COMSOVEREIGN HOLDING CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this report. All share and per share amounts presented herein have been restated to reflect the implementation of the 1-for-3 reverse stock split effected onJanuary 21, 2021 , as if it had occurred at the beginning of the earliest period presented. Business Overview We are a provider of technologically advanced telecom solutions to network operators, mobile device carriers, governmental units, and other enterprises worldwide. We have assembled a portfolio of communications, power and 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 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 fewU.S. based providers of telecommunications equipment and services. 41 Corporate History We were incorporated inNevada onApril 17, 2014 , as a wholly owned subsidiary ofMacroSolve, Inc. , anOklahoma corporation ("MacroSolve"), and effectiveApril 30, 2014 , in order to consolidate our operations into an entity incorporated inNevada , MacroSolve merged with and into us. OnJune 3, 2014 , we acquiredDrone Aviation Corp. through a stock exchange transaction, and onMarch 26, 2015 ,Drone Aviation Corp. merged with and into us. As a result of the stock exchange and merger withDrone Aviation Corp. , we acquiredDrone Aviation Corp.'s subsidiary,Lighter Than Air Systems Corp. , which does business under the nameDrone Aviation . OnNovember 27, 2019 , we completed the ComSovereign Acquisition in a stock-for-stock transaction with a total purchase price of approximately$75.0 million . The ComSovereign Acquisition was treated as a reverse merger for accounting purposes underU.S. GAAP withComSovereign as the accounting acquirer and our company as the accounting acquiree.ComSovereign Corp. was incorporated in the state ofDelaware onJanuary 10, 2019 and commenced operations through a series of acquisitions.
On
OnJanuary 31, 2019 ,ComSovereign acquired the capital stock of InduraPower, aTucson, Arizona -based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. InduraPower suspended operations in May, 2022.
On
OnApril 1, 2019 ,ComSovereign acquired the equity securities of DragonWave, aDallas -based manufacturer of high-capacity microwave and millimeter point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide. According to a report by theU.S. Federal Communications Commission , as ofDecember 2019 , DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios inNorth America . OnMay 23, 2022 ,Syntronic Production Services Canada Inc. acquired certain assets and employees fromDragonWave X Canada, Inc. , the Canadian subsidiary of DragonWave, in returns for assuming employment liabilities and the assumption of a lease inKanata, Ontario, Canada , through an Asset Purchase Agreement. OnApril 1, 2019 ,ComSovereign acquired the capital stock of Lextrum, aTucson, Arizona -based developer of full-duplex wireless technologies and components, including multi-reconfigurable RF antennae and software programs. This technology enables the doubling of a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies.
On
OnMarch 6, 2020 , our newly formed subsidiary, Sovereign Plastics, acquired substantially all the assets of aColorado Springs, Colorado -based manufacturer of plastic and metal components to third-party manufacturers. We acquired our Sovereign Plastics business to increase our operating margins by reducing the manufacturing and production costs of our telecom products. Sovereign Plastics will also primarily operate as the material, component manufacturing and supply chain source for all our subsidiaries. OnJune 21, 2022 COMSovereign soldSovereign Plastics LLC toTheLandersCompanies LLC . OnJuly 6, 2020 , we acquired the equity securities of VNC, an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones offered by ourDrone Aviation subsidiary and enabled and operated in nearly any location in the world. OnJanuary 29, 2021 , we acquired Fastback, a manufacturer of intelligent backhaul radio (IBR) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight (NLOS) limitations. Fastback's advanced IBR products allow operators to economically add capacity and density to their macrocells and expand service coverage density with small cells. These solutions also allow operators to both provide temporary cellular and data service utilizing mobile/portable radio systems and provide wireless Ethernet connectivity. 42 OnFebruary 25, 2021 , we acquired SKS, an Israeli-based company with tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance ("ISR") capabilities to customers worldwide for both land and marine based applications. Its innovative technologies include fiber optic tethers that enable secure, high-capacity communications, including support for commercial 4G and 5G wireless networks. SKS's flagship HoverMast line of quadrotor-tethered drones feature uninterruptible ground-based power, fiber optic communications for cyber immunity, and the ability to operate in GPS-denied environments while delivering dramatically improved situational awareness and communications capabilities to users. HoverMast is utilized by the Israeli government for border patrol and coastal applications and is also deployed in several international markets. SKS was idled in June, 2022. OnApril 1, 2021 , we acquiredRVision , a developer of technologically advanced video and communications products and physical security solutions designed for government and private sector commercial industries. It has been serving governments and the military for nearly two decades with sophisticated, environmentally rugged optical and infrared cameras, hardened processors, custom tactical video hardware, software solutions, and related communications technologies. OnJune 3, 2021 , we acquired Innovation Digital, aCalifornia -based developer of "beyond state-of-the-art" mixed analog/digital signal processing solutions, IP licensing, design and consulting services. Its signal processing techniques and intellectual property have significantly enhanced the bandwidth and accuracy of RF transceiver systems and have provided enabling technologies in the fields of communications and RADAR systems, signals intelligence and electronic warfare, test and measurement systems, and semiconductor devices. OnJune 23 ,COMSovereign reached an agreement with the former owners of Innovation Digital to return to the former owners of Innovation Digital 15 patents and 5 pending or provisional patents to those former owners in return for the cancelation of an outstanding$600,000 promissory note, the return of 500,000 shares of common stock, and the waiver of certain severance payments. OnJuly 16, 2021 , we acquired RF Engineering, aMichigan -based provider of high-quality microwave antennas and accessories. By providing one of the industry's lowest costs of ownership, RF Engineering has continued to innovate and expand, and it recently announced the industry's first Universal Licensed Microwave Antenna. OnOctober 4, 2021 , we completed the acquisition of SAGUNA, an Israeli-based 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'sEdge Cloud operates on general purpose computing hardware but can be optimized to support the latest artificial intelligence and machine learning features through dedicated accelerators. SAGUNA was idled in June, 2022. Principle of Consolidation Our consolidated financial statements included in this report include our accounts and those of our subsidiaries:Drone AFS Corp. ,Lighter Than Air Systems Corp. , DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics, VNC, Fastback, SKS,RVision , Innovation Digital, RF Engineering, and SAGUNA from their respective dates of acquisition.
Reportable Segments and Reporting Units
The Company currently operates as one Segment. A reporting unit ("RU") is a
component of an operating segment that is a business activity for which discrete
financial information is available and segment management regularly reviews the
operating results of that component. The Company's legal operating subsidiaries
are not organized to qualify as a segment, however, each operating entity has
separate financial information and an operating manager, who oversees the
business and financial activities, reporting to the Chief Operating Decision
Maker. ("CODM"). Therefore, each legal entity is deemed to be a separate
reporting unit.
43
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, injection moulding, 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 years endedDecember 31, 2021 and 2020, approximately 29% and 18%, respectively, of our revenues were derived from sales outside ofthe United States . While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outsidethe 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 theU.S. government and its agencies, even if such systems are for integration into foreign locations.
Cost of Goods Sold and Gross Profit
Our cost of goods sold is comprised primarily of the costs of manufacturing
products, procuring finished goods from our third-party manufacturers,
third-party logistics and warehousing provider costs, shipping and handling
costs and warranty costs. We presently outsource the manufacturing of our
Fastback and DragonWave products to SMC for Fastback products and Benchmark for
DragonWave products. Cost of goods sold also includes costs associated with
supply operations, including personnel-related costs, provision for excess and
obsolete inventory, third-party license costs and third-party costs related to
the services we provide. Additionally, cost of goods sold does not include any
depreciation and amortization expenses as we separate depreciation and
amortization expense into its own category within operating expenses.
Gross profit has been and will continue to be affected by various factors,
including changes in our supply chain and evolving product mix. The margin
profile of our current products and future products will vary depending on
operating performance, features, materials, manufacturer, and supply chain.
Gross margin will vary as a function of changes in pricing due to competitive
pressure, our third-party manufacturing, our production costs, costs of shipping
and logistics, provision for excess and obsolete inventory and other factors. We
expect our gross margins will fluctuate from period to period depending on the
interplay of these various factors.
44
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. We
expect our sales and marketing expense to increase materially in the year ending
December 31, 2022 as we ramp up our sales and marketing efforts to correspond to
our increased production efforts relating to certain of our telecom products.
General and Administrative
In addition to personnel costs, general and administrative expense consists of
professional fees, such as legal, audit, accounting, information technology and
consulting fees; share-based compensation; and facilities and other supporting
overhead costs. We expect general and administrative expense to increase in
absolute dollars as we continue to expand our product offerings and expand into
new markets. During fiscal 2021, we incurred, and during fiscal 2022 we expect
to continue to incur, increases in supporting overhead costs, professional fees,
transfer agent fees and expenses, development costs and other expenses related
to operating as a public company.
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation related to fixed assets such as test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, as well as amortization related to definite-lived intangibles.
Interest Expense Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense. As many of our debt instruments were past due at various times during fiscal 2020 and, as a result, were accruing interest at increased interest rates, and as we have been able to refinance our debt or issue equity to reduce our outstanding debt in the first quarter of fiscal 2021, our interest expense decreased in fiscal 2021 due to lower interest rates on our debt or lower debt balances. Impairment We account for goodwill and intangible assets in accordance with ASC 350, Intangibles -Goodwill and Other.Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth quarter of 2020, we adopted ASU No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. For the year endedDecember 31, 2021 , there were total impairment charges of$106.1 million , primarily due to goodwill of$62.4 million and intangibles of$43.7 million . 45 Provision for Income Taxes Current and deferred income tax expense or benefit in any given period will depend upon a number of events and circumstances, one of which is the income tax net income or loss from operations for the period which is usually different from theU.S. GAAP net income from operations for the period due to differences in tax laws and timing differences. See Note 14 - Income Taxes in the Notes to our financial statements included elsewhere in this report for a reconciliation onU.S. GAAP income or loss and tax income or loss. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period. Results of Operations Year Ended Year Ended December 31, December 31, (Amounts in thousands) 2021 2020 Revenue$ 12,640 $ 9,427 Cost of Goods Sold 6,497 4,596 Gross Profit 6,143 4,831 Operating Expenses Research and development 4,044 2,013 Sales and marketing 615 24 General and administrative 26,332
17,485
Gain on the sale of assets (83 ) (1 ) Depreciation and amortization 14,711 12,531 Impairment-Goodwill 62,385 - Impairment-Intangibles 43,670 - Total Operating Expenses 151,674 32,052 Net Operating Loss (145,531 ) (27,221 ) Other Income (Expense) Interest expense (2,848 ) (11,309 ) Loss on extinguishment of debt (4,602 ) (16 ) Foreign currency transaction gain/(loss) 48 (74 ) Interest income - 2 Other income/(expense) (116 ) (1,369 ) Total Other Expenses (7,518 ) (12,766 ) Net Loss Before Income Taxes (153,049 ) (39,988 ) Deferred Tax Benefit - 2,906 Net Loss$ (153,049 ) $ (37,081 ) Dividends on preferred stock (168 ) - Net loss available to common stockholders$ (153,217 ) $ (37,081 ) Loss per common share: Basic and Diluted$ (2.20 ) $ (0.82 ) Weighted-average shares outstanding: Basic and Diluted 69,784 45,294 46
Year Ended
Total Revenues
For the year ended
Cost of Goods Sold and Gross Profit
For the year endedDecember 31, 2021 , cost of goods sold increased$1.9 million , or 41%, which primarily consisted of the increases in payments to our contact manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with the manufacturing of our intelligent batteries and plastics, all directly related to our increase in revenues. Gross profit for the year endedDecember 31, 2021 increased$1.3 million with a gross profit margin of 49% compared to 51% for 2020. These changes in gross profit margin resulted primarily from the mix of products sold, with varying gross margins.
Research and Development Expense
For the year ended
Sales and Marketing Expense
For the year ended
General and Administrative Expense
For the year ended
Depreciation and Amortization For the year endedDecember 31, 2021 , depreciation and amortization increased$2.1 million , or 17%, due to the commencement of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements. This increase was driven primarily through the realization of full periods of depreciation and amortization for acquisitions that occurred during 2020, as well as additional acquisitions in 2021. Other Expense
For the year ended
Impairment For the year endedDecember 31, 2021 , there was at total impairment charge of$106.1 million , primarily due to goodwill of$62.4 million and intangibles of$43.7 million . The existence of goodwill impairment was indicated as a result of ourDecember 31, 2021 year end common stock share price of$0.75 being down from a high during 2021 of$6.57 . The company had a market equity value of$60.3 million but a book value of equity of$332.3 million ; thereby failing the "Qualitative" test. The company engaged a valuation advisor ("Valuation Advisor") to assist in the fair market value estimate of all of the Company's entities. 47 The Company hired the Valuation Advisor as a third party expert to value each of the Company's entities apart from SAGUNA, a Multi-Access Edge Computing ("MEC") cloud software developer which was purchased onOctober 24, 2021 . The Valuation Advisor examined 3 different methods of "Valuation":
? The Market Approach which is based on the assumption that the value of an asset
(including a company) is equal to the value of a substitute asset with the same
characteristics. Therefore, the value of an asset can be inferred by finding
similar assets (or an interest in similar assets) that have been sold in recent
arm's-length transactions.
? The Income Approach which seeks to measure the future benefits that can be
quantified in monetary terms. The Income Approach typically involves two
general steps. The first is making a projection of the total cash flows
expected to accrue to an investor in the asset. Examples include cash flow
realizable from an interest in a business, rental savings from a favorable
contract (e.g., a lease or a license), or royalty savings from ownership of a
patent. The second step involves discounting these cash flows to present value
at a discount rate that considers the degree of risk (or uncertainty)
associated with the realization of the projected monetary benefits.
? The Cost Approach which is based on the premise that a prudent investor would
pay no more for an asset than its replacement or reproduction cost. The cost to
replace the asset would include the cost of constructing a similar asset of
equivalent utility at prices applicable at the time of the valuation analysis.
To calculate an estimate of the fair market value using the Cost Approach, the
replacement cost new is determined and reduced for depreciation of the asset.
In considering these valuation approaches for the Company, the Valuation Advisor applied the Income Approach. For the Income Approach, the Company provided the Valuation Advisor with a financial forecast through FY2032. The Income Approach was used in the analysis based on financial projections of future operations.
As a result of their valuations, the Company determined that an impairment
charge of
Subsequent to the fiscal year end ofDecember 31, 2021 , however, there has been further degradation of the company's quoted bid price. The Company is anticipating additional impairments of long-lived assets including goodwill in future periods. 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022COMSovereign Holding Corp. (bid price)$ 6.0000 2.7700
2.0700 1.6100 0.7549 0.8399
$ 12,888.28 13,480.11 14,639.33 14,448.58 15,644.97 14,220.50$ 11,127.85
Sales have not materialized as projected:
$000 "s USD 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022 Quarterly Revenue$ 1,913 $ 2,086 $ 3,611 $ 4,115 $ 2,828 $ 3,334 $ 2,274 Chip Availability and Price: The chip market became encumbered as a result of the shutdowns of overseas production as a result of COVID 19. JP Morgan CEOJamie Dimond indicated in the fourth quarter of 2021 that, "…disruption will not be an issue next year."1 Hence, our projections for 2022 were improved over the poor performing 2020 and 2021 fiscal years. Lead times which normally have been 13 weeks now range anywhere from 36 to 52 weeks. The Company has been forced to source chips from 2nd and 3rd tier chip vendors. An LDO (Low Dropout Regulator), switch which the company was paying$0.70 per chip prior to COVID are now$73 -$80 per chip with a 36 week and above lead time. Other examples are:
? an Ethernet Switch with a standard cost of
? an Ethernet Phy (Physical layer transceiver) with a standard cost of
quotes ranging from$250 to$1,600 per chip.
In conjunction with the increase in price a chip lead times, capital availability has also been frozen. The Company is dependent, forthe near future, on additional investment capital to fund growth initiatives and production.
12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 3/31/2022 6/30/2022
10 Year Treasury Yield as a
surrogate for capital cost 1.7930 % 0.6760 % 1.4310 % 1.4670 % 1.5120 % 2.3750 % 2.8890 %
VIX index as a surrogate for
capital availability 14.02 46.80 15.07 23.14 17.22 20.56 28.71
1https://supplychaindigital.com/supply-chain-risk-management/imf-lowers-economic-growth-citing-supply-chain-disruption
48
As can be seen from the chart above the 10-year Treasury yield has moved upwards
almost doubling since the end of the year. The VIX index, which is a measure of
market volatility is used as surrogate for capital availability, higher risk
lower capital availability. The company believes these trends indicate that
future independent financing will be harder to find and more expensive when it
is available.
With the drop of the stock price in the second quarter of 2022, the company
anticipates additional impairment of
Provision for Income Taxes For the year endedDecember 31, 2021 , deferred tax benefit decreased by$2.9 million primarily as a result of changes in the valuation allowance for deferred tax assets driven by the effect of deferred tax liabilities on acquisitions that occurred during 2021. Net Loss For the year endedDecember 31, 2021 , we had net loss of$153.0 million compared to a net loss of$37.1 million for the periodDecember 31, 2020 , related to the items described above. Going Concern and Liquidity Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As ofDecember 31, 2021 , we had$1.9 million in cash compared to$0.7 million atDecember 31, 2020 , an increase of$1.2 million . As ofDecember 31, 2021 , we had$1.6 million in accounts receivable compared to$0.8 million atDecember 31, 2020 , an increase of$0.8 million resulting from augmented sales and from receivables gained through business acquisitions during the year. As ofDecember 31, 2021 , we had total current assets of$21.6 million and total current liabilities of$25.1 million , or negative working capital of$3.5 million , compared to total current assets of$7.7 million and total current liabilities of$34.3 million , or negative working capital of$26.6 million atDecember 31, 2020 . This is an increase of$23.1 million over the working capital balance at the end of 2020. As ofDecember 31, 2021 , we had undiscounted obligations relating to the payment of indebtedness and past due payroll, accrued liabilities, and accounts payable, exclusive of interest, due and payable on or prior toDecember 31, 2021 as follows:
?
payable that were past due;
?
which $500,000 was paid;
?
of 2022, which was fully paid;
?
of 2022;
?
of 2022;
?
of 2022;
49
In January and February 2021 , we completed two public offerings of our equity
securities in which we received aggregate net proceeds of $39.7 million , after
payment of all offering expenses. We applied approximately $8.5 million of such
net proceeds to repay debt and interest and approximately $0.9 million of
related party notes.
We anticipate meeting our cash obligations on our remaining indebtedness that is
payable on or prior to December 31, 2022 from the earnings from operations,
including, in particular, the operations of Drone Aviation , Sky Sapience,
Fastback, DragonWave, from the sale of non-core assets, and possibly from the
proceeds of additional indebtedness or equity raises.
Our future capital requirements for our operations will depend on many factors,
including the profitability of our businesses, the number and cash requirements
of other acquisition candidates that we pursue, and the costs of our operations.
We have been investing in research and development in anticipation of increasing
revenue opportunities in our cellular network solutions business, which has
contributed to our losses from operations.
We plan to generate positive cash flow from our recently completed acquisitions
to address some of our liquidity needs. However, two execute our business plan,
service our existing indebtedness, finance our proposed acquisitions, and
implement our business strategy, we anticipate that we may need to obtain
additional financing from time to time and may choose to raise additional funds
through public or private equity or debt financings, a bank line of credit,
borrowings from affiliates or other arrangements. We cannot be sure that any
additional funding, if needed, will be available on terms favorable to us or at
all. Furthermore, any additional capital raised through the sale of equity or
equity-linked securities may dilute our current stockholders' ownership in us
and could also result in a decrease in the market price of our common stock. The
terms of those securities issued by us in future capital transactions may be
more favorable to new investors and may include the issuance of warrants or
other derivative securities, which may have a further dilutive effect.
Furthermore, any debt financing, if available, may subject us to restrictive
covenants and significant interest costs. There can be no assurance that we will
be able to raise additional capital, when needed, to continue operations in
their current form. The report of our independent registered public accountants
on our financial statements for the year ended December 31, 2021 , stated that
our losses, negative cash flows from operations, limited capital resources and
accumulated deficit raise substantial doubt about our ability to continue as a
going concern.
We had capital expenditures of $3.1 million and of $0.2 million for the years
ended December 31, 2021 and 2020, respectively. We expect our capital
expenditures for next 12 months will be consistent with our prior spending.
These capital expenditures will be primarily utilized for equipment needed to
generate revenue and for office equipment. We expect to fund such capital
expenditures out of our working capital.
Line of Credit and Debt Agreements
Line of Credit In 2017, we issued a promissory note (the "CNB Note") toCity National Bank of Florida ("CNB") in the principal amount of$2.0 million . Through various amendments, the CNB Note had a maturity date ofAugust 2, 2020 and allowed for a CNB line of credit with advances that could have been requested until the maturity date ofAugust 2, 2020 so long as no event of default existed under the CNB Note or certain other events. The CNB Note bore an interest rate equal to the average of the interest rates per annum at whichU.S. dollars were offered in the London Interbank Borrowing Market ("LIBOR") for a 30-day period (the "Index") plus 2.9 percentage points over the Index. A late charge of 5.0% of any monthly payment not received by CNB within 10 calendar days after its due date would have been charged. Prepayment of the CNB Note was allowed at any time without penalty. In the event of a default, the interest rate would increase to the highest lawful rate. As ofDecember 31, 2019 , the interest rate on the CNB Note was 4.6% per annum. We and our former Chairman and Chief Executive Officer,Jay Nussbaum , were obligated to maintain a minimum average annual balance of$1.6 million in the aggregate with CNB. In the event we did not maintain this account balance, CNB could charge us a fee equal to 2% of the deficiency as additional interest under the CNB Note. The CNB Note was personally guaranteed byMr. Nussbaum and his estate, who along with us were obligated to maintain an aggregate unencumbered liquidity of no less than$6.0 million . In addition, the CNB Note was secured by all ofDrone Aviation's accounts, inventory, and equipment along with an assignment of a$120 thousand bank account that we maintained at CNB. As ofDecember 31, 2019 ,$2.0 million was drawn against the CNB line of credit. 50 As discussed below, onMarch 19, 2020 , we issued a promissory note to the estate ofMr. Nussbaum in the principal amount of$2.0 million , the proceeds of which, were used to repay the balance of the CNB Note. InJanuary 2021 , this loan, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. Secured Notes Payable InAugust 2016 , InduraPower issued a promissory note not to exceed the principal amount of$550 thousand bearing interest at 8.5% per annum with a maturity date ofAugust 31, 2018 . InduraPower could draw funds under the note throughFebruary 28, 2017 . Interest on this note was payable monthly and the full principal balance was due at maturity. OnSeptember 11, 2019 , the note was amended and both parties agreed that the outstanding balance of$0.8 million would be due onFebruary 28, 2020 . This promissory note was secured by substantially all of the assets of InduraPower. This promissory note was past due and accrued interest at an increased default rate of 12.5% per annum. This note, and all related accrued interest, was repaid inJanuary 2021 . InAugust 2016 , InduraPower issued a promissory note in the principal amount of$0.5 million that bears interest at 9.0% per annum and matures onMarch 1, 2022 . Accrued interest only payments were due monthly beginningOctober 1, 2016 throughMarch 1, 2017 . Monthly payments of$9 thousand for interest and principal are due on this note for the following 60 consecutive months. This promissory note is secured by all assets, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. As ofDecember 31, 2020 , an aggregate principal amount of$150 thousand was outstanding under this note. This promissory note was past due and accrued interest at an increased default rate of 18.0% per annum. This note, and all related accrued interest, was repaid inJanuary 2021 . See Note 9 - Debt Agreements in the Notes to our consolidated financial statements forDecember 31, 2020 included elsewhere in this report. InAugust 2016 , InduraPower issued a promissory note in the principal amount of$50 thousand with an interest rate of 7.9% per annum and a maturity date ofSeptember 1, 2021 . BeginningApril 1, 2017 , equal monthly payments of$1 thousand for interest and principal were due on the note for 60 consecutive months. This promissory note is secured by business equipment, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. As ofDecember 31, 2020 , an aggregate principal amount of$11 thousand was outstanding under this note. This promissory note was past due and accrued interest at an increased default rate of 18.0% per annum. This note, and all related accrued interest, was repaid inJanuary 2021 . See Note 9 - Debt Agreements in the Notes to our consolidated financial statements forDecember 31, 2020 included elsewhere in this report. InNovember 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 onNovember 26, 2021 . Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal is due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of DragonWave and is guaranteed byComSovereign . InJanuary 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. OnFebruary 26, 2020 , we entered into a$0.6 million secured business loan fromTVT Capital, LLC bearing interest at 78.99% per annum which matured onDecember 26, 2020 . The proceeds of such loan were used to pay past due payroll, accounts payable and notes payable. Principal and interest payments of$19 thousand were due weekly. The loan was secured by our assets. This note was repaid in January, 2021. In connection with the acquisition of the business by Sovereign Plastics onMarch 6, 2020 , we assumed a secured loan withFirstBank in the principal amount of$1.0 million bearing interest at 5% per annum and with a maturity date ofJune 1, 2020 . OnAugust 5, 2020 , the maturity date of this loan was extended toSeptember 15, 2020 , with a single payment of all unpaid principal and accrued interest then due, and the interest rate was increased to 36% per annum for any principal balance remaining unpaid past the extended maturity date. The loan was secured by certain assets of Sovereign Plastics. This loan was subject to covenants, whereby Sovereign Plastics was required to meet certain financial and non-financial covenants at the end of each fiscal year. This loan, plus all related accrued interest, was repaid inJanuary 2021 . 51 OnMarch 19, 2020 , we entered into a secured loan agreement in the amount of$2.0 million bearing interest at 5% per annum with a maturity date ofAugust 31, 2020 . Interest payments of$8 thousand were due monthly, with the full principal amount due at maturity. OnAugust 5, 2020 , the maturity date of this loan was extended toOctober 15, 2020 . The loan was secured by certain intellectual property assets of our company. The proceeds of the loan were used to repay the balance of the CNB Note (revolving line of credit) that was entered into in 2017. InJanuary 2021 , this loan, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.
In connection with the acquisition of the business by Sovereign Plastics on
? we assumed an equipment financing loan with an aggregate principal
balance of $65 thousand , which is secured by the related equipment,
bearing interest at 8.5% per annum. Monthly principal and interest
payments of approximately $2 thousand were due over the term. This
loan, plus all related accrued interest, was repaid in January 2021 .
? We assumed an equipment financing loan with an aggregate principal
balance of $96 thousand , which is secured by the related equipment,
bearing interest at 6.7% per annum. Monthly principal and interest
payments of approximately $2 thousand were due over the term. This
loan, plus all related accrued interest, was repaid in January 2021 .
? we assumed an equipment financing loan with an aggregate principal
balance of $44 thousand , which is secured by the related equipment,
bearing interest at 6.7% per annum. Monthly principal and interest
payments of approximately $1 thousand were due over the term. This
loan, plus all related accrued interest, was repaid in January 2021 .
On December 8, 2020 , we entered into a secured loan agreement pursuant to which
we received a loan in the amount of $1.0 million that was evidenced by a
promissory note in the principal amount of $1.1 million , including $0.1 million
of original issue discount, that bore interest at the rate of 10% per annum and
matured on January 6, 2021 . Interest and principal were payable in full at
maturity. The loan was guaranteed by VNC and was secured by our equity in VNC,
substantially all of the assets of VNC and certain intellectual property assets
of our company. As additional consideration for such loan, Daniel L. Hodges , our
Chairman and Chief Executive Officer, transferred to the lender 16,667 shares of
common stock. The proceeds of the loan were used for working capital purposes,
including the acquisition of certain inventory As of December 31, 2020 , an
aggregate principal amount of $1.1 million was outstanding under this loan. In
January 2021 ,$350 thousand of this loan, plus all accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. The remaining$750 thousand principal amount of this loan was fully repaid duringJanuary 2021 . OnJanuary 29, 2021 , in connection with the acquisition of our new manufacturing facility inTucson, Arizona , our wholly-owned subsidiary,AZCOMS LLC ("AZCOMS"), the purchaser of such facility, entered into a secured loan agreement pursuant to which it received a loan in the amount of up to$5.4 million that bore interest on the outstanding loan balance at the greater of (i) 8% per annum or (ii) 6.75% per annum in excess of the 1-month LIBOR rate, and matures onJanuary 29, 2022 . At the closing of the loan, the lender withheld$513 thousand of the loan amount as an interest reserve. In addition,$875 thousand of the loan amount was withheld to pay for lender-approved improvements to the property secured by the loan. Interest was payable monthly. The loan was due in full at maturity. Upon an event of default, the interest rate on the loan would have increased by an additional 5.00% per annum, and the outstanding principal amount of the loan, accrued interest thereon and fees would have become due on demand. Upon the maturity date and on any prepayments of the loan, AZCOMS will owe an exit fee equal to the greater of (a)$54 thousand , or (b) 1.00% of the unpaid loan balance and all unpaid accrued interest and fees. The loan was secured by the land, building and certain other assets of AZCOMS and was guaranteed by our company and by our Chief Executive Officer,Daniel L. Hodges .
On
OnMay 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 million and warrants to purchase up to 1,820,000 shares of our common stock, par value$0.0001 per share (the "Common Stock"), for a purchase price of$10 million (representing an original issue discount of 10.0% on the note), of which we received$5,000,000 onMay 28, 2021 and$5 million onJune 2, 2021 . OnAugust 25, 2021 , we entered into a first amendment and limited waiver to the securities purchase agreement dated as ofMay 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 onMay 27, 2023 . We were required to make monthly interest and principal payments in 18 equal monthly instalments of$611 thousand 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 have the right to make interest and principal payments in the form of additional 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. As ofDecember 31, 2021 , an aggregate principal amount of$6.4 million was outstanding under this note. 52 The amended note is convertible by the holder in whole or in part at any time after the six-month anniversary of the issuance date into shares of common stock at a conversion price of$3.00 per share, subject to adjustment and certain limitations. We have the right to prepay the amended note at any time with no penalty. However, should we exercise our buy-back right, the holder of the amended note will have the option of converting 25% of the outstanding principal amount of the note into shares of common stock at a conversion price equal to the lower of (A) the repayment price, or (B) the conversion price then in effect. The amended note is guaranteed by our subsidiaries and is secured by a first priority lien on substantially all of our assets and properties and the assets and properties of our subsidiaries, subject only to the liens securing the approximately$1 million principal amount of outstanding indebtedness of one of our subsidiaries. The warrants are exercisable to purchase up to 1,820,000 shares of common stock for a purchase price of$3.00 per share, subject to adjustment, at any time on or prior toMay 27, 2026 , and may be exercised on a cashless basis if the shares of common stock underlying the Warrants are not then registered under the Securities Act. OnAugust 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 million (representing an original issue discount of 16.0% on the note), which$5 million we received onAugust 26, 2021 . The note bears interest at the rate of 6% per annum from the date of funding and matures onAugust 25, 2023 . We were required to make monthly interest and principal payments in 18 equal monthly instalments of$322 thousand 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 have the right to make interest and principal payments in the form of additional 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. As ofDecember 31, 2021 , an aggregate principal amount of$4.8 million was outstanding under this note. The note is convertible by the holder in whole or in part at any time after the six-month anniversary of the issuance date into shares of common stock at a conversion price of$3.00 per share, subject to adjustment and certain limitations. We have the right to prepay the amended note at any time with no penalty. However, should we exercise our buy-back right, the holder of the amended note will have the option of converting 33 1/3% of the outstanding principal amount of the note into shares of common stock at a conversion price equal to the lower of (A) the repayment price, or (B) the conversion price then in effect. The note is guaranteed by our subsidiaries and is secured by a first priority lien on substantially all of our assets and properties and the assets and properties of our subsidiaries, subject only to the liens securing the approximately$1 million principal amount of outstanding indebtedness of one of our subsidiaries. The warrants are exercisable to purchase up to1,315,789 shares of common stock for a purchase price of$3.00 per share, subject to adjustment, at any time on or prior toAugust 25, 2026 , and may be exercised on a cashless basis if the shares of common stock underlying the Warrants are not then registered under the Securities Act. Notes Payable In connection with its acquisition of DragonWave and Lextrum inApril 2019 ,ComSovereign assumed the obligations of the seller of a promissory note in the principal amount of$0.5 million bearing interest at 12.0% per annum with a maturity date ofOctober 17, 2017 . OnOctober 1, 2019 , the maturity date was extended untilDecember 31, 2020 and the interest rate was reduced to 10% per annum. All unpaid accrued interest fromOctober 2017 throughSeptember 30, 2019 was converted into 50,000 shares of common stock of the company. Accrued interest and the full principal balance were due at maturity. OnApril 30, 2020 , we also issued 4,832 shares of common stock in lieu of an aggregate cash interest payment payable byComSovereign throughDecember 31, 2019 on this outstanding note payable. InJanuary 2021 , this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. In connection with its acquisition of DragonWave and Lextrum inApril 2019 ,ComSovereign assumed the obligations of the seller of a promissory note in the principal amount of$175 thousand that bore interest at the rate of 15% per annum and was due onNovember 30, 2017 . The interest rate increased to 18% per annum when the note became past due. OnOctober 1, 2019 ,ComSovereign amended the promissory note to extend the maturity date toSeptember 30, 2020 and to change the interest rate to 10% per annum. Both parties to the note also agreed to convert all unpaid accrued interest into 3,334 shares of common stock of the company. Accrued interest and principal were due and payable at maturity. This note, plus all related accrued interest, was repaid inJanuary 2021 . 53 InOctober 2017 , DragonWave issued a 90-day promissory note in the principal amount of$4.4 million and received proceeds of$4.0 million . Through several amendments, accrued interest was charged at the rate of 8% per annum, payment terms were amended and the maturity date was extended toFebruary 28, 2019 . OnSeptember 3, 2019 , the promissory note was increased to$5.0 million as all unpaid accrued interest was added to the principal balance. Additionally, the maturity date was extended toMarch 30, 2020 and the interest rate was changed to 10% per annum. Under this new amendment, principal and interest payments were due and payable monthly. OnApril 21, 2020 , the maturity date of this note was extended toAugust 31, 2020 , the interest rate was increased to 12% per annum, and we issued to the lender 33,334 shares of our common stock that have been treated as debt issuance costs. OnAugust 5, 2020 ,$1.5 million principal amount of this note was extinguished in exchange for 333,334 shares of common stock with a fair value of$4.53 per share. InJanuary 2021 , this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. OnNovember 7, 2019 ,ComSovereign issued several promissory notes in the aggregate principal amount of$450 thousand that bore interest at 133% per annum which matured onDecember 6, 2019 . An aggregate principal amount of$0.2 million was owed to three related parties out of the$450 thousand promissory notes. Accrued interest and principal were due and payable at maturity. We repaid$250 thousand of the aggregate principal amount of these promissory notes during the first quarter of 2020. An additional$133 thousand of the aggregate principal amount of these promissory notes, along with accrued interest and associated late fee penalties of$52 thousand , was fully extinguished onAugust 5, 2020 in exchange for 41,093 shares of common stock with a fair value of$4.53 per share. This note, plus all related accrued interest, was repaid inJanuary 2021 . OnMarch 5, 2020 , we issued a promissory note for consideration totaling$446 thousand in the principal amount of$0.5 million that matured onNovember 30, 2020 . Additionally, in lieu of interest, we issued to the lender 16,667 shares of our common stock. InJanuary 2021 , this note, plus all related accrued interest, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock.
In connection with the acquisition of the business by Sovereign Plastics on
? we entered into several promissory notes with the sellers in the
aggregate principal amount of $410 thousand that did not bear interest
and had a maturity date of June 30, 2020 and monthly principal
payments. These notes, plus all related accrued interest, was repaid in
January 2021 .
? we agreed to pay an aggregate of $166 thousand to the sellers on or
before June 30, 2020 . The agreement was not interest bearing.This
loan, plus all related accrued interest, was repaid in January 2021 .
? we assumed a note payable in the amount of $87 thousand bearing
interest at 3% per annum and with a maturity date of February16, 2023.
Monthly payments in the amount of $4 thousand for principal and
interest are due over the term. As of December 31, 2021 , an aggregate
principal amount of $11 thousand was outstanding and past due under
this note..
On May 29, 2020 , we issued a promissory note in the principal amount of $290
thousand with an original issue discount of $40 thousand and a maturity date of
December 31, 2020 . The full $290 thousand balance was due at maturity, with
interest accruing at a rate of 12% per annum for any principal balance remaining
unpaid past the maturity date. In January 2021 , this note, plus all related
accrued interest, was extinguished in exchange for shares of common stock and
warrants to purchase shares of common stock.
Between July 2, 2020 and August 21, 2020 , we borrowed an aggregate of $1.2
million from accredited investors and issued to such investors promissory notes
evidencing such loans. The principal amounts of the notes are between $50
thousand and $0.2 million . The notes bear interest at a rate of 15% to 18% and
have maturity dates between October 13, 2020 and November 30, 2020 . As
additional consideration for such loans, Daniel L. Hodges , the Company's
Chairman and Chief Executive Officer, transferred to such investors an aggregate
of 96,634 shares of common stock. On July 29, 2020 , we sold 30,614 shares of
common stock at a price of $3.00 per share to one of the accredited investors.
In January 2021 , $750 thousand of these notes, plus all related accrued
interest, was extinguished in exchange for shares of common stock and warrants
to purchase shares of common stock. Also in January 2021 , the remaining
aggregate principal balance of $350 thousand , plus all related accrued interest,
was paid.
Between November 4, 2020 and November 24, 2020 , we borrowed an aggregate of $550
thousand from accredited investors and issued to such investors promissory notes
evidencing such loans. The principal amounts of the notes were between $50
thousand and $0.1 million . The loans bore interest at a rate of 15% and had
maturity dates between January 31, 2021 and February 23, 2021 . As additional
consideration for such loans, Daniel L. Hodges , our Chairman and Chief Executive
Officer, guaranteed the notes and transferred to such investors an aggregate of
38,334 shares of common stock. $0.5 million principal amount of these notes and
accrued interest thereon was converted to shares of common stock in January
2021.The remaining note in the principal amount of $50 thousand was repaid in
February 2021 .
On July 1, 2020 , we borrowed $50 thousand from Mr. Brent Davies , a director of
our company, and issued to Mr. Davies a promissory note evidencing such loan
that bore interest at 4.8% and matured on November 30, 2020 . This loan, plus all
related accrued interest, was repaid in January 2021 .
54
During 2019, TM made loans to DragonWave in the aggregate principal amount of
$1.3 million to embed TM's modulation technology within DragonWave's Harmony
line of radios. These loans bore interest at 5% per annum and matured on
December 31, 2020 . Interest and principal was due at maturity. These loans were
converted to shares of common stock on October 1, 2020 .
On August 5, 2019 , Mr. Hodges and his wife loaned DragonWave $0.2 million at an
interest rate of 5.0% per annum with a maturity date of December 31, 2020 .
Interest was payable monthly while the full principal balance was due at
maturity. This loan, plus all related accrued interest, was repaid in January
2021 .
Between October 15, 2020 and December 28, 2020 , we borrowed an aggregate of $0.6
million from a related party and issued promissory notes evidencing such loans.
The principal amounts of the notes were between $0.1 million and $350 thousand ,
and such notes bore interest at 10% per annum and were due between January 14,
2021 and March 28, 2021 . These notes, plus all related accrued interest, were
repaid in January 2021 .
Between November 13, 2020 and December 24, 2020 , we borrowed an aggregate of
$160 thousand from a member of our board of directors and issued promissory
notes evidencing such loans. The principal amounts of the notes were between $40
thousand and $120 thousand , and such notes bore interest at 8% per annum and
were due between February 12, 2021 and March 23, 2021 . In January 2021 , this
note, plus all related accrued interest, was extinguished in exchange for shares
of common stock and warrants to purchase shares of common stock.
In connection with our acquisition of Fastback on January 29, 2021 , we issued to
the sellers $1.5 million aggregate principal amount of term promissory notes.
The individual principal amounts of the notes ranged from $2 thousand to $393
thousand . These notes bore interest at the rate of 10% per annum and matured on
the earlier of (i) January 1, 2022 , (ii) the date on which an aggregate of $6.0
million worth of products and services were sold following the acquisition date
by (A) Fastback or (B) our company and our subsidiaries (other than Fastback) to
certain specified Fastback customers, or (iii) the date on which we issued and
sold shares of our common stock or debt securities to investors in a bona-fide
arms-length financing transaction for aggregate consideration of at least $12.0
million . Interest was payable in cash semiannually in arrears on each June 1 and
December 1 , commencing on June 1, 2021 , and on the maturity date. Upon an event
of default, the interest rate would have automatically increased to 15% per
annum compounded semiannually. These notes matured on February 10, 2021 and were
repaid in full in the first quarter 2021.
Senior Debentures
In connection with its acquisition of DragonWave and Lextrum in April 2019 ,
ComSovereign assumed the obligations of the seller of $0.1 million aggregate
principal amount of 8% Senior Convertible Debentures of the seller that bore
interest at the rate of 8% per annum and matured on December 31, 2019 . Interest
was payable semi-annually in cash or, at the seller's option, in shares of the
seller's common stock at the conversion price that was equal to the lesser of
(1) $24.00 or (2) 80% of the common stock price offered under the next equity
offering. As of December 31, 2019 , an aggregate principal amount of $0.1 million
was outstanding under these debentures. On April 30, 2020 , these debentures were
modified to remove the conversion feature and provide for the settlement of
these debentures only in cash. This debenture, plus all related accrued
interest, was repaid in January 2021 .
Convertible Notes Payable
On July 7, 2020 , we sold a convertible promissory note in the principal amount
of $286 thousand with an original issue discount of $36 thousand that bore
interest at the rate of 12.5% per annum, and warrants to purchase an additional
52,910 shares of common stock. Warrants to purchase up to 9,260 shares of common
stock were also issued to an unrelated third-party as a placement fee for the
transaction. In connection with this note, we recognized a Beneficial Conversion
Feature ("BCF") of $140 thousand , a debt discount of $50 thousand associated
with the issuance of warrants to the note holder, and debt issuance costs of $36
thousand , which were all recorded as debt discounts. On July 28, 2020 , we
defaulted on this note under the related Registration Rights Agreement by not
filing a registration statement within 90 days of the initial April 29, 2020
note origination date. As a result, the aggregate principal balance increased by
$88 thousand , which was composed of an $86 thousand penalty payment-in-kind and
a $2 thousand interest payment-in-kind, representing 130% of the outstanding
principal and accrued interest balance on the default date. In addition, the
interest rate was increased to 24% per annum, and the note and accrued interest
was due on-demand. During the three and year ended September 30, 2020 , $261
thousand of the amounts recorded as debt discounts were amortized and recognized
in interest expense in the Consolidated Statement of Operations. In January
2021 , this note, plus all accrued interest, was converted into shares of common
stock.
55
On August 21, 2020 , we sold a $1.7 million convertible promissory note with an
original issue discount of $0.2 million that bore interest at the rate of 5.0%
per annum and matured on November 20, 2020 . Accrued interest and principal were
due on the maturity date. Additionally, as additional consideration for the
loan, we issued to the lender 133,334 shares of our common stock. We also issued
to an unrelated third-party as a placement fee for the transaction warrants to
purchase up to 17,857 shares of our common stock at an exercise price of $8.40
per share at any time on or prior to August 21, 2025 . This note, plus all
related accrued interest, was repaid in January 2021 .
In connection with our acquisition of Fastback on January 29, 2021 , we issued to
the sellers $11.2 million aggregate principal amount of convertible promissory
notes. The individual principal amounts of the notes ranged from $6 thousand to
$5.6 million . These notes initially bear interest at the rate of 1.01% per
annum, which is to be adjusted to the prime rate as published by the Wall Street
Journal on each annual anniversary of the issuance date, and mature on January
29, 2026 . Interest is payable in cash annually in arrears on each January 1 .
Commencing on January 29, 2022 , the principal and accrued interest on these
notes may be converted in full to shares of our common stock at a conversion
price of $5.22 per share, subject to adjustment. Upon an event of default, the
interest rate will automatically increase to 15% per annum compounded annually,
and all unpaid principal and accrued interest may become due on demand. Upon
maturity, the interest rate will automatically increase to 15% per annum
compounded annually on any unpaid principal. There is a provision in the notes
held by the selling shareholders of our Fastback radio line which indicates that
an event of default can be declared if the Company fails to file its requisite
securities filings timely and the event(s) is not cleared. To date, while the
holders have reserved their rights, the Company has been in amicable dialogue
with them about the late filings and has a plan to regain compliance in such
filings in the very near future. No adverse actions have been taken against the
Company and we expect none insofar as filing currency and compliance is regained
quickly.
In connection with our acquisition of Innovation Digital on June 3, 2021 , we
issued to the seller a convertible promissory note in the principal amount of
$600 thousand . The convertible promissory bears interest at the rate of 5% per
annum, matures on June 3, 2022 and is convertible into shares of our common
stock commencing on December 3, 2021 at an initial conversion price of $2.35 per
share; provided, however, that on the maturity date, the holder may (i) demand
payment of the entire outstanding principal balance and all unpaid accrued
interest under Convertible Note or (ii) continue to hold the Convertible Note,
in which case the convertible note shall thereafter accrue interest at the rate
of 10% per annum, compounded annually, until such time as (x) the holder makes a
demand of payment and the convertible note is repaid in full; or (y) the
convertible note is converted in full. If the convertible note is converted into
shares of our common stock after the maturity date of the convertible note, the
conversion price will be the closing price of our common stock on the date the
conversion notice is provided to us. As of December 31, 2021 , an aggregate
principal amount of $600 thousand was outstanding under this note. On June 3,
2022 this note went into default. On June 23 , the Company reached an agreement
with the former owners of Innovation Digital to return to the former owners of
Innovation Digital 15 patents and 5 pending or provisional patents to those
former owners in return for the cancelation of the outstanding $600,000
promissory note, the return of 500,000 shares of common stock, and the waiver of
certain severance payments
Senior Convertible Debentures
OnSeptember 24, 2019 ,ComSovereign sold$250 thousand aggregate principal amount of 10% Senior Convertible Debentures that bore interest at the rate of 10% per annum and was scheduled to mature onDecember 31, 2021 . Interest was paid semi-annually in arrears in June and December of each year in cash or, atComSovereign's option, in shares of common stock at the conversion price that was equal to the lesser of (1)$7.50 or (2) a future effective price per share of any common stock sold. Upon an event of default, the interest rate would have automatically increased to 15% per annum. As ofDecember 31, 2019 , an aggregate principal amount of$250 thousand was outstanding under these debentures. OnApril 30, 2020 , these debentures were amended to provide for the conversion of the debentures into shares of our common stock instead ofComSovereign's common stock. Additionally, the conversion price was changed from$7.50 per share to$2.27 per share. InJanuary 2021 , this debenture, plus all related interest, was converted into shares of common stock. OnJuly 2, 2020 , we sold$1.0 million aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor that bore interest at the rate of 9% per annum and had a maturity date ofSeptember 30, 2020 . OnSeptember 30, 2020 , the maturity date of these debentures was extended toNovember 30, 2020 . Accrued interest and principal were due on the maturity date, with interest paid in cash or, at our option, in shares of common stock at the conversion price of$3.00 per share. Upon an event of default, the interest rate would have automatically increased to 15% per annum. The debentures were convertible into shares of common stock at a conversion price of$3.00 per share. We also issued warrants to purchase 33,334 shares of common stock that are exercisable for a purchase price of$3.00 per share, at any time on or prior to the earlier ofDecember 31, 2022 or the second anniversary of our consummation of a public offering of our common stock in connection with an up-listing of the common stock to a national securities exchange, which occurred onJanuary 26, 2021 . InJanuary 2021 , principal of$0.9 million related to this debenture was converted into shares of common stock. Also inJanuary 2021 , the remaining principal amount of$0.1 million , plus all accrued interest, was extinguished in exchange for common stock and warrants to purchase common stock. 56
Paycheck Protection Program of the CARES Act
Between April 30 and May 26, 2020 , six of our subsidiaries received loan proceeds in the aggregate amount of$455 thousand under the Paycheck Protection Program ("PPP"). The PPP loan has a maturity of two years and an interest rate of 1% per annum. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable pursuant to section 1106 of the CARES Act, after a period of up to 24 weeks, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness shall be calculated in accordance with the requirements of the PPP, including the provisions of Section 1106 of the CARES Act, although no more than 40 percent of the amount forgiven can be attributable to non-payroll costs. Further, the amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the period of up to 24 weeks.$453 thousand was fully forgiven in 2021. As ofDecember 31, 2021 , an aggregate amount of principal of$2 thousand was outstanding under these loans. In connection with the VNC acquisition onJuly 6, 2020 , we assumed a PPP loan in the principal amount of$24 thousand bearing interest at 1% per annum and with a maturity date ofMay 14, 2022 . Terms are consistent with our other PPP loans. This loan was fully forgiven during the third quarter of 2021. OnAugust 11, 2020 , one of our subsidiaries received loan proceeds in the aggregate amount of$104 thousand under the PPP. The PPP loan has a maturity of five years and an interest rate of 1% per annum. Terms are consistent with our other PPP loans. This loan was fully forgiven during the third quarter of 2021. Sources and Uses of Cash For the For the Year Year Ended Ended December 31, December 31, (Amounts in thousands) 2021 2020 Cash flows used in operating activities$ (39,521 ) $ (6,020 ) Cash flows (used in) provided by investing activities (9,472 ) (3,323 ) Cash flows provided by financing activities 50,138 9,238 Effect of exchange rates on cash 23 23 Net (decrease)/increase in cash and cash equivalents$ 1,168 $ (82 ) Operating Activities For the year endedDecember 31, 2021 , net cash used in operating activities was$39.5 million . Net cash used in operating activities primarily consisted of the net operating loss of$153.0 million , which was offset by depreciation and amortization of$14.7 million , impairment of intangibles and goodwill of$43.7 million and$62.4 million , respectively, and working capital changes of$16.4 million . For the year endedDecember 31, 2020 , net cash used in operating activities was$6.0 million . Net cash used in operating activities primarily consisted of the net operating loss of$37.1 million and the effect of deferred income taxes of$2.9 million , which was offset by depreciation and amortization of$12.5 million , amortized discounts and debt issuance costs on our outstanding debt of$8.9 million , other noncash charges of$3.1 million , and bad debt expense of$1.0 million . Additionally, working capital changes provided$8.4 million in cash during the period. 57 Investing Activities For the year endedDecember 31, 2021 , net cash used in investing activities was$9.5 million . Investing activities primarily consisted of the acquisition of the net assets of Fastback, Sky Sapience,RVision , Innovation Digital, RF Engineering and SAGUNA for purchase prices of$13.9 million ,$11.8 million ,$5.5 million ,$9.0 million ,$2.8 million and$9.9 million , respectively. For the year endedDecember 31, 2020 , net cash used in investing activities was$3.3 million . Investing activities primarily consisted of the acquisition of the net assets of Sovereign Plastics and VNC for purchase prices of$0.8 million and$18.8 million , respectively. The purchase price of the assets of Sovereign Plastics included cash paid on the closing date of$0.3 million and short-term debt incurred to the sellers of$0.6 million . The purchase price of VNC included cash paid on the settlement date of$2.9 million , shares with values at the acquisition date of$11.9 million , warrants and options with values at the acquisition date of$3.8 million and a note receivable of$0.3 million . Financing Activities For the year endedDecember 31, 2021 , financing activities provided cash of$50.1 million . Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of$39.7 million and net proceeds of borrowings of$14.3 million , which was offset by the repayment of debt of$9.9 million and the repayment of related party notes of$1.0 million . For the year endedDecember 31, 2020 , financing activities provided cash of$9.2 million . Financing activities primarily consisted of$12.3 million of proceeds from the issuance of debt, which was offset by the repayment of$2.0 million on the line of credit and the repayment of$1.1 million of debt.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies in the Notes to our financial statements included elsewhere in this report for our evaluation of accounting standards not yet adopted.
Critical Accounting Policies and Estimates
The following is not intended to be a comprehensive list of our accounting
policies or estimates. Our significant accounting policies are more fully
described in Note 2 - Summary of Significant Accounting Policies in the Notes.
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies and estimates as
disclosed in the Notes. We consider the policies and estimates discussed below
as critical to an understanding of our financial statements because their
application places the most significant demands on our judgment, with financial
reporting results dependent on estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Specific risks for
these critical accounting estimates are described in the following paragraphs.
Preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
Besides estimates that meet the "critical" accounting estimate criteria, we make
many other accounting estimates in preparing our financial statements and
related disclosures. All estimates, whether or not deemed critical, affect
reported amounts of assets, liabilities, revenue and expenses as well as
disclosures of contingent assets and liabilities. Estimates are based on
experience and other information available prior to the issuance of the
financial statements. Materially different results can occur as circumstances
change and additional information becomes known, including for estimates that we
do not deem "critical."
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Accounts Receivable and Credit Policies
Trade accounts receivable consist of amounts due from the sale of our products and services. Such accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 to 45 days of receipt of the invoice. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. As ofDecember 31, 2021 , we characterized$1.2 million as uncollectible.
Beneficial Conversion Features and Warrants
We evaluate the conversion feature of convertible debt instruments to determine
whether the conversion feature is beneficial as described in ASC 470-30, Debt
with Conversion and Other Options. We record a beneficial conversion feature
("BCF") related to the issuance of convertible debt that has conversion features
at fixed or adjustable rates that are in-the-money when issued and record the
relative fair value of any warrants issued with those instruments. The BCF for
the convertible instruments is recognized and measured by allocating a portion
of the proceeds to the warrants and as a reduction to the carrying amount of the
convertible instrument equal to the intrinsic value of the conversion features,
both of which are credited to additional paid-in capital. We calculate the fair
value of warrants with the convertible instruments using the Black-Scholes
valuation model. The Black-Scholes valuation model requires various inputs such
as the annualized volatility of our stock, stock price and annual risk-free rate
of return. As ComSovereign was a private company for most of 2019, in
determining the BCF related to the convertible debt of ComSovereign and its
subsidiaries in fiscal 2019, we had to rely on factors outside the public
markets for the inputs. If different inputs were used or different judgments
were made, the results could have a material adverse effect on our financial
statements.
Under these guidelines, we first allocate the value of the proceeds received
from a convertible debt transaction between the convertible debt instrument and
any other detachable instruments included in the transaction (such as warrants)
on a relative fair value basis. A BCF is then measured as the intrinsic value of
the conversion option at the commitment date, representing the difference
between the effective conversion price and our stock price on the commitment
date multiplied by the number of shares into which the debt instrument is
convertible. The allocated value of the BCF and warrants are recorded as a debt
discount and accreted over the expected term of the convertible debt as interest
expense. If the intrinsic value of the BCF is greater than the proceeds
allocated to the convertible debt instrument, the amount of the discount
assigned to the BCF is limited to the amount of the proceeds allocated to the
convertible debt instrument.
Revenue Recognition
In May 2014 , the FASB issued Accounting Standards Update ("ASU") No. 2014-09
(Topic 606), Revenue from Contracts with Customers. Topic 606 supersedes the
revenue recognition requirements in Topic 605, Revenue Recognition and requires
entities to recognize revenues when control of the promised goods or services is
transferred to customers at an amount that reflects the consideration to which
the entity expects to be entitled to in exchange for those goods or services.
The principles in the standard are applied in five steps: 1) identify the
contract(s) with a customer; 2) identify the performance obligations in the
contract; 3) determine the transaction price; 4) allocate the transaction price
to the performance obligations in the contract; and 5) recognize revenue when
(or as) the entity satisfies a performance obligation. We adopted Topic 606 as
of January 10, 2019 (date of inception).
Our revenue recognition policies are consistent with this five-step framework.
Understanding the complex terms of agreements and determining the appropriate
time, amount and method to recognize revenue for each transaction requires
judgment. These significant judgments include: (1) determining what point in
time or what measure of progress depicts the transfer of control to the
customer; (2) applying the series guidance to certain performance obligations
satisfied over time; and (3) estimating how and when contingencies, or other
forms of variable consideration, will impact the timing and amount of
recognition of revenue. The timing and revenue recognition in a period could
vary if different judgments were made.
59
Long-Lived Assets and
We account for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the year endedDecember 31, 2021 , we recorded impairment charges of$106.1 million in respect to our acquisitions of 13 businesses. The impairment charge is related to goodwill in the amount of$62.4 million and total intangibles in the amount of$43.7 million , specifically trade names, licenses, technology, and customer relationships, in the amounts of$4.9 million ,$281 thousand ,$16.8 million , and$21.7 million , respectively. Three entities account for approximately 70% of the balance of intangibles, post-impairment, including Lextrum, VEO and Fastback in the amounts of$6.2 million ,$3.3 million , and$1.8 million , respectively. The remaining 30% is across ten entities which were mostly acquired in 2020 and 2021. All the impairment charges are recognized in the consolidated income statement within the operating (loss)/profit. Throughout the past 3-5 years, we targeted companies with technology that fit our portfolio and align with our strategic vision for 5G innovation. The impairment was primarily driven by lackluster business performance as a result of turbulent economic factors such as the impact of COVID-19, chip shortages, our declining stock price and our inability to secure adequate funding to service our customers. We believe that in the absence of future positive cash flow, declines in revenue generation, or continued difficult business conditions, further impairments may be required. The Company will monitor such economic conditions and record such additional charges when and if necessary. We account for goodwill and intangible assets in accordance with ASC 350, Intangibles -Goodwill and Other.Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth quarter of 2020, we adopted ASU No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. For the year endedDecember 31, 2021 , we recorded an impairment charge of$62.4 million . Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed. Assumptions must be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future asset impairment reviews. Due to the many variables inherent in the estimation of a business's fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis. Share-Based Compensation We account for share-based compensation costs in accordance with ASC 718, Compensation - Stock Compensation. ASC 718, which requires companies to measure the cost of awards of equity instruments, including stock options and restricted stock awards, based on the grant-date fair value of the award and to recognize it as compensation expense over the employee's requisite service period or the non-employee's vesting period. An employee's requisite service period is the period of time over which an employee must provide service in exchange for an award under a share-based payment arrangement and generally is presumed to be the vesting period. In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures and performance attributes. Since share-based compensation expense can be material to our financial condition, different assumptions and estimates could have a material adverse effect on our financial statements.
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