bandwidth, and reduce drive power while offering lower operating costs.

 

Our engineering and management teams have extensive experience in optical systems and networking, digital signal processing, large-scale application-specific integrated circuit design and verification, SiP design and integration, system software development, hardware design, high-speed electronics design and network planning, installation, maintenance, and servicing. We believe this broad expertise in a wide range of advanced technologies, methodologies, and processes enhances our innovation, design and development capabilities, and has enabled us, and we believe will continue to enable us, to develop and introduce future-generation communications and computing technologies. In the course of our product development cycles, we engage with our customers as they design their current and next-generation network equipment in order to gauge current and future market needs.

 

Our Business

 

Through a series of acquisitions, we have expanded our service offerings and geographic reach over the past three years. On November 27, 2019, we completed the acquisition of ComSovereign Corp. (“ComSovereign”) in a stock-for-stock transaction with a total purchase price of approximately $80 million (the “ComSovereign Acquisition”). ComSovereign had been formed in January 2019 and, prior to its acquisition by our company, had completed five acquisitions of companies with unique products in development for, or then being marketed to, the telecommunications market. As a result of our acquisitions, our company is comprised of the following principal businesses, each of which was acquired to address a different opportunity or sector of the telecom infrastructure and service market. These acquired entities are designated as CORE and Noncore businesses. Our CORE business is comprised of our network hardware and software products and services solutions, and our Noncore business is comprised the Drone and related products. Our Power division employees have been idled.

 

Our CORE business is comprised of the following acquisitions:

 

  DragonWave-X LLC. DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), are a Dallas-based manufacturer of high-capacity microwave and millimeter wave point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide. According to a report of the U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America. DragonWave was acquired by ComSovereign in April 2019 prior to the ComSovereign Acquisition. On May 23, 2022, the Company sold the assets of DragonWave’s Canadian subsidiary, and transferred the related employees and assigned the Canadian lease of DragonWave’s Canadian subsidiary, to a third party.

 

  Virtual NetCom, LLCVirtual NetCom, LLC (“VNC”) is an edge compute focused wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G NR capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. We acquired VNC in July 2020.

 

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  Fastback. Skyline Partners Technology LLC, which conducted business under the name Fastback Networks (“Fastback”), is a manufacturer of intelligent backhaul radio (“IBR”) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight limitations. Fastback’s advanced IBR products allow operators to economically add capacity and density to their existing cellular networks and expand service coverage density with small cells. These solutions also allow operators to both provide temporary cellular and data service utilizing mobile/portable radio systems and provide wireless Ethernet connectivity. We acquired Fastback in January 2021.

 

  Silver Bullet Technology, Inc. Silver Bullet Technology, Inc. (“Silver Bullet”) is a California-based engineering firm that designs and develops next generation network systems and components, including large-scale network protocol development, software-defined radio systems and wireless network designs. ComSovereign acquired Silver Bullet in March 2019 prior to the ComSovereign Acquisition.

 

  Lextrum, Inc. Lextrum, Inc. (“Lextrum”) is a Tucson, Arizona-based developer of full-duplex wireless technologies and components, including multi-reconfigurable radio frequency (“RF”) antennae and software programs. This technology enables the doubling of a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies. ComSovereign acquired Lextrum in April 2019 prior to the ComSovereign Acquisition.

 

  VEO Photonics, Inc. VEO Photonics, Inc. (“VEO”), based in San Diego, California, is a research and development company innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment. ComSovereign acquired VEO in January 2019 prior to the ComSovereign Acquisition. In order to conserve cash, VEO idled the employees in June 2022.

 

  RF Engineering & Energy Resource, LLC. RF Engineering & Energy Resource, LLC (“RF Engineering”) is a Michigan-based provider of high-quality microwave antennas and accessories. By providing one of the industry’s lowest cost of ownership, RF Engineering has continued to innovate and expand, and it recently announced the industry’s first Universal Licensed Microwave Antenna. Supporting frequencies from (6-42 GHz), customers can now reduce sparing costs and safely future-proof their networks by leveraging this new Universal plug and play architecture. We acquired RF Engineering in July 2021. In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC.

 

  SAGUNA Networks Ltd. SAGUNA Networks Ltd. (“SAGUNA”) based in Yokneam, Israel, is the software developer behind the award-winning SAGUNA Edge Cloud, which transforms communication networks into powerful cloud-computing infrastructures for applications and services, including augmented and virtual reality, Internet of Things (“IoT”), edge analytics, high-definition video, connected cars, autonomous drones and more. SAGUNA allows these next-generation applications to run closer to the user in a wireless network, dramatically cutting down on latency, which is a fundamental and critical requirement of 5G networks. SAGUNA’s Edge Cloud operates on general purpose computing hardware but can be optimized to support the latest artificial intelligence and machine learning features through dedicated accelerators. We acquired SAGUNA in October 2021. In order to conserve cash, SAGUNA idled the employees in June 2022.

 

Our NONCORE business is comprised of the following:

 

  Drone Aviation. Lighter Than Air Systems Corp., which does business under the name Drone Aviation (“Drone Aviation”), is based in Jacksonville, Florida and develops and manufactures cost-effective, compact and enhanced tethered unmanned aerial vehicles, including Lighter-Than-Air aerostats and drones that support surveillance sensors and communications networks. We acquired Drone Aviation in June 2014.

 

  Sky Sapience Ltd. Sky Sapience Ltd. (“SKS”) is an Israeli-based manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather ISR capabilities to customers worldwide for both land and marine-based applications. Its innovative technologies include fiber optic tethers that enable secure, high-capacity communications, including support for commercial 4G and 5G wireless networks. SKS’s flagship HoverMast line of quadrotor-tethered drones feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while delivering dramatically improved situational awareness and communications capabilities to users. We acquired SKS in March 2021. In order to conserve cash, SKS idled the employees in June 2022.  On December 21, 2022, we agreed to sell SKS, subject to closing conditions and there are no assurances that the transaction will close.

 

  Rvision, Inc. Rvision, Inc. (“Rvision”) is a California-based developer of technologically advanced video and communications products and physical security solutions designed for government and private sector commercial industries. It has been serving governments and the military for nearly two decades with sophisticated, environmentally rugged optical and infrared cameras, hardened processors, custom tactical video hardware, software solutions, and related communications technologies. It also has developed nano-defractive optics with integrated, artificial intelligence-driven electro-optical sensors and communication network connectivity products for smart city/smart campus applications. We acquired Rvision in April 2021. On December 29, 2022, we sold Rvision in order to settle two lawsuits.

 

As part of the Company’s restructuring, commencing January 1, 2023, the Company is integrating its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer intends to manage the Company and make decisions based on the Company’s consolidated operating results.

 

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Discontinued Operations

 

On June 21, 2022, the Company sold its Sovereign Plastics business unit for total consideration of $2.0 million to TheLandersCompanies LLC.

 

The historical operating results of Sovereign Plastics are reported as income (loss) from discontinued operations.

 

Nasdaq Compliance Developments

 

As previously disclosed in our Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, we are not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of our common stock. Additionally, because we were late with filing our Quarterly Reports on Form10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 (collectively the “Delinquent Reports”), we are not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”).

 

On November 17, 2022, a hearing was held before the Nasdaq Hearings Panel (the “Panel”) regarding our request for continued listing on The Nasdaq Capital Market of our common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the Panel issued its determination, granting our request for the continued listing of our common stock, subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq’s filing requirement by getting our remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other conditions.

 

We are working to file our Delinquent Reports with the SEC as soon as practicable and are otherwise taking definitive steps to evidence compliance with all other applicable criteria for continued listing on Nasdaq. We have put forth a reverse split proposal to our stockholders to be voted on at our Annual Stockholders meeting on January 18, 2023, as part of our efforts to gain compliance with the minimum bid price requirement. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.

 

Because the Company did not reach a quorum, the Annual Meeting could not conduct business on January 18, 2023, and the vote of the Reverse Stock Split Proposal (referred to as “Proposal 1”) could not proceed in time for compliance with Nasdaq’s minimum bid price requirement in Nasdaq Listing Rule 5550(a)(1) on or before February 2, 2023. The Panel granted our request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with Listing Rule 5550(a)(2) by February 24, 2023.

 

Significant Components of Our Results of Operations

 

Revenues

 

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

 

During the three and six months ended June 30, 2022, approximately 7% and 16%, respectively, of our revenues were derived from sales outside of North America. During the three and six months ended June 30, 2021, approximately 44% and 40%, respectively, of our revenues were derived from sales outside of North America. While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outside the United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.S. government and its agencies, even if such systems are for integration into foreign locations.

 

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Cost of Goods Sold and Gross Profit

 

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

 

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

 

Operating Expenses

 

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

 

Research and Development

 

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

 

Sales and Marketing

 

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

 

General and Administrative

 

In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs.

 

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Depreciation and Amortization

 

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

 

Interest Expense

 

Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense.

 

Share-Based Compensation

 

Share-based compensation consists of expense related to the issuance of equity instruments, which can be in many forms, such as incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including performance-based awards under our long-term incentive plans or outside of such plans. The expense related to any share-based compensation grant is allocated to specific groupings in the condensed consolidated statement of operations in the same manner as the grantee’s normal compensation expense and will vary depending upon the number of underlying shares of common stock, the fair value of the common stock on the date of grant and the vesting period. 

 

Results of Operations 

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
(Amounts in thousands, except share and per share data)  2022   2021   2022   2021 
                 
Revenue  $2,088   $2,401   $4,141   $3,502 
Cost of goods sold   2,981    1,270    4,464    1,873 
Gross profit (loss)   (893)   1,131    (323)   1,629 
Operating expenses                    
Research and development (1)   536    1,199    1,708    1,747 
Sales and marketing (1)   12    109    78    157 
General and administrative (1)   5,396    6,624    11,176    13,411 
Depreciation and amortization   262    3,455    1,003    6,955 
Impairment expense   15,775    281    15,775    281 
Loss on sales (ID, DWXC) (2)   2,564    -    2,564    - 
Loss on lease abandonment   11,329    -    11,329    - 
Gain on the sale of assets   -    -    (8,441)   (83)
Total operating expenses, net   35,873    11,668    35,191    22,468 
Loss from operations   (36,766)   (10,537)   (35,514)   (20,839)
Other expense                    
Interest expense   (1,348)   (546)   (2,227)   (982)
Other expense   -    5    -    - 
Gain (loss) on extinguishment of debt   (445)   323    (618)   (4,779)
Foreign currency transaction loss   (1)   18    (1)   (62)
Total other expense   (1,794)   (200)   (2,846)   (5,823)
Loss from continuing operations   (38,560)   (10,737)   (38,360)   (26,662)
Income (loss) from discontinued operations, net of tax   811    160    747    (121)
Net loss  $(37,749)  $(10,577)  $(37,613)  $(26,783)

 

(1)These are exclusive of depreciation and amortization
(2)InnovationDigital (“ID”), DragonWave-X Canada (“DWXC”)

 

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Three and Six Months Ended June 30, 2022 Compared to Three and Six Months Ended June 30, 2021

 

Total Revenues

 

For the three months ended June 30, 2022, total revenues were $2.1 million compared to $2.4 million for the three months ended June 30, 2021. The decrease of $0.3 million, or 13%, primarily consisted of decreased sales of our aerostat products and accessories offset by increases in our mobile network backhaul products.

 

For the six months ended June 30, 2022, total revenues were $4.1 million compared to $3.5 million for the six months ended June 30, 2021. The increase of $0.6 million, or 18%, primarily consisted of increased sales of mobile network backhaul products, the sale of our aerostat products and accessories and one-time sales of inventory. The increase was driven primarily from revenue from companies acquired in 2021 (ID, RFE and SAG).

 

Cost of Goods Sold and Gross Profit (Loss)

 

For the three months ended June 30, 2022, cost of goods sold was $3.0 million compared to $1.3 million for the three months ended June 30, 2021. The increases of $1.7 million, or 135%, primarily consisted of the one-time sales of inventory, payment to our contract manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities.

 

For the six months ended June 30, 2022, cost of goods sold were $4.5 million compared to $1.9 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, the increase of $2.6 million, or 138%, primarily consisted of the one-time sale of inventory, the payment to our contract manufacturer, including increases in purchase price variances for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities. The increase was driven primarily from revenue from companies acquired in 2021 (ID, RFE and SAG).

 

Gross profit (loss) for the three months ended June 30, 2022 was $(0.9) million compared to $1.1 million for the three months ended June 30, 2021. The decrease in gross profit margin of $2.0 million, or 179%, was driven primarily by the one-time sale of DragonWave inventory and products that were lower margin during the current quarter as compared to the corresponding period in fiscal year 2021 and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers, resulting from current macro supply chain constraints.

 

Gross profit (loss) for the six months ended June 30, 2022 was $(0.3) million compared to $1.6 million for the six months ended June 30, 2021. The decrease in gross profit margin of $2.0 million, or 120%, was driven primarily by the one-time sale of DragonWave inventory and products that were lower margin during the current quarter as compared to the corresponding period in fiscal year 2021 and increases in purchase price variances due to increased prices from manufacturing and logistical suppliers, resulting from current macro supply chain constraints.

 

Research and Development Expense

 

For the three months ended June 30, 2022, research and development expense was $0.5 million compared to $1.2 million for the three months ended June 30, 2021. The decrease of $0.7 million consisted primarily of contract labor and payroll related costs. This decrease was primarily for development of DragonWave radio software features, VNC system product development, VEO photonics chip development. The expenses are mostly contractor labor and our own engineering teams.

 

For the six months ended June 30, 2022, research and development expense was $1.7 million compared to $1.7 million for the six months ended June 30, 2021.

 

Sales and Marketing Expense

 

For the three months ended June 30, 2022, sales and marketing expense was $12 thousand compared to $109 thousand for the three months ended June 30, 2021. The decrease of $97 thousand primarily consisted of decreases in payroll and related costs performed primarily by a 2021 acquired subsidiary.

 

For the six months ended June 30, 2022, sales and marketing expense was $78 thousand compared to $157 thousand for the six months ended June 30, 2021. The decrease of $79 thousand primarily consisted of decreases in payroll and related costs performed primarily by a 2021 acquired subsidiary.

 

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General and Administrative Expenses

 

For the three months ended June 30, 2022, general and administrative expense was $5.4 million compared to $6.6 million for the three months ended June 30, 2021. The decrease of $1.2 million primarily consisted of decreases in professional expenses of $0.6 million, which were primarily driven by decreases in certain public relations services, accounting services, and other professional services.

 

For the six months ended June 30, 2022, general and administrative expense was $11.2 million compared to $13.4 million for the six months ended June 30, 2021. The decrease of $2.3 million primarily consisted of decreases in professional expenses of $2.2 million, which were primarily driven by decreases in certain public relations services, accounting services, and other professional services. This was partially offset by increased payroll and related costs of $1.1 million due to additional employees and salary increases, increases of $0.6 million in expenses due to 2021 acquisitions plus rent increased by $0.4 million, resulting from the sale and leaseback of our Tucson (Arizona) office building (the “Tucson Building”; see below) on or about January 31, 2022.

 

Depreciation and Amortization

 

For the three months ended June 30, 2022, depreciation and amortization was $0.3 million compared to $3.5 million for the three months ended June 30, 2021. The decrease of $2.5 million was primarily due to the sale of our Tucson Building (see below).

 

For the six months ended June 30, 2022, depreciation and amortization was $1.0 million compared to $7.0 million for the six months ended June 30, 2021. The decrease of $6.0 million was primarily due to the sale of our Tucson Building and 2021 year-end impairment of intangible assets (see below).

 

Impairment Expense

 

For the three and six months ended June 30, 2022, impairment expense was $15.8 million compared to $0.3 million for the three and six months ended June 30, 2021. The increase of $15.5 million primarily arose out of the re-calendarization of revenue into later periods.

 

Loss on Sales of Innovation Digital and DragonWave-X Canada Assets

 

For the three and six months ended June 30, 2022, the loss on the sales of Innovation Digital and DragonWave-X Canada was $2.6 million compared to $0 for the three and six months ended June 30, 2021. The increase is primarily due to the transfer of $2.0 million of finished goods inventory to the purchaser of DragonWave-X Canada and the $0.6 million of intellectual property returned to the original owners of Innovation Digital.

 

Loss on Lease Abandonment

 

For the three and six months ended June 30, 2022, the loss on lease abandonment was $11.3 million compared to $0 for the three and six months ended June 30, 2021. The increase of $11.3 million primarily consisted of $10.0 million related to the abandonment of the Tucson lease and related leasehold improvements and inventory, $1.0 million related to the abandonment of the Dallas office space and related leasehold improvements, and $0.2 million related to the return of various pieces of operating lease equipment and abandonment of small offices or airport hangers used for drone storage.

 

Gain on the Sale of Assets

 

For the three months ended June 30, 2022, the gain on the sale of assets was $0 compared to $0 for the three months ended June 30, 2021. For the six months ended June 30, 2022, the gain on the sale of assets was $8.4 million compared to $0.1 million for the six months ended June 30, 2021. The increase of $8.3 million is primarily due to the January 31, 2022 sale of our Tucson Building for $15.8 million of cash. The Tucson Building had a carrying value of $6.7 million. The Company recognized an $8.4 million gain on sale of assets, which is net of $0.7 million of related transaction costs.

 

Other Expense

 

For the three months ended June 30, 2022, other expense was $1.8 million compared to other expense of $0.2 million for the three months ended June 30, 2021. The increase of $1.6 million primarily consisted of increases in the gain (loss) on extinguishment of debt of $0.8 million and interest expense of $0.8 million.

 

For the six months ended June 30, 2022, other expense was $2.8 million compared to other expense of $5.8 million for the six months ended June 30, 2021. The decrease of $2.9 million primarily consisted of a decrease in the gain (loss) on extinguishment of debt of $4.2 million, partially offset by increases in interest expense of $1.3 million.

 

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Loss from Continuing Operations

 

For the three and six months ended June 30, 2022, we had a net loss from continuing operations of $38.6 million and $37.4 million, respectively, compared to a net loss from continuing operations of $10.7 million and $26.7 million for the three and six months ended June 30, 2021, related to the items described above.

 

Income (Loss) from Discontinued Operations

 

For the three and six months ended June 30, 2022, we had a net income from discontinued operations of $0.8 million and $0.7 million, respectively, compared to a net income (loss) from discontinued operations of $0.2 million and $(0.1) million for the three and six months ended June 30, 2021, related to the items described above.

 

Liquidity and Capital Resources 

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its cash requirements. As of June 30, 2022, we had $0.2 million in cash compared to $1.9 million on December 31, 2021, a decrease of $1.7 million resulting primarily from $11.1 million of cash used in operating activities and $7.6 million of debt repayments, partially offset by $15.1 million of cash proceeds from the sale of the Tucson Building on or about January 31, 2022. See Note 11 – Property and Equipment, Net in the notes to the condensed consolidated financial statements for more information related to the sale of the Tucson Building.

 

As of June 30, 2022, we had negative working capital of $9.2 million compared to negative working capital of $3.6 million as of December 31, 2021.

 

As of June 30, 2022, we had undiscounted obligations relating to the payment of indebtedness as follows:

 

  $19.5 million related to indebtedness that is due during the remainder of 2022;

 

  $0.1 million related to indebtedness that is due during 2023; and

 

  $0.1 million related to indebtedness that is due after 2026.

 

Subsequent to June 30, 2022, the following developments should be noted:

 

  of the $19.7 million of indebtedness that is outstanding, $7.9 million was converted into common stock and $11.2 million entered technical default and the holders sent us a letter indicating that they were reserving their rights, but to date they haven’t declared a default;

 

  additional promissory notes with a face value of $0.7 million were issued.

 

Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, and the costs of our operations. We cannot be sure that any additional funding, if needed, will be available. Any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership and could also result in a decrease in the market price of our common stock. Debt financing, if available, may subject us to restrictive covenants and significant interest costs.

 

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Going Concern

 

The accompanying unaudited condensed consolidated financial statements and notes have been prepared assuming that we will continue as a going concern. For the six months ended June 30, 2022, we used cash flows in operating activities of $11.1 million, and at June 30, 2022 we had an accumulated deficit of $255.5 million and we had working capital of $9.2 million.

 

Our fiscal operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about our ability to continue as a going concern. Based on our current cash on hand and subsequent activity as described herein, we presently only have enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of our limited cash availability, our operations have been scaled back to the extent possible. We continue to explore opportunities with third parties and related parties to provide additional capital; however, we have not entered into any agreement to provide the necessary capital. In the near term, there will be limited opportunities to raise capital of significance due to our Nasdaq compliance issues, as discussed in Nasdaq Compliance Developments herein.

 

We will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet our future liquidity requirements. However, there can be no assurance that we will be successful in any capital-raising efforts that we may undertake. If we are not able to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.

 

Lines of Credit and Debt

 

Summary information with respect to our debt or other credit facilities is set forth in Note 14 – Debt of the notes to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report.

 

Sources and Uses of Cash 

 

   For the Six Months Ended 
   June 30, 
(Amounts in thousands)  2022   2021 
Cash flows used in operating activities  $(11,084)  $(26,153)
Cash flows provided by (used in) investing activities   14,935    (7,932)
Cash flows used in (provided by) financing activities   (7,195)   41,603 
Cash flows provided by discontinued operations   1,632    (3,213)
Net (decrease) increase in cash and cash equivalents  $(1,712)  $4,305 

 

Operating Activities

 

For the six months ended June 30, 2022, net cash used in operating activities was $11.1 million. Net cash used in operating activities primarily consisted of the net loss from continuing operations of $37.6 million, which was partially offset by adjustments for non-cash expenses of $25.2 million and net cash generated by changes in the levels of operating assets and liabilities of $1.3 million.

 

For the six months ended June 30, 2021, net cash used in operating activities was $26.2 million. Net cash used in operating activities primarily consisted of the net operating loss from continuing operations of $26.7 million, which was partially offset by adjustments for non-cash expenses of $15.1 million, and net cash used to fund changes in the levels of operating assets and liabilities of $14.6 million.

 

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Investing Activities

 

For the six months ended June 30, 2022, net cash provided by investing activities was $14.9 million. Investing activities primarily consisted of proceeds from the building sale of $15.1 million, which was partially offset by the acquisition of property and equipment of $0.2 million.

 

For the six months ended June 30, 2021, net cash used in investing activities was $7.9 million. Investing activities primarily consisted of net cash used to fund business acquisitions of $4.3 million, acquire property and equipment of $2.5 million, and acquire intangible assets of $1.2 million, which was partially offset by proceeds from disposal of property and equipment of $0.1 million.

 

Financing Activities

 

For the six months ended June 30, 2022, net cash used in financing activities was $7.2 million. Financing activities primarily consisted of repayment of debt of $7.6 million and preferred stock dividends accrued but not paid of $0.2 million, which was offset by $0.6 million proceeds of debt .

 

For the six months ended June 30, 2021, net cash provided by financing activities was $41.6 million. Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of $45.0 million and net proceeds of borrowings of $9.3 million, which was offset by the repayment of debt of $6.3 million, offering costs of $5.3 million, the repayment of related party notes of $0.9 million, and issuance costs of $0.2 million.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.

 

However, it should be noted that business developments commencing in the second quarter of 2022 (see Note 3 – Discontinued Operations and Note 20 – Other Business Developments) in the footnotes to the unaudited consolidated financial statements herein, included discussions of selling or exiting of certain businesses and/or assets and of idling of employees. During the current quarter, the Company determined that it was more likely than not that any reporting unit’s fair value was below that reporting unit’s carrying amount. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2022. As a result of our quantitative impairment testing, we recorded goodwill and intangible asset impairment of $7.2 million and $8.6 million, respectively.

 

Consequently, for the purpose of emphasis, we are again disclosing below our accounting policy related to long-lived assets and goodwill.

     

Long-Lived Assets and Goodwill

 

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required under Regulation S-K for smaller reporting companies.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures.

 

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our Chief Executive Officer and Acting Principal Financial and Accounting Officer has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Acting Principal Financial and Accounting Officer has concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.

 

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, management has identified the following material weaknesses in our disclosure controls and procedures:

 

  While improvements were made in the segregation of duties and controls over cash and accounts payable, we have not effectively segregated certain accounting duties due to the now smaller size of our accounting staff;

 

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

 

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

 

Our remediation of the material weaknesses in our internal control over financial reporting is ongoing.

 

(b) Changes in Internal Control Over Financial Reporting.

 

There have been no changes in our internal control over financial reporting as of and for the three and six months ended June 30, 2022, as compared to the internal control over financial reporting weaknesses described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

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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, 2021, except as follows.

 

On or about July 17, 2022, the former employees of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $400,000 of post-June 30, 2022 claims of the former employees. The approximately $400,000 of post-June 30, 2022 claims of the former employees were resolved and the action was dismissed on or about January 9, 2023.

 

On or about July 28, 2022, a former employee filed suit against the Company, Dustin McIntire, and Daniel Hodges in the San Diego County California Superior Court, Case No. 37-2022-00028083-CU-BC-CTL (“RVI Claim #1”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company failed to issue him stock options, and that he is owed future amounts. He is claiming damages of no less than $238,000. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit. On December 29, 2022, the Company resolved this lawsuit through the sale of Rvision, Inc. to the plaintiff and others.

 

On or about August 22, 2022, two former Fastback employees filed suit against the Company, DragonWave and Fastback in the Alameda County Superior Court, California, Case No. 22CV016666. The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times, failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff is claiming damages of no less than $66,500. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit.

 

On or about August 23, 2022, a former employee filed suit against the Company in the Clark County District Court, Nevada, Case No. 3 A-22-857361-C (“RVI Claim #2”). The plaintiff alleged that his wages were not paid, that he was constructively discharged, that the Company failed to issue him stock options, and that he is owed future amounts. He is claiming damages of no less than $184,000. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit. On December 29, 2022, the Company resolved this lawsuit through the sale of Rvision, Inc. to the plaintiff and others.

 

On or about September 20, 2022, the Company was served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806. The plaintiff alleges that for $125,000 he purchased an 8% promissory note in 2018 from Transform-X which has not been paid. Plaintiff alleges that the Company is also liable under the Transform-X promissory note. This lawsuit was removed to the United States District of South Carolina, Civil Action No.:3:22-cv-03645-MGL. The Company strongly disputes the plaintiff’s allegations and intends to vigorously defend the lawsuit.

 

On or about November 14, 2022, an intellectual property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego. The plaintiff alleges that they performed work for the Company and its subsidiaries and are owed approximately $75,000.

 

On or about November 15, 2022, the Company resolved the claims of former employees of SAGUNA who had, on or about July 17, 2022, filed an insolvency request against SAGUNA in the Nazareth District Court, Israel, No. 27624-07-22. The approximately $200,000 of post-June 30, 2022 claims of the former employees were resolved and the action was dismissed on or about November 17, 2022.

 

On or about January 10, 2023, a recruiting and staffing company obtained default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for principal of $134,650, prejudgment interest of $4,542.24, court costs of $425, attorney’s fees of $6,300, and post judgment interest at 7%.

 

On January 9, 2023, a former employee of Elitise, LLC, filed suit against our Company in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. We dispute plaintiff’s allegations, and we intend to vigorously defend the lawsuit.

 

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Item 1A. Risk Factors

 

Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2021 Annual Report on Form 10-K filed with the SEC on August 16, 2022. However, due to recent activities of the Company, the following additional risk factor has been identified:

 

The Company May Be Delisted From Nasdaq

 

  Minimum Bid Price. The Company is not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) due to the price of our common stock. The Company requested continued listing on The Nasdaq Capital Market of its common stock and additional time to regain compliance with the minimum bid price requirement. After a hearing before the Nasdaq Hearings Panel (the “Panel”) the Panel granted the Company’s request for continued listing subject to evidencing compliance with Nasdaq’s minimum bid price requirement by February 2, 2022. In order to reach that goal, the Company put forth a reverse split proposal to its stockholders to be voted on at its Annual Stockholders meeting on January 18, 2023. There can be no assurances, however, that the Stockholders will approve the proposal, or that if the proposal is approved, the Company’s common stock price will meet the minimum bid price, or that the Company will be able to gain or maintain compliance with the Nasdaq Listing Rules. Because the Company did not reach a quorum, the Annual Meeting could not conduct business on January 18, 2023, and the vote of the Reverse Stock Split Proposal (referred to as “Proposal 1”) could not proceed in time for compliance with Nasdaq’s minimum bid price requirement in Nasdaq Listing Rule 5550(a)(1) on or before February 2, 2023. The Panel granted the Company’s request for an extension to obtain stockholder approval of the Reverse Stock Split Proposal on February 8, 2023, and to demonstrate compliance with Listing Rule 5550(a)(2) by February 24, 2023.

 

As of the time of this filing, the prior day’s closing bid price for our common stock was approximately $0.11 per share.

 

  Filing Requirement. The Company is not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”). The Company is delinquent with filing its Quarterly Reports on Form10-Q for the quarters ended June 30, 2022 and September 30, 2022. The Company requested continued listing on The Nasdaq Capital Market of its common stock and additional time to regain compliance with the filing requirement. After the hearing, the Panel granted the Company’s request for continued listing subject to evidencing compliance with Nasdaq’s filing requirement by getting the delinquent Form 10-Qs filed, including the filing of the Form10-Q for the quarter ended September 30, 2022 by February 24, 2023, and certain other conditions. There can be no assurances, however, that the Company will meet the deadlines for filing its delinquent Form 10-Qs, or that the Company will be able to gain or maintain compliance with the Nasdaq Listing Rules

 

There is no assurance that the Company will regain compliance during the grace periods or be able to maintain compliance with Nasdaq’s listing requirements in the future. If we are not able to regain compliance during the grace period, Nasdaq will notify us that our common stock, our Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”), and our warrants will be delisted from The Nasdaq Capital Market.

 

If our securities were delisted from Nasdaq, among other things, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common and preferred stock, greater difficulty in obtaining financing, potential loss of confidence by employees, loss of institutional investor interest and fewer business development opportunities.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There have been no sales of unregistered securities within the within the reporting period that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:

 

Between April 15, 2022 and June 2, 2022, we issued to an accredited investor an aggregate of 3,165,115 shares of our common stock upon the conversion of certain principal of an outstanding senior secured convertible promissory note at a weighted average conversion price of $0.25 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.

 

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On May 9, 2022, we issued to a consulting firm for services rendered, 240,000 shares of our common stock that were valued at $0.28 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.

 

Subsequent to the second quarter, 2022, between July 12, 2022 and September 23, 2022, we issued to two accredited investors an aggregate of 18,916,792 shares of our common stock upon the conversion of certain principal of outstanding senior secured convertible promissory notes at a weighted average conversion price of $0.10 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.

 

Between October 4, 2022 and December 9, 2022, we issued to two accredited investors an aggregate of 131,091,068 shares of our common stock upon the conversion of certain principal and interest of outstanding senior secured convertible promissory notes at a weighted average conversion price of $0.10 per share. Such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.

 

Item 3. Default Upon Senior Securities

 

(a) Defaults Upon Senior Securities

 

In connection with our acquisition of Fastback on January 29, 2021, we issued to the sellers $11.2 million aggregate principal amount of convertible promissory notes that mature on January 29, 2026. There is a provision in the convertible promissory notes that an event of default could be declared if the Company fails to file its requisite its securities filings timely. The Company is delinquent with its Form 10-Q filings. To date, while the convertible promissory note holders have reserved their rights, the convertible promissory notes have not been declared in default, and the Company has a plan to regain compliance with such filings. No adverse actions have been taken against the Company and we expect none insofar as filing compliance is regained.

 

On May 27, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $11.0 million and warrants to purchase up to 1,820,000 shares of our common stock, par value $0.0001 per share, for a purchase price of $10.0 million (representing an original issue discount of 10.0% on the note), of which we received $5,000,000 on May 28, 2021 and $5.0 million on June 2, 2021. On August 25, 2021, we entered into a first amendment and limited waiver to the securities purchase agreement dated as of May 27, 2021 and amended and restated the convertible note.

 

The amended note bears interest at the rate of 6% per annum from the date of funding and matures on May 27, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $611,000 each, commencing in November 2021. We had the right to make interest and principal payments in the form of shares of common stock, which shares will be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of June 30, 2022, an aggregate principal amount of approximately $3.6 million was outstanding under this note. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $49,000.

 

On August 25, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $5.8 million and warrants to purchase up to 1,315,789 shares of our common stock, par value $0.0001 per share (the “Common Stock”), for a purchase price of $5.0 million (representing an original issue discount of 16.0% on the note), which $5.0 million was received on August 26, 2021.

 

38

 

 

The note bears interest at the rate of 6% per annum from the date of funding and matures on August 25, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $322,000 each, commencing in November 2021. So long as shares of our common stock are registered for resale under the Securities Act of 1933, as amended, or may be sold without restriction on the number of shares or manner of sale, we had the right to make interest and principal payments in the form of additional shares of common stock, which shares would be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of June 30, 2022, an aggregate principal amount of approximately $3.7 million was outstanding under this note. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $180,000.

 

In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2.0 million loan that bears interest at the rate of 9% per annum and originally matured on November 26, 2021. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal was due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of DragonWave and is guaranteed by ComSovereign Corp.. In January 2021, a total of $1.0 million of principal of this note, plus all related accrued interest and charges, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. In January 2022, a total of $500,000 was paid to the note holder. As of the date of this filing, this note had a remaining principal balance of $500,000.

 

On or about April 29, 2022, the Company sold an original issue discount note in the amount of $550,000 to an investor for the purchase price of $500,000. This note was due approximately July 29, 2022 and bears a default interest rate of 12% after the maturity date. As of the date of this filing, this note had a remaining principal balance of $550,000.

 

(b) Material Arrearage in the Payment of Dividends.

 

On October 29, 2021, the Company sold in a public offering 320,000 shares of the Company’s newly-designated 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), at a public offering price of $25.00 per share, which is the initial liquidation preference of the Series A Preferred Stock.

 

The Series A Preferred Stock has been listed on The Nasdaq Capital Market under the symbol “COMSP”.

 

Dividends at the rate of 9.25% per annum of the $25.00 liquidation preference per share (equivalent to an annual rate of $2.3125) on the Series A Preferred Stock are payable monthly in arrears on or about the twentieth (20th) day of each month. Dividends on the Series A Preferred Stock are cumulative. The Company paid dividends commencing on or about November 20, 2021, and paid the monthly dividend through May 20, 2022.

 

On or about May 25, 2022, the Company announced that it had suspended the payment on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $493,312.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

None

 

39

 

 

Item 6. Exhibits

 

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

 

Exhibit
Number
  Description
31.1   Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   Inline XBRL Instance Document
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

40

 

 

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: January 27, 2023 /s/ David A. Knight
  David A. Knight
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: January 27, 2023 /s/ David A. Knight
  David A. Knight
  Acting Principal Financial and
Accounting Officer

 

 

41

 

 

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