COMSovereign Holding (COMS) 10-Q/A2022 Q1 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended March 31, 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)

(904) 834-4400

(Registrant’s Telephone Number, Including Area Code)

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

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.

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 December 14, 2022, there were 238,113,575 shares of registrant’s common stock outstanding.

EXPLANATORY NOTE

As previously reported in the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) on January 27, 2023, on January 25, 2023, the Audit Committee of the Registrant concluded, after discussion with the Registrant’s management and the independent registered public accounting firm for the Company, that the March 31, 2022 consolidated financial statements of the Registrant should no longer be relied upon due to errors in the consolidated financial statements which should be restated.

The purpose of this Amended Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2022 (“Form 10-Q/A”), is to amend the Form 10-Q filed with the Securities and Exchange Commission on December 15, 2022 (the “Form 10-Q”) to include a restatement of the amortization of intangible assets which may have a material impact on the Company’s results of operations. See Note 18 - Restatement of Financial Statements included herein for additional details.

Note that this Form 10-Q/A only corrects the previously referenced misstatement and hasn’t been updated for Company developments since the original Form 10-Q was filed.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

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

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(unaudited)

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

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 1 DESCRIPTION OF BUSINESS AND RESTATEMENT (AS RESTATED)

Restatement of Previously Issued Unaudited Condensed Consolidated Financial Statements

COMSovereign (defined below) has determined that certain intangible assets were not correctly amortized in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 that were included in the Company’s March 31, 2022 Form 10-Q, which was filed with the Securities and Exchange Commission on December 15, 2022. The financial statements were restated to adjust certain previously recorded transactions, see Note 18 – Restatement of Financial Statements for additional information. In addition, Going Concern (Note 3) has been restated to disclose the restated income resulting from the correction of the aforementioned amortization expense.

Description of Organization and Business Operations

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 months ended March 31, 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, financial position and cash flows for the three months ended March 31, 2022 and 2021 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 March 31, 2022 and for the three months ended March 31, 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. 

Principles of Consolidation

The unaudited condensed consolidated financial statements as of March 31, 2022 and December 31, 2021, and for the three months ended March 31, 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.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

Long-Lived Assets and Goodwill

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

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. As of March 31, 2022, the Company determined that it was not more likely than not that any reporting unit’s fair value was below that reporting unit’s carrying amount. Accordingly, it wasn’t necessary to perform interim impairment testing as of March 31, 2022.

The Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches. 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. For the market approach, the Company uses internal analyses based primarily on market comparables. The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and its expectations.

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 March 31, 2022 and December 31, 2021 approximated their fair value due to their short-term nature.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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 GOING CONCERN (AS RESTATED)

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 three months ended March 31, 2022, the Company used cash flows in operating activities of $8.7 million, it had an accumulated deficit of $217.7 million and had working capital of $8.5 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 18 – 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 18 – 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 18 – 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.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 4 REVENUE

The following table is a summary of the Company’s timing of revenue recognition for the three months ended March 31, 2022 and 2021:

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 months ended March 31, 2022 and 2021:

Revenue by geographic destination consisted of the following for the three months ended March 31, 2022 and 2021:

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 March 31, 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.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 5 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 income (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 income (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 income (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 March 31, 2022 and 2021, respectively:

NOTE 6 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

Cash and cash equivalents consisted of the following as of March 31, 2022, and December 31, 2021:

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 March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, $195,000 of restricted cash was released upon the sale of a building and the remainder of the restricted cash will be released as overseas leases expire in January and July of 2023. See Note 10 – Property and Equipment, Net for additional information related to the sale of the building.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 7 ACCOUNTS RECEIVABLE, NET

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

Bad debt (recovery) expense totaled $(48,968) and $(2,142) for the three months ended March 31, 2022 and 2021, respectively.

NOTE 8 INVENTORY, NET

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

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 9 PREPAID EXPENSES

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

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 10 PROPERTY AND EQUIPMENT, NET

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

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 11 – Leases for additional information about the subsequent leaseback of the office building.

The Company recognized $505,000 and $362,000 of depreciation expense for the three months ended March 31, 2022 and 2021, respectively.

NOTE 11 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 March 31, 2022 and December 31, 2021 were as follows:

On February 1, 2022, the Company entered into a lease agreement with the new owners of the Tucson Building (see Note 10 - 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. See Note 19 – Subsequent Events - Lease Developments for information related to the subsequent lease default and lease abandonment.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

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

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

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 March 31, 2022:

Finance Leases

The Company has finance leases for certain manufacturing and office equipment.

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of March 31, 2022:

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the finance lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2022:

NOTE 12 DEBT

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

During the three months ended March 31, 2022 (a) $2.8 million of Notes A and B principal was satisfied by $1.9 million (plus interest) of aggregate payments in cash, plus aggregate conversions of principal and interest of $0.9 million and $44,000, respectively, into an aggregate of 1,576,058 shares of the Company’s common stock; (b) $0.5 million of Note C past due principal was repaid in cash; (c) $5.2 million of Note D (the Tucson Building mortgage) was repaid in cash from the proceeds of the January 31, 2022 building sale; and (d) an aggregate of $16,000 of Notes E, F, and G principal were repaid in cash. The conversions of Notes A and B were pursuant to a share-settled redemption feature wherein the conversions are required to be accounted for under extinguishment accounting, which resulted in the recognition of a $173,000 loss on extinguishment.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

Future maturities contractually required by the Company under debt obligations are as follows as of March 31, 2022:

During the three months ended March 31, 2022 and 2021, the Company recognized $880,000 and $469,000 of interest expense in connection with the aforementioned indebtedness.

For additional information related to debt, including subsequent conversions of Notes A and B principal into common stock, see Note 19 – Subsequent Events – Debt and Equity Developments. Because of such subsequent conversions, the March 31, 2022 outstanding principal of Notes A and B (and the related debt discounts) were fully reclassified from current to long term.

NOTE 13 STOCKHOLDERS’ EQUITY

See Note 12 – Debt and Note 19 – 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.

Dividends

During the three months ended March 31, 2022, the Company recorded $123,328 of dividends paid or payable to the holders of the 9.25% Series A Preferred Stock.

NOTE 14 SHARE-BASED COMPENSATION

Restricted Stock Awards

A summary of the restricted stock unit (“RSU”) activity during the three months ended March 31, 2022 is presented below:

During the three months ended March 31, 2022 and 2021, the Company recognized $78,496 and $349,080, 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 March 31, 2022, there was $234,354 of unrecognized stock-based compensation expense related to RSUs that will be recognized over the weighted average remaining vesting period of 0.73 years.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

Stock Options

There were no stock options issued during the three months ended March 31, 2022 and 2021.

The following table presents stock option activity for the three months ended March 31, 2022:

The following table presents information related to stock options as of March 31, 2022:

The Company recognized $456,604 and $7,374 of share-based compensation expense related to options for the three months ended March 31, 2022 and 2021, respectively. Compensation expense related to stock options is recorded in general and administrative expense in the condensed consolidated statement of operations. At March 31, 2022, the Company had $2.6 million of unrecognized compensation expense related to options.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

Warrants

All warrants are valued utilizing the Black-Scholes pricing model using the assumptions listed below. There were no warrants issued during the three months ended March 31, 2022. The weighted average grant date fair value of all warrants issued during the three months ended March 31, 2021 was $1.60 per share. The following table summarizes the assumptions used to estimate the fair value of warrants granted during the three months ended March 31, 2022 and 2021:

The following table represents warrant activity for the three months ended March 31, 2022:

The following table presents information related to warrants as of March 31, 2022:

NOTE 15 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.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

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.

See Note 19 – Subsequent Events – Litigation, Claims and Contingencies Developments for post-March 31, 2022 developments.

NOTE 16 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 March 31, 2022, accounts receivable from two customers comprised an aggregate of approximately 32% of the Company’s total trade accounts receivable, and none of these balances were characterized as uncollectible. In addition, for the three months ended March 31, 2022, revenue from three customers individually exceeded 10% of revenue and, in total, comprised approximately 37% of the Company’s total revenue. No vendors accounted for greater than 10% of expenses for the three months ended March 31, 2022.

NOTE 17 BUSINESS ACQUISITIONS

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

The following information represents the unaudited pro forma combined results of operations, giving effect to the acquisitions as if they occurred at the beginning of the period ended March 31, 2021.

NOTE 18 RESTATEMENT OF FINANCIAL STATEMENTS

In these restated financial statements and footnotes, the following tables compare the Company’s previously issued Balance Sheet, Statement of Operations and Statement of Cash Flows as of March 31, 2022 and for the three months then ended to the corresponding restated financial statements for the period end. The adjustment that relates to the restated financial statements is the recording of a $1.3 million reduction of amortization expense associated with intangible assets.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

The effects of the restatement on the line items within the Company’s unaudited condensed consolidated March 31, 2022 financial statements are as follows:

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

NOTE 19 SUBSEQUENT EVENTS

Executive Officer and Board of Director Developments

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

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

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

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.

Business Developments

Commencing in May 2022, the Company embarked on a restructuring, including a reduction of over 70% of overhead and personnel 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 suspended operations.

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 employment liabilities and assuming DragonWave Canada’s lease in Kanata, Ontario, Canada, through an Asset Purchase Agreement.

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

On June 21, 2022, the Company sold its Sovereign Plastics LLC (“Sovereign Plastics”) business unit for total consideration of $2 million to TheLandersCompanies LLC.

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”) 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.

Debt and Equity Developments

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 March 31, 2022, the proceeds were recorded as a related party note deposit in current liabilities.

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 Company’s secured senior convertible notes payable (see Note 12 – Debt) entered into default, which resulted in a 5% or $375,833 increase in the principal value, pursuant to the terms of the notes. 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. Subsequent to March 31, 2022 and through the filing date of this Form 10-Q, the note holders converted $8,715,583 of principal and $171,599 of interest into an aggregate of 154,167,727 shares of the Company’s common stock. As of the filing date, the remaining combined principal and interest balance of the secured senior convertible notes was approximately $228,000.

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

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 a 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.

On May 24, 2022, the Company received notice from counsel for holders of $11.15 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. The notice indicated that the holders were reserving their rights.

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 $370,000.

On June 23, 2022, the Company reached an agreement to cancel a $600,000 promissory note (see Business Developments above).

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.

Lease Developments

In May 2022, the Company abandoned its lease of the Tucson Building (see Note 11 – Leases) after previously defaulting on the lease.

In June 2022, ComSovereign Corp. abandoned its Dallas, TX office lease and VEO Photonics, Inc. abandoned its San Diego, CA office lease.

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

Litigation, Claims and Contingencies Developments

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.

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 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 March 31, 2022 and the other $1.3 million is included in contract liabilities – current in the March 31, 2022 balance sheet. 

COMSOVEREIGN HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(unaudited)

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-March 31, 2022 claims of the former employees.

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. 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 has accrued for the wage claims for services provided, but has not accrued for the claims associated with future services. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit.

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. 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 has accrued for the wage claims for services provided, but has not accrued for the claims associated with future services. The Company disputes certain allegations of the plaintiff and intends to vigorously defend the lawsuit.

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 March 31, 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-March 31, 2022 claims of the former employees were resolved and the action was dismissed on or about November 17, 2022.

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 has 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.

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 months ended March 31, 2022, compared to the three months ended March 31, 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: 

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 has been idled.

Our CORE business is comprised of the following acquisitions: