S-1 1 ea125331-s1_comsovereign.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on August 28, 2020

Registration No. 333-______

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

ComSovereign Holding Corp.

(Exact name of Registrant as specified in its charter)

 

Nevada   3663   46-5538504
(State or other jurisdiction of   (Primary Standard Industrial   (IRS Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

5000 Quorum Drive, STE 400

Dallas, TX 75254

469-930-2661

(Address, including zip code, and telephone number, including area code,

of Registrant’s principal executive offices)

 

Daniel L. Hodges

5000 Quorum Drive, STE 400

Dallas, TX 75254

469-930-2661

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Please send copies of all communications to:

 

Eric M. Hellige, Esq. Gregory Sichenzia, Esq.
Pryor Cashman LLP Sichenzia Ross Ference LLP
7 Times Square 1185 Avenue of the Americas, 37th Floor
New York, NY 10036 New York, NY 10036
(212) 421-4100 (212) 930-9700

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

  

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  Proposed Maximum
Aggregate Offering
Price(1)(2)
   Amount of
Registration
Fee(2)
 
Units(3)  $23,000,000(4)  $2,985.40 
Common Stock, $0.0001 par value per share, included in the Units   (5)    
Warrants to purchase Common Stock(6)   (5)    
Common Stock underlying Warrants   28,750,000    3,731.75 
Underwriter’s Warrants (7)        
Common Stock underlying Underwriter’s Warrants (8)   1,250,000    162.25 
Total Registration Fee  $53,000,000   $6,879.40 

 

(1)Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Pursuant to Rule 416 under the Securities Act of 1933, as amended, the shares of Common Stock registered hereby also include an indeterminate number of additional shares of Common Stock as may from time to time become issuable by reason of stock splits, stock dividends, recapitalizations or other similar transactions

 

(2)Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant.

 

(3)Each Unit consists of one share of Common Stock and one Warrant, each Warrant exercisable for one share of Common Stock.

 

(4)Includes shares of Common Stock and/or Warrants representing 15% of the number of shares of Common Stock and Warrants included in the Units offered to the public that the underwriters have the option to purchase to cover over-allotments, if any.

 

(5)Included in the price of the Units. No separate registration fee required pursuant to Rule 457(g) under the Securities Act of 1933, as amended.

 

(6)The Warrants are exercisable at a price per share of Common Stock equal to 125% of the Unit offering price.

 

(7) No fee pursuant to Rule 457(g) under the Securities Act of 1933, as amended.
   
(8) The Underwriter’s Warrants will represent the right to purchase 5% of the aggregate number of shares of common stock sold in this offering excluding the overallotment option at an exercise price equal to 125% of the offering price per share.

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

 

 

 

 

 

  

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 28, 2020

 

Units

 

ComSovereign Holding Corp.

 

We are offering          units, each unit consisting of one share of our common stock, $0.0001 par value, and one warrant, each warrant exercisable for one share of common stock in a firm commitment underwritten offering at an assumed public offering price of $    per unit (based upon the last reported sale price of our common stock on the OTCQB on          , 2020). The warrants included within the units are exercisable immediately, will have an exercise price per share of common stock equal to 125% of the public offering price of one unit, and will expire five years from the date of issuance. The shares of common stock and warrants that are part of the units are immediately separable and will be issued separately in this offering. The offering also includes the shares of common stock issuable from time to time upon exercise of the warrants.

 

Our common stock is currently quoted on the OTCQB market, operated by OTC Markets Group, under the symbol “COMS.” On          , 2020, the last quoted price of our common stock as reported on the OTCQB was $         per share. We have applied to list our common stock and the warrants included with the units on the NYSE American exchange under the symbol “COMS” and “COMSW,” respectively, which listing we expect to occur upon consummation of this offering and is a condition of this offering. No assurance can be given that our application will be approved or that a trading market will develop for the warrants included within the units.

 

The final public offering price per unit will be determined through negotiation between us and the underwriter in this offering and will take into account the recent market price of our common stock, the general condition of the securities market at the time of this offering, the history of, and the prospects for, the industry in which we compete, and our past and present operations and our prospects for future revenues. The recent market price used throughout this prospectus may not be indicative of the public offering price per unit.

 

An investment in our securities is speculative and involves a high degree of risk. Investors should carefully consider the risk factors and other uncertainties described in this prospectus before purchasing our common stock. See “Risk Factors” beginning on page 7.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL, ACCURATE, OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

   Per Unit   Total 
Public offering price  $   $ 
Underwriting discounts and commissions(1)  $     $  
Proceeds to us, before expenses  $    $  

 

(1) Does not include a non-accountable expense allowance equal to 1.0% of the gross proceeds of this offering payable to the underwriters. See “Underwriting” on page 86 for additional disclosure regarding compensation payable to the underwriters.

 

We have granted a 45-day option to the representative of the underwriters to purchase up to an aggregate of             additional shares of common stock and/or             additional  warrants (equal to 15% of the common stock and warrants included in the units sold in the offering) in any combination thereof, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock will be equal to the public offering price of one unit, less the underwriting discount, and the purchase price to be paid per additional warrant will be $0.00001.

 

The underwriters expect to deliver our shares and warrants to purchasers in the offering on or about        , 2020.

 

ThinkEquity
 
a division of Fordham Financial Management, Inc.

 

The date of this prospectus is     , 2020.

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
Prospectus Summary 1
Risk Factors 7
Special Note Regarding Forward-Looking Statements 27
Use of Proceeds 29
Market for Common Equity and Related Stockholders Materials 30
Capitalization 31
Dilution 32
Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Executive Compensation 71
Director Compensation 79
Business 49
Management 63
Principal Stockholders 81
Certain Relationships and Related Transactions 83
Description of Securities 86
Underwriting 89
Legal Matters 92
Experts 92
Where You Can Find More Information 93
Index to Financial Statements F-1

 

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ABOUT THIS PROSPECTUS

 

The registration statement as of which this prospectus forms a part that we have filed with the Securities and Exchange Commission, or SEC, includes exhibits that provide more detail of the matters discussed in this prospectus.

 

You should read this prospectus and the related exhibits filed with the SEC, together with the additional information described under the heading “Where You Can Find More Information.”

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the securities offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.

 

We are not offering to sell or seeking offers to purchase these securities in any jurisdiction where the offer or sale is not permitted. We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the jurisdiction of the United States who come into possession of this prospectus are required to inform themselves about and to observe any restrictions relating to this Offering and the distribution of this prospectus applicable to that jurisdiction.

 

Unless the context otherwise requires, the terms the “Company,” “we,” “us” and “our” refer to ComSovereign Holding Corp. and our subsidiaries. We have registered our name, logo and the trademarks “Dragonwave®,” “Harmony™” and “Horizon™” in the United States. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. Except as set forth above and solely for convenience, the trademarks and trade names in this prospectus are referred to without the ®, © and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets, which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in the shares. You are urged to read this prospectus in its entirety, including the information under “Risk Factors” and our financial statements and related notes included elsewhere in this prospectus.

 

Our Company

 

Overview 

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency 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, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.

 

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

 

·Telecom and Network Products and Solutions. We design, develop, market and sell technologically-advanced products for telecom network operators, mobile device carriers and other enterprises, including the following:

 

  o Backhaul Telecom Radios. We offer a line of high-capacity packet microwave solutions that drive next-generation IP networks. Our carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data, enabling service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product portfolio is wireless network backhaul, including a range of products ideally suited to support the emergence of underlying small cell networks. Additional solutions include leased-line replacement, last mile fiber extension and enterprise networks.
     
  o “Front-Edge” & Small Cell 4G LTE and 5G Radios. We offer citizens broadband radio service (CBRS) frequency and other small cell radios that are designed to connect to other front edge radios or to connect directly to mobile devices such as mobile phones and other IoT devices. Recently, we developed the world’s first fully-virtualized 5G core network on a microcomputer the size of a credit card, enabling, for the first time, the ability to have the 5G network collocated on the front edge with the small cell communicating with the devices themselves.

 

oIn-Band Full-Duplex Technologies. We have developed proprietary wireless transmission technologies that alleviate the performance limitations of the principal transmission technologies used by most networks today. Time Division Duplex (TDD) transmission technology used by many communications systems utilizes a single channel for transmission of data alternating between downlink or uplink, which limits capacity/throughput. Frequency Division Duplex (FDD) technologies in the marketplace today use two independent channels for downlink and uplink but require twice the spectrum. Neither TDD nor FDD can simultaneously transmit and receive on a single channel - a limitation that network advancements and 5G will require for optimal performance. In early 2021, we intend to commence offering products incorporating our proprietary In-Band Full-Duplex technologies that simultaneously transmit and receive data on a single channel, which resolves the limitation of current TDD and FDD transmissions by increasing network performance and doubling spectrum efficiency.

 

·Intelligent Batteries and Back-Up Power Solutions. We are developing for the telecom industry a full line of environmentally-friendly, non-volatile advanced intelligent lithium ion batteries and back-up power units that charge quickly, have a life span approximately five times longer than conventional lead-acid batteries and can be monitored remotely. We are also currently offering and developing models that provide power for a wide range of applications, including cellular towers and other radio access network (RAN) infrastructures, automobiles, boats, spacecraft and other vehicles.

 

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·Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications such as intelligence, surveillance and reconnaissance (“ISR”) and communications. We focus primarily on the development of a tethered aerostat known as the Winch Aerostat Small Platform (“WASP”), which is principally designed for military and security applications where they can provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high-strength armored tether.

 

The ComSovereign Group

 

Through a series of acquisitions, we and our operating subsidiaries have expanded our service offerings and geographic reach over the past two years. On November 27, 2019, we completed the acquisition (the “ComSovereign Acquisition”) of COMSovereign Corp. (“ComSovereign”) in a stock-for-stock transaction with a total purchase price of approximately $75 million.  ComSovereign was 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 operating units, each of which was acquired to address a different opportunity or sector of the North American telecom infrastructure and service market:

 

  DragonWave-X LLC. DragonWave-X LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”), a Dallas-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 of the U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America.  DragonWave was acquired by ComSovereign in April 2019 prior to the ComSovereign Acquisition.

 

Virtual NetCom LLC. Virtual NetCom LLC (“VNC”) is a Virginia-based EDGE telecom access radio developer and provider of both 4G LTE/Advanced and 5G capable radio equipment. Additionally, VNC has virtualized and patented an entire LTE Advanced network core solution that we believe eliminates much of the costly backbone equipment of telecom networks. VNC also has developed and is currently selling a rapidly-deployable network system that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world. We acquired VNC in July 2020.

 

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

 

  InduraPower, Inc. InduraPower Inc. (“InduraPower”) is a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. ComSovereign acquired InduraPower in January 2019 prior to the ComSovereign Acquisition.  

 

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

 

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

 

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VEO. VEO, based in San Diego, California, is a research and development company innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment. ComSovereign acquired VEO in January 2019 prior to the ComSovereign Acquisition.

 

Sovereign Plastics LLC. Sovereign Plastics LLC (“Sovereign Plastics”), based in Colorado Springs, Colorado, operates as the material, component manufacturing and supply chain source for all of our subsidiaries, and also provides plastic and metal components to third-party manufacturers. Its ability to rapidly prototype new product offerings and machine moldings, metals and plastic castings has reduced the production cycle for many of our components from months to days. We acquired the business currently conducted by Sovereign Plastics in March 2020.

 

On August 24, 2020, we entered into an Agreement and Plan of Merger and Reorganization dated as of August 24, 2020 (the “FN Merger Agreement”) among our company and our wholly-owned subsidiary, CHC Merger Sub 8, LLC, Skyline Partners Technology LLC, a Colorado limited liability company that does business under the name Fastback Networks (“Fastback”), and John Helson, solely in his capacity as the representative of the security holders of Fastback, pursuant to which, subject to the terms and conditions of the FN Merger Agreement, we have agreed to acquire Fastback.  We believe Fastback has been a leader in the development and commercialization of innovative 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. Fastback has a U.S. patent portfolio comprised of 65 granted and 12 pending patents. Collectively the patent portfolio covers key technologies including antenna arrays, signal processing, adaptive antennas, beamforming/steering, self-optimizing networks, spectrum sharing and hybrid band operations.

 

Pursuant to the FN Merger Agreement, the aggregate merger consideration we are obligated to pay for Fastback will consist of (i) $1,250,000 in cash, which we expect to pay from the net proceeds of this offering, (ii) $1,500,000 aggregate principal amount of our term debentures, and (iii) $11,150,000 aggregate principal amount of our convertible debentures that are convertible into our common stock at a conversion price of $1.74 per share, subject to adjustment. Our proposed acquisition of Fastback is subject to the condition that we raise at least $12 million of gross proceeds from the sale of our equity or debt securities, which would be satisfied upon the closing of this offering, and certain other customary closing conditions. 

 

Our Corporate Information

 

We were incorporated as Drone Aviation Holding Corp. in the State of Nevada on April 17, 2014. An amendment to our Articles of Incorporation changing our name to COMSovereign Holding Corp. was effected on November 30, 2019. Our principal executive offices are located at 5000 Quorum Drive, Suite 400, Dallas, Texas 75254, and our telephone number is (904) 834-4400. Our website address is www.ComSovereign.com, and many of our subsidiaries also have their own websites linked to and that may be accessed from our principal corporate website. Information on our website and on that of our subsidiaries is not part of this prospectus.

 

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About This Offering

 

Securities Offered

 

              units, each consisting of one share of common stock and one warrant, each warrant exercisable for one share of common stock. The warrants included within the units are exercisable immediately, will have an exercise price of $ per share, equal to 125% of the public offering price of one unit, and will expire five years from the date of issuance. The shares of common stock and warrants that are part of the units are immediately separable and will be issued separately in this offering.
     
Offering price per Unit   $     .
     
Over-Allotment   We have granted the underwriters a 45-day option to purchase up to an aggregate of           additional shares of common stock and/or             additional warrants (equal to 15% of the common stock and warrants underlying the units sold in this offering) in any combination thereof, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock shall be equal to the public offering price of one unit, less the underwriting discount, and the purchase price to be paid per additional warrant shall be $0.00001.
     
Common Stock Outstanding After Offering           shares (or       shares of the underwriters exercise their over-allotment option in full.
     
Use of Proceeds  

We estimate that we will receive net proceeds, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us, of $     million from this offering assuming no exercise in the underwriter’s over-allotment option.

 

We intend to use the net proceeds of this Offering for the repayment of outstanding indebtedness, the acquisition of new companies or products, inventory production and marketing, operating expenses and working capital. See “Use of Proceeds” on page 29 for more information.

     
Risk Factors  

An investment in our securities is highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page 7.

     
Lock-Ups   We, our officers and directors, and certain holders of our capital stock will enter into lock-ups restricting the transfer of shares of, or relating to, our capital stock for a period of 180 days, with respect to our officers and directors, and 90 days, with respect to us and certain holders of our capital stock, commencing on the date of this prospectus.
     

Trading Symbol

 

  Our common stock is presently quoted on the OTCQB Marketplace under the symbol “COMS”. We have applied to have our common Stock and the warrants included within the units offered hereby listed on the NYSE American exchange under the symbols “COMS” and “COMSW,” respectively.

 

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The number of shares of common stock to be outstanding immediately after this offering is based on 140,584,274 shares of common stock outstanding as of July 31, 2020, and excludes an aggregate of up to approximately                                   shares of common stock based upon the following: 

 

An aggregate of 2,329,300 shares of common stock issuable upon the exercise of outstanding stock purchase warrants with a weighted average exercise price of $0.46 per share that expire between November 20, 2020 and July 6, 2025;

 

  An aggregate of 965,608 shares of common stock issuable upon the conversion of outstanding convertible indebtedness with a weighted average conversion price of $0.86 per share that matures prior to January 29, 2021;

 

  An aggregate 7,790,506 shares of common stock issuable upon the exercise of options with a weighted average exercise price of $0.53 per share granted under our long-term equity incentive plans as of July 31, 2020;

 

an estimated              shares of common stock issuable upon the exercise of the warrants included in the units (or            shares of common stock if the underwriters exercise their over-allotment option in full with respect to the warrants contained in the units);

 

                  shares of common stock issuable upon the exercise of the underwriters’ over-allotment option to purchase additional shares of common stock included in the units; and

 

                  shares of common stock issuable upon the exercise of the warrants to be issued to the underwriters.

 

Selected Financial Information

 

On November 27, 2019, we completed the ComSovereign Acquisition in a stock-for-stock transaction with a total purchase price of approximately $75 million. The ComSovereign Acquisition was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquirer and our company as the accounting acquiree. As a result, our consolidated financial statements included in this prospectus include those of ComSovereign for the periods from the date of its incorporation (January 10, 2019) through June 30, 2019 and December 31, 2019. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only from the date of acquisition of ComSovereign, November 27, 2019.

 

The following consolidated balance sheet data as of December 31, 2019 and selected consolidated statement of operations data for the period January 10, 2019 (inception) to December 31, 2019 have been derived from our audited financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of June 30, 2020 and the selected consolidated statements of operations data for the period January 10, 2019 (inception) to June 30, 2019 and for the six-month period ended June 30, 2020 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements.

 

This financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results that may be expected in any future period.

 

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Consolidated Statement of Operations Data

 

(Amounts in US$’s, except share data)   Six Months Ended
June 30,
2020
    January 10, 2019 (Inception) to
June 30,
2019
    January 10, 2019
(Inception) to
December 31,
2019
 
    (unaudited)        
Revenue   $ 5,495,297     $ 1,002,911 (1)   $ 4,712,212 (1)
Cost of Goods Sold (2)     2,613,632       888,270       2,990,716  
Gross Profit     2,881,665       114,641       1,721,496  
                         
Operating Expenses                        
Research and development  (2)     701,485       60,964       174,257  
Sales and marketing  (2)     29,625       3,815       6,222  
General and administrative  (2)     8,680,321       4,392,935       14,325,078  
Depreciation and amortization     5,745,063       2,478,219       7,567,184  
Gain on sale of fixed assets     663       197,089       (98,410 )
Total Operating Expenses     15,156,494       6,935,933       21,974,331  
Net Operating Loss     (12,274,829 )     (6,821,292 )     (20,252,835 )
Other Income (Expenses)                        
Loss on conversion of debt                 (2,640,000 )
Net loss on extinguishment of debt                 (434,774 )
Foreign currency transaction gain                 191,547  
Interest expense     (2,356,821 )     (362,602 )     (8,399,663 )
Other expense                 (147,430 )
Total Other Expenses     (2,316,394 )     76,713       (11,430,320 )
Net Loss Before Income Taxes     (14,591,223 )     (6,744,579 )     (31,683,155 )
Deferred Tax Benefit           1,686,145       4,137,900  
Net Loss   $ (14,591,223 )   $ (5,058,434 )   $ (27,545,255 )
Basic and Diluted Loss Per Share     (0.11 )     (0.14 )   $ (0.57 )

 

(1) Does not include 2019 revenues of Drone Aviation for the period prior to the ComSovereign Acquisition, which amounted to $1,380,497 for the period January 10, 2019 (Inception) to June 30, 2019 and $5,783,796 for the period January 10, 2019 (Inception) to December 31, 2019.

 

(2)Exclusive of depreciation and amortization.

 

Consolidated Balance Sheet Data

 

   June 30, 2020
(unaudited)
     
   Actual   Pro Forma
as Adjusted (1)
   December 31,
2019
 
Cash  $368,685   $            $812,452 
Total current assets   7,430,226         8,665,369 
Total assets   115,749,802         119,987,435 
Total current liabilities   24,448,860         15,142,599 
Total liabilities   26,987,631         17,040,060 
Accumulated earnings   42,158,177         27,568,638 
Total stockholders equity   88,762,172         102,947,375 

 
(1) The pro forma adjusted balance sheet data gives effect to (i) the receipt of $        million in net proceeds from our sale of           units in this offering at an assumed offering price of $          per unit (the closing price of our common stock on          , 2020) after deducting underwriting discount and estimated offering expenses payable by us and the use of $        of such net proceeds to repay in full at closing certain outstanding indebtedness as set forth under “Use of Proceeds” on page 29 and (ii) the conversion of current liabilities in the aggregate amount of $       to common stock at or prior to the closing of this offering.

 

6

 

  

RISK FACTORS

 

An investment in our in our securities involves a high degree of risk. The risks described below include all material risks to investors in this offering that are known to our company. You should carefully consider such risks before participating in this offering. Our business, financial condition and results of operations could be materially harmed by these risks. As a result, the trading price of our common stock could decline, and you might lose all or part of your investment. When determining whether to buy our common stock and warrants, you should also refer to the other information in this prospectus, including our financial statements and the related notes included elsewhere in this prospectus.

 

Risks Related to Our Business and Industry

 

Since our recent acquisition of ComSovereign in November 2019, we lack an established operating history on which to evaluate our consolidated business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in profits.

 

While we have conducted our Drone Aviation business operations since 2014, we consummated the acquisition of our ComSovereign subsidiary and its various lines of business, which are diverse and involve a number of different proposed and existing product offerings, in November 2019, and two other operating subsidiaries since that time. As a result, we have a limited operating history as a consolidated company upon which you may evaluate our business and prospects. Our business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. You should consider an investment in our company in light of these risks, uncertainties, expenses and difficulties. Such risks include:

 

the absence of an operating history in our current business and at our current scale;

 

our ability to raise capital to develop our business and fund our operations;

 

expected continual losses for the foreseeable future;

 

our ability to anticipate and adapt to developing markets;

 

acceptance by customers;

 

limited marketing experience;

 

competition from competitors with substantially greater financial resources and assets;

 

the ability to identify, attract and retain qualified personnel;

 

our ability to provide superior customer service; and

 

reliance on key personnel.

 

Because we are subject to these risks, and the other risks discussed below, you may have a difficult time evaluating our business and your investment in our company.

 

We incurred net losses in the six-month period ended June 30, 2020 and our 2019 fiscal year with negative cash flows, and we cannot assure you as to when, or if, we will become profitable and generate positive cash flows. 

 

We experienced net losses from operations in the six-month period ended June 30, 2020 and the fiscal year ended December 31, 2019, and we may continue to incur net losses from operations in the future. On the basis of our audited financial statements included in this prospectus and without giving effect to the operations of our Drone Aviation subsidiary prior to the consummation of the ComSovereign Acquisition on November 27, 2019, as of June 30, 2020, we had a cumulative net loss of approximately $42.1 million since our inception (which included non-cash accounting charges of approximately $19.5 million resulting from stock-based compensation expenses, amortization of our debt discount related to our convertible notes, the change in our right-of-use operating lease asset, depreciation, amortization and income taxes). Such losses have historically required us to seek additional funding through the issuance of debt or equity securities. Our long-term success is dependent upon, among other things, achieving positive cash flows from operations and, if necessary, augmenting such cash flows using external resources to satisfy our cash needs. There can be no assurance that we will be able to obtain additional funding, if needed, on commercially reasonable terms, or of all.

 

7

 

 

We expect to continue to incur losses from operations and negative cash flows, which raise substantial doubt about our ability to continue as a going concern.

 

We anticipate incurring additional losses until such time, if ever, as we can generate significant sales of our DragonWave microwave radios and related products. We will require substantial additional financing to fund our DragonWave operations and to develop and commercialize the technologies of our other operating subsidiaries. These factors raise substantial doubt about our ability to continue as a going concern.

 

We will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions to stockholders. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in our ability to raise capital, we believe that there is substantial doubt in our ability to continue as a going concern.

 

We may not generate sufficient cash flows to cover our operating expenses.

 

As noted above, we have incurred recurring losses since inception. Until we can generate significant sales of our DragonWave product lines, we expect to continue to incur losses primarily as a result of costs and expenses related to research and continued development of the technologies of our other operating subsidiaries and our corporate general and administrative expenses. Our limited capital resources and operations to date have been funded primarily through sales of our debt and equity securities. As of June 30, 2020, we had negative working capital of approximately $16.7 million and limited available cash. We except to convert current liabilities in the amount of $           to common stock at or prior to the closing of this offering and to use approximately $           of the net proceeds of this offering to repay in full certain outstanding indebtedness as set forth herein under the caption “Use of Proceeds.” After giving effect to such debt conversions and repayments, we believe that our existing cash as of June 30, 2020, cash generated from operations and the remaining net proceeds of this offering will be sufficient to meet our anticipated cash requirements through at least      2021. This estimate is based upon assumptions that may prove to be incorrect, and we could exhaust our available cash resources sooner as than we currently expect. In the event that we are unable to generate sufficient cash from our operating activities or raise additional funds, we may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects.

 

We have significant debt and if we are unable to repay our debt when it becomes due, our business, financial condition and results of operations could be materially harmed.

 

As of June 30, 2020, we had total undiscounted debt obligations, excluding related-party debt, of approximately $15.1 million, excluding forgivable debt under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Of this debt, $1.7 million was past due and unpaid as of June 30, 2020 and $12.3 million of the additional debt obligations mature on or prior to December 31, 2020. While we plan to reduce our outstanding debt obligations by approximately $         million with a portion of the net proceeds of this offering and to convert an additional $         of our outstanding debt to common stock at or prior to the closing of this offering, the aggregate amount of our remaining indebtedness could have significant effects on our business, such as:

 

limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

requiring us to dedicate a portion of our cash flows from operations to pay interest on our debt, which would reduce availability of our cash flows to fund working capital, capital expenditures, potential acquisitions, execution of our growth strategy and other general corporate purposes;

 

making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions; and

 

placing us at a competitive disadvantage compared with our competitors that have less debt.

 

8

 

 

We may not be able to generate sufficient cash flows from our operations to repay our past due and other indebtedness when it becomes due and to meet our other cash needs. If the holders of our past due indebtedness make demand for payment, or we are not able to pay our other debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt, sell additional debt or equity securities or sell our assets on favorable terms, if at all, and if we must sell our assets, we may negatively affect our ability to generate revenue.

 

If we are unable to obtain additional funding when needed, our business operations will be harmed, and if we do obtain additional financing, our then-existing shareholders may suffer substantial dilution.

 

As we take steps in the commercialization and marketing of our technologies, or respond to potential opportunities and/or adverse events, our working capital needs may change. We anticipate that if our cash and cash equivalents are insufficient to satisfy our liquidity requirements, we will require additional funding to sustain our ongoing operations and to continue our research and development activities. We do not have any contracts or commitments for additional funding, and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all, if needed. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to conduct business operations. If we are unable to obtain additional financing to finance a revised growth plan, we will likely be required to curtail such plans or cease our business operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.

 

Raising capital in the future could cause dilution to our existing shareholders and may restrict our operations or require us to relinquish rights.

 

In the future, we may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration or strategic alliance arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams or product candidates on terms that are not favorable to us.

  

The occurrence of the COVID-19 pandemic may negatively affect our operations depending on the severity and longevity of the pandemic.

 

The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. In addition, it may hamper our efforts to comply with our filing obligations with the SEC. At this time, we cannot predict the impact of COVID-19 on our ability to obtain financing necessary to fund our working capital and other requirements. Depending on the severity and longevity of the COVID-19 pandemic, our business, customers and stockholders may experience a significant negative impact.

 

9

 

 

Rapid technological change in our market and/or changes in customer requirements could cause our products to become obsolete or require us to redesign our products, which would have a material adverse effect on our business, operating results and financial condition.

 

The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changing customer demands and evolving industry standards, any of which can render existing products obsolete. We believe that our future success will depend in large part on our ability to develop new and effective products in a timely manner and on a cost-effective basis. As a result of the complexities inherent in our products, major new products and product enhancements can require long development and testing periods, which may result in significant delays in the general availability of new releases or significant problems in the implementation of new releases. In addition, if we or our competitors announce or introduce new products our current or future customers may defer or cancel purchases of our products, which could materially adversely affect our business, operating results and financial condition. Our failure to develop successfully, on a timely and cost-effective basis, new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements would have a material adverse effect on our business, operating results and financial condition.

 

Product development is a long, expensive and uncertain process, and our failure to develop marketable products in our various markets could adversely affect our business, prospects and financial condition.

 

The development of our technologies and products, particularly for our proposed full-duplex wireless microwave products and our SiP technologies product lines, is a costly, complex and time-consuming process, and the investment in product development often involves a long wait until a return, if any, is achieved on such investment. We continue to make significant investments in research and development relating to our technologies and products. Investments in new technology and processes are inherently speculative. Technical obstacles and challenges we encounter in our research and development process may result in delays in or abandonment of product commercialization, substantially increase the costs of development and negatively affect our results of operations.

 

We compete with companies that have significantly more resources for their research and development efforts than we have or have received government contracts for the development of new products.

 

A number of our competitors have received considerable funding from government or government-related sources to develop various technologies or products.  Most of these organizations and many of our other competitors have greater financial, technical, manufacturing, marketing and sales resources and capabilities than we do. In addition, with respect to products we are developing for certain markets, we anticipate increasing competition as a result of industry consolidation, which has enabled companies to enhance their competitive position and ability to compete against us. These organizations also compete with us to:

 

attract parties for acquisitions, joint ventures or other collaborations;

 

license proprietary technology that is competitive with the technology we are developing;

 

attract funding; and

 

attract and hire talented and other qualified personal.

 

Our competitors may succeed in developing and commercializing products earlier than we do. Our competitors may also develop products or technologies that are superior to those we are developing and render our technology candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products and technologies, our marketing and sales will suffer and our financial condition would be adversely affected.

 

10

 

 

Successful technical development of our products does not guarantee successful commercialization.

 

Even if we successfully complete the technical development for one or all of our product development programs, we may still fail to develop a commercially successful product for a number of reasons, including, among others, the following:

 

failure to obtain the required regulatory approvals for their use;

 

prohibitive production costs;

 

competing products;

 

lack of innovation of the product;

 

continuing technological changes in the market rendering the product obsolete;

 

failure to scale-up our operations sufficiently to satisfy demand for our products;

  

ineffective distribution and marketing;

 

lack of sufficient cooperation from our partners; and

 

demonstrations of the products not aligning with or meeting customer needs.

 

Although we have sold our DragonWave radios and our WASP aerostat systems and various other aerostat ISR systems and components, our success in the market for the products we develop will depend largely on our ability to prove our products’ capabilities.  Upon demonstration, our products may not have the capabilities they were designed to have or that we believed they would have.  Furthermore, even if we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with a larger, more established, more proven company than ours. Moreover, competing products may prevent us from gaining wide market acceptance of our products.  We may not achieve significant revenue from new product investments for a number of years, if at all.

  

Product quality problems, defects, errors or vulnerabilities in our products could harm our reputation and adversely affect our business, financial condition, results of operations and prospects.

 

We may experience quality control problems in our manufacturing operations or the manufacturing operations of our contract manufacturers. We produce highly-complex products that incorporate advanced technologies and that we believe to be state-of-the-art for our industry. Despite our testing prior to their release, our products may contain undetected defects or errors, including design, contract manufacturing or supplier quality issues, especially when first introduced or when new versions are released. Product defects or errors in the future could affect the performance of our products and could delay the development or release of new products or new versions of products. In addition, undetected quality problems may prompt unexpected product returns and adversely affect warranty costs. Allegations of unsatisfactory performance could cause us to lose revenue or market share, damage our reputation in the market and with customers, and increase our warranty costs and related returns, which could negatively impact our gross margins, cause us to incur substantial costs in redesigning the products, cause us to lose significant customers, subject us to liability for damages or divert our resources from other tasks, any one of which could materially adversely affect our business, financial condition, results of operations and prospects.

 

If we lose our rights to use software we currently license from third parties, we could be forced to seek alternative technology, which could increase our operating expenses and could adversely affect our ability to compete.

 

We license certain software used in our products from third parties, generally on a non-exclusive basis. The termination of any of these licenses, or the failure of the licensors to adequately maintain or update their software, could delay our ability to ship our products while we seek to implement alternative technology offered by other sources and could require significant unplanned investments on our part if we are forced to develop alternative technology internally. In addition, alternative technology may not be available to us on commercially reasonable terms from other sources. In the future, it may be necessary or desirable to obtain other third-party technology licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings. There is a risk that we will not be able to obtain licensing rights to the needed technology on commercially reasonable terms, or at all.

 

11

 

 

If sufficient radio spectrum is not allocated for use by our products or if we fail to obtain regulatory approval for our products, our ability to market our products may be restricted.

 

Radio communications are subject to significant regulation in North America, Europe, India and other jurisdictions in which we sell our products. Generally, our products must conform to a variety of national and international standards and requirements established to avoid interference among users of radio frequencies and to permit the interconnections of telecommunications equipment. In addition, our products are affected by the allocation and licensing (by auction or other means) of radio spectrum by governmental authorities. Such governmental authorities may not allocate or license sufficient radio spectrum for use by prospective customers of our products. Historically, in many developed countries, the lack of availability of commercial radio spectrum or the failure by governments to license that spectrum has inhibited the growth of wireless telecommunications networks.

 

In order to sell our products in any given jurisdiction, we must obtain regulatory approval for our products. Each jurisdiction in which we market our products has its own rules relating to such approval. Products that support emerging wireless telecommunications services can be marketed in a jurisdiction only if permitted by suitable radio spectrum allocations and regulations, and the process of establishing new regulations is complex and lengthy.

 

Any failure by regulatory authorities to allocate suitable and sufficient radio spectrum to potential customers in a timely manner could adversely and materially impact demand for our products and may result in the delay or loss of potential orders for our products. In addition, any failure by us to obtain or maintain the proper regulatory approvals for our products could have a material adverse effect on our business, financial condition and results of operations.

 

We are dependent upon our resellers in certain jurisdictions to provide localized support and other local services which assist us in avoiding certain costs and investments.

 

By selling our products in certain markets through resellers, we are able to avoid certain costs relating to operating in those markets, including but not limited to local support costs, costs of maintaining a local legal entity, administration costs and logistics. If we choose or are required to sell direct in these markets (due to customer preference, termination of a reseller relationship or other reasons), the cost advantages described will no longer be available to us, which could result in an increase in our operating costs.

 

If critical components or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business.

 

We and the contract manufacturers of our products rely on a limited number of suppliers for the raw materials and hardware components necessary to manufacture our products. We do not have any long-term agreements with any of our suppliers that obligate them to continue to sell their materials or products to us. Our reliance on these suppliers involves significant risks and uncertainties as to whether our suppliers will provide an adequate supply of required raw materials, component parts, and products. Lead-times for limited-source materials and components can be as long as six months, vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. From time to time, shortages in allocations of components have resulted in delays in filling orders. Shortages and delays in obtaining components in the future could impede our ability to meet customer orders. In addition, as the demand for these components and other products increases, it is likely that the price for these components will increase. If we or our contract manufacturers are unable to obtain the raw materials, including certain electrical components used in our telecom products or the helium gas used in our aerostat products to provide lift, and component parts in the quantities and the quality we require on a timely basis and at acceptable prices, we may not be able to deliver our products on a timely or cost-effective basis, which could cause our customers to terminate their contracts with us, increase our costs and materially harm our business, results of operations, and financial condition. Furthermore, if our suppliers or the suppliers of our contract manufacturers are unable or unwilling to supply the raw materials or components we or our contract manufacturers require, we will be forced to locate alternative suppliers and possibly redesign our products to accommodate components from alternative suppliers. This would likely cause significant delays in manufacturing and shipping our products to customers and could materially harm our business. 

 

12

 

 

Our dependence and exposure on component suppliers are heightened when we introduce new products. New products frequently include components that we do not use in other product lines. When we introduce new products, we must secure reliable sources of supply for those products at volumes that will be dictated by end-customer demand. Demand is often difficult to predict until the new product is better established. Constraints in our supply chain can slow the progress of new product rollouts, adversely affecting our business, results of operations and financial condition.

 

Our future profitability may depend on achieving cost reductions from increasing manufacturing quantities of our products. Failing to achieve such reductions in manufacturing costs could materially affect our business.

 

We have limited experience manufacturing certain of our products, particularly our tethered aerostat and drone products and our DragonWave microwave radio products, in high volumes and do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture our products in large quantities while maintaining our quality, speed, price, engineering and design standards. Our inability to develop such manufacturing processes and capabilities could have a material adverse effect on our business, financial condition, and results of operations. We expect our suppliers to experience an increase in demand for their products, and we may not have reliable access to supplies that we require and may not be able to purchase such materials or components at cost effective prices. There is no assurance that we will obtain any material labor and machinery cost reductions associated with higher production levels, and failure to achieve these cost reductions could adversely impact our business and financial results.

 

We rely primarily upon one outsourced manufacturer for manufacturing our DragonWave microwave radios and related components and we are exposed to the risk that this manufacturer will not be able to satisfy our manufacturing needs on a timely basis.

 

We do not have any internal manufacturing capabilities to produce our DragonWave microwave radios and related components and we rely upon a single outsourced manufacturer to manufacture such products. Substantially all of our microwave radio products are currently manufactured by Benchmark Electronics, Inc. See “Description of the Business – Manufacturing, Suppliers and Vendors.” Our ability to ship DragonWave’s products to our customers could be delayed or interrupted as a result of a variety of factors relating to our outsourced manufacturer, including:

 

our outsourced manufacturer not being obligated to manufacture our products on a long-term basis in any specific quantity or at any specific price;

 

early termination of, or failure to renew, contractual arrangements;

 

our failure to effectively manage our outsourced manufacturer relationship;

 

our outsourced manufacturer experiencing delays, disruptions or quality control problems in its manufacturing operations;

 

lead-times for required materials and components varying significantly and being dependent on factors such as the specific supplier, contract terms and the demand for each component at a given time;

 

underestimating our requirements, resulting in our outsourced manufacturer having inadequate materials and components required to produce our products, or overestimating our requirements, resulting in charges assessed by the outsourced manufacturers or liabilities for excess inventory, each of which could negatively affect our gross margins;

 

the possible absence of adequate capacity and reduced control over component availability, quality assurances, delivery schedules, manufacturing yields and costs; and

 

our outsourced manufacturer experiencing financial instability which could affect its ability to manufacture or deliver our products.

 

13

 

 

Although we believe that our outsourced manufacturer has sufficient economic incentive to perform our manufacturing, the resources devoted to these activities by it are not within our control, and there can be no assurance that manufacturing problems will not occur in the future. Insufficient supply or an interruption or stoppage of supply from our outsourced manufacturer or our inability to obtain additional manufacturers when and if needed, could have a material adverse effect on our business, results of operations and financial condition.

 

If any of our outsourced manufacturers are unable or unwilling to continue manufacturing our products in required volumes and quality levels, we will have to identify, qualify, select and implement acceptable alternative manufacturers, which would likely be time consuming and costly. In addition, an alternate source may not be available to us or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Therefore, any significant interruption in manufacturing would result in us being unable to deliver the affected products to meet our customer orders, which could have a material adverse effect on our business, results of operations and financial condition.

 

Our potential customers for our DragonWave radios and our Drone Aviation aerostat and drone products are likely to include U.S. Government or Government-related entities that are subject to appropriations by Congress. Reduced funding for defense procurement and research and development programs would likely adversely impact our ability to generate revenues. 

 

We anticipate that the majority of our revenue to be derived from our aerostats products and a substantial percentage of our revenue to be derived from our DragonWave radio product sales, at least in the foreseeable future, will come from U.S. Government and Government-related entities, including the U.S. Department of Defense and other departments and agencies. Government programs in which we may seek to participate, and contracts for tethered aerostats and drones or microwave radios, must compete with other programs for consideration during Congress’ budget and appropriations hearings, and may be affected by changes not only in political power and appointments but also general economic conditions and other factors beyond our control. A government closure based on a failure of Congress to agree on federal appropriations or the uncertainty surrounding a continuing resolution may result in termination or delay of federal funding opportunities we are pursuing. Reductions, extensions or terminations in a program in which we are seeking to participate or overall defense or other spending could adversely affect our ability to generate revenues and realize any profits. We cannot predict whether potential changes in security, defense, communications and intelligence priorities will afford opportunities for our business in terms of research and development or product contracts, but any reduction in government spending on such programs could negatively impact our ability to generate revenues. In addition, our ability to participate in U.S. Government programs may be affected by the adoption of new laws or regulations relating to government contracting or changes in existing laws or regulations, changes in political or public support for security and defense programs, and uncertainties associated with the current global threat environment and other geo-political matters.

 

Opportunities for expanded uses of our drone products in the United States are limited by federal laws and rulemaking.

 

The drone products we design and manufacture for use within the United States are limited by federal laws and rulemaking, including the commercial drone regulations (Part 107) adopted by the U.S. Federal Aviation Administration (the “FAA”) at the end of August 2016. Our ability to design, manufacture and release new products for use in the United States will be limited by federal law and regulations, which can be slow and subject to delays based on political turnover and disruptions in federal funding, among other reasons. The Part 107 rules limit the altitude, available airspace and weight of a drone and also the certification of remote pilots that can operate a drone for commercial purposes in the United States. We, or our customers, may seek waivers from the Part 107 rules for expanded operations; however, the processing of waivers is lengthy and uncertain. Political limits on the ability to issue new regulations could slow the growth of the aerostat and tethered drone market.

 

Some of our products may be subject to governmental regulations pertaining to exportation, which may limit the markets in which we can sell some of our products.

 

International sales of certain of our products, including our tethered aerostat and drone products, may be subject to U.S. laws, regulations and policies like the International Traffic in Arms Regulations (“ITAR”) and other export laws and regulations and may be subject to first obtaining licenses, clearances or authorizations from various regulatory entities. If we are not allowed to export our products or the clearance process is burdensome, our ability to generate revenue would be adversely affected. The failure to comply with any of these regulations could adversely affect our ability to conduct our business and generate revenues, as well as increase our operating costs. 

 

14

 

 

Economic conditions in the U.S. and worldwide could adversely affect our revenues.

 

Our revenues and operating results depend on the overall demand for our technologies and services. If the U.S. and worldwide economies weaken, either alone or in tandem with other factors beyond our control (including war, political unrest, pandemic, shifts in market demand for our services, actions by competitors or other causes), we may not be able to maintain or expand the growth of our revenue.

 

Sales to customers outside the United States or with international operations expose us to risks inherent in international sales.

 

During the six-month period ended June 30, 2020 and fiscal 2019, on a pro forma basis giving effect to the ComSovereign Acquisition as if such acquisition had occurred on January 10, 2019, approximately 18% and 15%, respectively, of our revenues were derived from sales outside of the United States. While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. Supporting our distributors operating in international markets may require significant resources and management attention and may subject us to regulatory, economic and political risks that are different from those in the United States. While our DragonWave subsidiary has limited operating experience in some international markets, we cannot assure you that our expansion efforts into other international markets will be successful. Our experience in the United States and other international markets in which we already have a presence may not be relevant to our ability to expand in other emerging markets. Our international expansion efforts may not be successful in creating further demand for our products outside of the United States or in effectively selling our products in the international markets we enter. In addition, we face risks in doing business internationally that could adversely affect our business, including:

 

the need and expense to localize and adapt our products for specific countries, including translation into foreign languages, and ensuring that our products enable our customers to comply with local telecommunications industry laws and regulations, some of which are frequently changing;

 

data privacy laws which require that customer data be stored and processed in a designated territory;

 

difficulties in staffing and managing foreign operations, including employee laws and regulations;

 

different pricing environments, longer sales cycles and longer accounts receivable payment cycles, and collections issues;

 

new and different sources of competition;

 

weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

 

laws and business practices favoring local competitors;

 

compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection, and anti-bribery laws and regulations;

 

increased financial accounting and reporting burdens and complexities;

 

restrictions on the transfer of funds;

 

15

 

 

our ability to repatriate funds from abroad without adverse tax consequences;

 

adverse tax consequences, including the potential for required withholding taxes;

 

fluctuations in the exchange rates of foreign currency in which our foreign revenues or expenses may be denominated;

 

changes in trade relations and trade policy, including the status of trade relations between the United States and China, and the implementation of or changes to trade sanctions, tariffs, and embargoes;

 

public health crises, such as epidemics and pandemics, including COVID-19; and

 

unstable regional and economic political conditions in the markets in which we operate.

 

Any of the foregoing factors could have a material adverse effect on our business, results of operations, and financial condition. Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks, which could adversely affect our business.

 

We intend to pursue strategic transactions in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.

 

We intend to continue to pursue potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses, products or technologies that expand, complement or otherwise relate to our current or future business. We also intend to consider, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. However, we may be unable to find suitable acquisition candidates or other suitable partners or products or may be unable to complete acquisitions or strategic transactions on favorable terms, if at all. For example, while the historical financial and operating performance or an acquisition or joint venture partner are among the criteria we evaluate in determining which acquisition or joint venture targets to pursue, there can be no assurance that any business or assets we acquire or contract with will continue to perform in accordance with past practices or will achieve financial or operating results that are consistent with or exceed past results. Any such failure could adversely affect our business, financial condition or results of operations.

 

In addition, any completed acquisition or other transaction may not result in the intended benefits for other reasons and any completed acquisition or other transaction will create or involve a number of other risks such as, among others:

 

the need to integrate and manage the businesses and products acquired with our own business and products;

 

additional demands on our resources, systems, procedures and controls;

  

disruption of our ongoing business; and

  

diversion of management’s attention from other business concerns.

  

Moreover, these transactions could involve:

 

substantial investment of funds or financings by issuance of debt or equity securities that could result in dilution to our stockholders, impact our ability to service our debt within scheduled repayment terms or include covenants or other restrictions that would impede our ability to manage our operations;

 

substantial investment with respect to technology transfers and operational integration; and

     

the acquisition or disposition of product lines or businesses.

 

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Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of existing stockholders or result in the issuance of or assumption of debt.

 

Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources of our company. Any such activity may not be successful in generating revenue, income or other returns to us, and the resources committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access capital markets on acceptable terms or at all, we may not be able to consummate acquisitions or may have to do so on the basis of a less than optimal capital structure. Our inability to (i) take advantage of growth opportunities for our business or for our products or (ii) address risks associated with acquisitions or investments in businesses may negatively affect our operating results. Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment or charges to earnings associated with any acquisition or investment activity may materially reduce our earnings. These future acquisitions or joint ventures may not result in their anticipated benefits, and we may not be able to properly integrate acquired products, technologies or businesses with our existing products and operations or combine personnel and cultures.  Failure to do so could deprive us of the intended benefits of those acquisitions.

 

We may be unable to successfully integrate our recent and future acquisitions, which could adversely affect our business, financial condition, results of operations and prospects.

 

In November 2019, we acquired the business and operations of ComSovereign, which itself had acquired five companies in 2019, including VEO and InduraPower in January 2019 and DragonWave, Lextrum and Silver Bullet in March 2019.  In addition, we completed the acquisition of the business and operations of Fast Plastic Parts, LLC in March 2020 and the acquisition of VNC in July 2020. In August 2020, we entered into an agreement for the acquisition of Fastback and we currently are in discussions for the acquisition of an additional company. The operation and management of recent acquisitions, or any of our future acquisitions, may adversely affect our existing results of operations or we may not be able to effectively manage any growth resulting from these transactions. Before we acquired them, these companies operated independently of one another. Until we establish centralized financial, management information and other administrative systems, we will rely on the separate systems of these companies, including their financial reporting systems.

 

Our success will depend, in part, on the extent to which we are able to merge these functions, eliminate the unnecessary duplication of other functions and otherwise integrate these companies (and any additional businesses with which we may combine in the future) into a cohesive, efficient enterprise. This integration process may entail significant costs and delays could occur. Our failure to integrate the operations of these companies successfully could adversely affect our business, financial condition, results of operations and prospects. To the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might adversely affect our business, financial condition, results of operations and prospects, as well as our credit and bonding capacity.

 

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If we fail to protect our intellectual property rights, we could lose our ability to compete in the marketplace.

 

Our intellectual property and proprietary rights are important to our ability to remain competitive and for the success of our products and our business. Patent protection can be limited and not all intellectual property is or can be patented. We rely on a combination of patent, trademark, copyright, and trade secret laws as well as confidentiality agreements and procedures, non-competition agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand.  We have little protection when we must rely on trade secrets and nondisclosure agreements.   Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees or competitors. Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior to our technologies and/or products, which could result in decreased revenues for us. Moreover, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management’s attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance their products. Our inability to adequately protect our intellectual property rights could adversely affect our business and financial condition and the value of our brand and other intangible assets.

 

If we fail to protect our intellectual property rights, our ability to pursue the development of our technologies and products would be negatively affected.

 

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property and technologies. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. We have numerous issued patents, and have filed several additional patent applications, outside the United States, and many companies have had difficulty protecting their proprietary rights in foreign countries. We may not be able to prevent misappropriation of our proprietary rights.  

  

The patent process is subject to numerous risks and uncertainties and there can be no assurance that we will be successful in protecting our technologies by obtaining and enforcing patents. These risks and uncertainties include the following:

 

patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage;

     

our competitors, many of which have substantially greater resources than us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and license our technologies either in the United States or in international markets;

     

there may be significant pressure on the United States government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for technologies that prove successful as a matter of public policy regarding security concerns;

     

countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.

 

Moreover, any patents issued to us may not provide us with meaningful protection, or others may challenge, circumvent or narrow our patents. Third parties may also independently develop technologies similar to ours or design around any patents on our technologies.

  

In addition, the United States Patent and Trademark Office and patent offices in other jurisdictions have often required that patent applications concerning software inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents, the patents may be substantially narrower than anticipated.

 

Our success depends on our patents, patent applications, patents that may be licensed exclusively to us, and other patents to which we may obtain assignment or licenses. We may not be aware, however, of all patents, published applications, or published literature that may affect our business by blocking our ability to commercialize our products, preventing the patentability of products or services by us or our licensors, or covering the same or similar technologies that may invalidate our patents, limit the scope of our future patent claims or adversely affect our ability to market our products and services.

 

In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.

 

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Patent protection and other intellectual property protection are crucial to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.

 

Other companies may claim that we infringe their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.

 

We do not believe our product technologies infringe the proprietary rights of any third party, but claims of infringement are becoming increasingly common and third parties may assert infringement claims against us.  It may be difficult or impossible to identify, prior to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party, either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license for or otherwise restrict our use of the intellectual property rights of third parties.  If we are required to obtain licenses to use any third-party technology, we would have to pay royalties, which may significantly reduce any profit on our products.  In addition, any such litigation could be expensive and disruptive to our ability to generate revenue or enter into new market opportunities.  If any of our products are found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products altogether. 

 

Security breaches, including cybersecurity incidents and other disruptions could compromise our information, expose us to liability and harm our reputation and business.

 

In the ordinary course of our business we collect and store sensitive data, including intellectual property, personal information, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees in our data centers and on our networks. The secure maintenance and transmission of this information is critical to our operations and business strategy. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information. Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate personal or confidential business information. In addition, an associate, contractor, or other third-party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. Despite the security measures we have in place and any additional measures we may implement in the future to safeguard our systems and to mitigate potential security risks, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches. Any such compromise of our data security and access, public disclosure, or loss of personal or confidential business information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our operations, damage to our reputation, loss of our customers’ willingness to transact business with us, and subject us to additional costs and liabilities which could materially adversely affect our business.

 

We do not carry insurance against all potential risks and losses, and our insurance might be inadequate to cover all of our losses or liabilities or may not be available on commercially reasonable terms.

 

We have limited, and potentially insufficient, insurance coverage for expenses and losses that may arise in connection with the quality of our products, property damage, work-related accidents and occupational illnesses, natural disasters and environmental contamination. In addition, we have no insurance coverage for loss of profits or other losses caused by the death or incapacitation of our senior management. As a result, losses or liabilities arising from these or other such events could increase our costs and could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We intend to reevaluate the purchase of insurance, policy limits and terms annually or when circumstances warrant from time to time. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions than we could obtain now. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable, and we may elect to continue to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations in certain jurisdictions, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations.

 

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The nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnity.

 

We develop and sell products where insurance or indemnification may not be available, including:

 

designing and developing products using advanced and unproven technologies and tethered aerostats and drones in intelligence and homeland security applications that are intended to operate in high demand, high risk situations; and

 

designing and developing products to collect, distribute and analyze various types of information.

 

Failure of certain of our products could result in loss of life or property damage. Certain products may raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may raise new legal issues.  Indemnification to cover potential claims or liabilities resulting from a failure of technologies developed or deployed may be available in certain circumstances, but not in others.  We are not able to maintain insurance to protect against all operational risks and uncertainties. Substantial claims resulting from an accident, failure of our product, or liability arising from our products in excess of any indemnity or insurance coverage (or for which indemnity or insurance is not available or was not obtained) could harm our financial condition, cash flows, and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively.

 

There may be health and safety risks relating to wireless products.

 

Our wireless communications products emit electromagnetic radiation. In recent years, there has been publicity regarding, and increased public attention with respect to, the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Health and safety issues related to our products may arise that could lead to litigation or other actions against us or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market our products and, in turn, could harm our business and results of operations.

 

If a successful product liability claim were made against us, our business could be seriously harmed.

 

Our agreements with our customers typically, although not always, contain provisions designed to limit our exposure to potential product liability claims. Despite this, it is possible that these limitations of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. We have not experienced a material product liability claim to date; however, the sale and support of our products may entail the risk of those claims, which are likely to be substantial in light of the use of our products in critical applications. A successful product liability claim could result in significant monetary liability to us and could seriously harm our business.

 

Misuse of our drone products or unmanned products manufactured by other companies could result in injury, damage and/or negative press that could depress the market for unmanned systems.

 

If any of our drone products are misused by our customers or their designees, or by the operators of other unmanned systems, in violation of the new commercial drone regulations (Part 107) adopted by the FAA or other federal, state or local regulations, such misuse could result in injuries to the operators or bystanders, damage to property and/or negative press that could result in a reduction in the market for aerostats or tethered drones in the future. The FAA, the press and the public have been closely monitoring the growth of unmanned systems in the United States. For instance, the FAA regularly publishes reports of drone sighting and reported drone strikes of manned aircraft. One or more incidents involving unmanned systems that results in injury or death of individuals, or damaged property could result in negative press that could put at risk current and future growth.

 

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Our tethered aerostat and drone business and operations are subject to the risks of hurricanes, tropical storms, and other natural disasters.

 

The corporate headquarters and manufacturing operations of our tethered aerostat and drone business operations are located in Jacksonville, Florida, where major hurricanes, tropical storms, and other severe weather conditions have occurred. A significant natural disaster, such as a hurricane, tropical storm, or other severe weather storm could severely affect our ability to conduct normal business operations for that product line, and as a result, our future operating results could be materially and adversely affected.

 

If we are unable to recruit and retain key management, technical and sales personnel, our business would be negatively affected.

 

For our business to be successful, we need to attract and retain highly-qualified technical, management and sales personnel. The failure to recruit additional key personnel when needed with specific qualifications and on acceptable terms or to retain good relationships with our partners might impede our ability to continue to develop, commercialize and sell our products. To the extent the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain such employees. The loss of any members of our management team may also delay or impair achievement of our business objectives and result in business disruptions due to the time needed for their replacements to be recruited and become familiar with our business.  We face competition for qualified personnel from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel needed for our business to succeed.

 

If we are required to reclassify independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial condition, results of operations and prospects.

 

We engage a significant number of independent contractors in our operations, particularly in our research and development efforts, for whom we do not pay or withhold any federal, state or provincial employment tax. There are a number of different tests used in determining whether an individual is an employee or an independent contractor and such tests generally take into account multiple factors. There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent contractors. Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties. If we are required to pay employer taxes or pay federal withholding with respect to prior periods with respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business, financial condition, results of operations and prospects.

 

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We have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

 

We have historically had a small internal accounting and finance staff with limited financial accounting systems. This lack of adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for the period from January 10, 2019 (inception) through December 31, 2019, our management team identified material weaknesses relating to, among other matters:

 

management lacks personnel with sufficient knowledge and experience with U.S. GAAP to prepare and review our financial statements, notes and supporting schedules;

 

we did not effectively segregate certain accounting duties due to the small size of our accounting staff;

 

we have identified a significant number of material transactions that were not properly recorded or were not recorded at all in the subsidiary ledgers;

 

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

 

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

 

We have taken steps, and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting systems and to implement new policies, procedures and controls. If we do not successfully remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.

  

Risks Relating to our Common Stock and this Offering

 

Our common stock has a limited trading market, which could affect your ability to sell shares of our common stock and the price you may receive for our common stock.

 

Our common stock is currently traded in the over-the-counter market on the OTCQB maintained by OTC Markets, Inc. under the symbol “COMS”. However, as the OTCQB is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than the NYSE American or other national securities exchanges, there has been only limited trading activity in our common stock, and we have a relatively small public float compared to the number of our shares outstanding. Further, while we have applied to list our common stock on the NYSE American exchange, even if our common stock is listed on the NYSE American, we cannot predict the extent to which investors’ interest in our common stock will provide an active and liquid trading market. If an active trading market for our common stock does not develop or is not sustained following this offering, you may not be able to sell your shares quickly or at the market price. Our ability to raise capital to continue to fund operations by selling shares of our common stock and our ability to acquire other companies or technologies by using shares of our common stock as consideration may also be impaired. The initial public offering price of our common stock will be determined by negotiations between us and the underwriters and may not be indicative of the market prices of our common stock that will prevail in the trading market.

 

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Our stock price may be volatile, which could result in substantial losses to investors and litigation.

 

In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance.  The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:

 

the results of operating and financial performance and prospects of other companies in our industry;

 

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;

 

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the telecommunications services and staffing industry;

 

changes in government policies in the United States and, as our international business increases, in other foreign countries;

  

changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;

 

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

changes in accounting standards, policies, guidance, interpretations or principles;

 

any lawsuit involving us, our services or our products;

 

arrival and departure of key personnel;

  

sales of common stock by us, our investors or members of our management team; and

 

changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.

 

Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance.  This may prevent you from being able to sell your shares at or above the price you paid for your shares of our common stock, if at all.  In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company.  Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.

 

Prior to the completion of this offering, there will have been no public trading market for our warrants. An active public trading market for the warrants may not develop, which may affect the market price and liquidity of the warrants.

 

The offering under this prospectus is an initial public offering of our warrants. Prior to the closing of this offering, there will have been no public market for any of our warrants. An active public trading market for our warrants offered under this prospectus may not develop after the completion of this offering. If an active trading market for our warrants does not develop after this offering, the market price and liquidity of the warrants offered under this prospectus may be materially and adversely affected.

 

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The warrants offered by this prospectus may not have any value.

 

The warrants offered by this prospectus will be exercisable for five years from the date of initial issuance at an initial exercise price equal to 125% of the public offering price per unit set forth on the cover page of this prospectus. There can be no assurance that the market price of our common stock will ever equal or exceed the exercise price of the warrants offered by this prospectus. In the event that our common stock price does not exceed the exercise price of such warrants during the period when such warrants are exercisable, the warrants may not have any value.

 

A warrant does not entitle the holder to any rights as common stockholders until the holder exercises the warrant for a share of our common stock.

 

Until you acquire shares of our common stock upon exercise of your warrants, your warrants will not provide you any rights as a common stockholder. Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

 

We have never declared or paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. 

 

We currently intend to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay cash dividends will be dependent upon our financial condition, operating results, capital requirements, applicable contractual restrictions and other such factors as our board of directors may deem relevant. 

 

The sale or availability for sale of substantial amounts of our common stock could adversely affect the market price of our common stock.

 

Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through common stock offerings. Our executive officers and directors beneficially own, collectively, a substantial percentage of our outstanding common stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.

 

In connection with the ComSovereign Acquisition in November 2019, we issued in the aggregate 95,000,000 shares of our common stock, all of which shares were restricted shares that may be sold in the public markets pursuant to Rule 144 under the Securities Act on and after November 27, 2020. As a result of such acquisition, an additional 2,300,000 restricted shares of our common stock held by certain current and former employees vested, which shares may be sold in the public markets pursuant to Rule 144 under the Securities Act on and after November 27, 2020. In addition, as of June 30, 2020, there were outstanding options and warrants to purchase an aggregate of 5,471,508 shares of our common stock at a weighted-average exercise price of $0.73 per share, all of which were exercisable as of such date. At such date, we also had outstanding $535,714 aggregate principal amount of convertible debt plus accrued interest thereon, with a weighted average conversion price of $0.83 per share of common stock. The exercise of options at prices below the market price of our common stock could adversely affect the price of shares of our common stock. Any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder.

 

Upon the closing of this offering, our directors and executive officers will own or control approximately          % of our outstanding common stock, which may limit your ability to propose new management or influence the overall direction of the business; this concentration of control may also discourage potential takeovers that could otherwise provide a premium to you.

 

Upon the closing of this offering, our executive officers and directors will beneficially own or control approximately           % of our outstanding common stock, or approximately           % of the underwriters exercise their over-allotment option in full. These persons will have the ability to substantially influence all matters submitted to our stockholders for approval and to substantially influence or control our management and affairs, including extraordinary transactions such as mergers and other changes of corporate control, and going private transactions.

 

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If you purchase shares of our common stock in this offering, you will incur immediate dilution in the book value of your shares.

 

The public offering price of our common stock will be substantially higher than the as adjusted net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, you will pay a price per share of our common stock that substantially exceeds the book value of our tangible assets after subtracting our liabilities. Based on an assumed public offering price of $         per share, you will experience immediate dilution of $         per share, representing the difference between our net tangible book value per share, after giving effect to this offering, and the assumed public offering price. Further, the future exercise of any outstanding options or warrants to purchase shares of our common stock, or the conversion of outstanding convertible indebtedness into shares of our common stock, will cause you to experience additional dilution. See “Dilution.” 

 

We may need to raise additional capital in the future. Additional capital may not be available to us on reasonable terms, if at all, when or as we require. If we issue additional shares of our common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing stockholders would experience further dilution and could trigger anti-dilution provisions in outstanding warrants.

 

Assuming we meet our current operating budget, we do not expect to need capital in the short-term. However, we may need to raise additional capital in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional working capital when required would have a material adverse effect on our business and financial condition and may result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.

 

Our officers and directors are entitled to indemnification from us for liabilities under our articles of incorporation, which could be costly to us and may discourage the exercise of stockholder rights.

 

Our articles of incorporation provide that we possess and may exercise all powers of indemnification of our officers, directors, employees, agents and other persons and our bylaws also require us to indemnify our officers and directors as permitted under the provisions of the Nevada Revised Statutes (“NRS”). We also have contractual indemnification obligations under our agreements with our directors and officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and stockholders.

 

Our bylaws and Nevada law may discourage, delay or prevent a change of control of our company or changes in our management, which could have the result of depressing the trading price of our common stock.

 

Certain anti-takeover provisions of Nevada law could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition arguably could benefit our stockholders.

 

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Nevada’s “combinations with interested stockholders” statutes, NRS 78.411 through 78.444, inclusive, prohibit specified types of business “combinations” between certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination, or the transaction by which such person becomes an “interested stockholder”, in advance, or unless the combination is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder, its affiliates and associates. Further, in the absence of prior approval certain restrictions may apply even after such two-year period. However, these statutes do not apply to any combination of a corporation and an interested stockholder after the expiration of four years after the person first became an interested stockholder. For purposes of these statutes, an “interested stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most significant transactions between a corporation and an “interested stockholder.” These statutes generally apply to Nevada corporations with 200 or more stockholders of record. However, a Nevada corporation may elect in its articles of incorporation not to be governed by these particular laws, but if such election is not made in the corporation’s original articles of incorporation, the amendment (1) must be approved by the affirmative vote of the holders of stock representing a majority of the outstanding voting power of the corporation not beneficially owned by interested stockholders or their affiliates and associates, and (2) is not effective until 18 months after the vote approving the amendment and does not apply to any combination with a person who first became an interested stockholder on or before the effective date of the amendment. We did not make such an election in our original articles of incorporation and have not amended our articles of incorporation to so elect.

  

Nevada’s “acquisition of controlling interest” statutes, NRS 78.378 through 78.3793, inclusive, contain provisions governing the acquisition of a controlling interest in certain Nevada corporations. These “control share” laws provide generally that any person that acquires a “controlling interest” in certain Nevada corporations may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. Our bylaws provide that these statutes do not apply to us or any acquisition of our common stock. Absent such provision in our bylaws, these laws would apply to us as of a particular date if we were to have 200 or more stockholders of record (at least 100 of whom have addresses in Nevada appearing on our stock ledger at all times during the 90 days immediately preceding that date) and do business in the State of Nevada directly or through an affiliated corporation, unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling interest provide otherwise. These laws provide that a person acquires a “controlling interest” whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would enable that person to exercise (1) one fifth or more, but less than one third, (2) one third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control shares” to which the voting restrictions described above apply.

 

Various provisions of our bylaws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder might consider in his or her best interest. Our bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the election of directors, and except as provided by Nevada law, our board of directors shall have the power to adopt, amend or repeal the bylaws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be consistent with your interests, and they may make changes to the bylaws that are not in line with your concerns.

 

Nevada law also provides that directors may resist a change or potential change in control if the directors determine that the change is opposed to, or not in the best interests of, the corporation. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock will likely decline.

 

The trading market for our common stock will rely in part on the research and reports that equity research analysts, over whom we have no control, publish about us and our business.  We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the market price for our common stock could decline. In the event we obtain securities or industry analyst coverage, the market price of our common stock could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it is inaccurate, or cease publishing reports about us or our business.

 

Our articles of incorporation allow for our board of directors to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of our preferred stock. Currently our board of directors has the authority to designate and issue up to 100,000,000 shares of our “blank check” preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by those forward-looking statements.

 

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus constitute “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. Examples of forward-looking statements include, but are not limited to, statements about the following: 

 

our prospects, including our future business, revenues, expenses, net income, earnings per share, gross margins, profitability, cash flows, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;

 

the potential impact of COVID-19 on our business and results of operations;

 

the effects on our business, financial condition and results of operations of current and future economic, business, market and regulatory conditions, including the current economic and market conditions and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;

 

the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flows, capital expenditures, liquidity, financial condition and results of operations;

 

our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;

 

our markets, including our market position and our market share;

 

our ability to successfully develop, operate, grow and diversify our operations and businesses;

 

our business plans, strategies, goals and objectives, and our ability to successfully achieve them;

 

the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability of borrowings under our credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;

 

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the value of our assets and businesses, including the revenues, profits and cash flows they are capable of delivering in the future;

 

the effects on our business operations, financial results, and prospects of business acquisitions, combinations, sales, alliances, ventures and other similar business transactions and relationships;

 

industry trends and customer preferences and the demand for our products, services, technologies and systems; and

 

the nature and intensity of our competition, and our ability to successfully compete in our markets.

 

These statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly-available information with respect to the factors upon which our business strategy is based, or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time.

 

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. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in this prospectus.  

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $          (or approximately $           if the underwriter exercises in full its option to purchase up to          additional shares of common stock) based upon an assumed offering price per unit of $         (the closing price of our common stock on          , 2020).

 

We intend to use the net proceeds from the sale of the securities offered hereby for the following principal purposes:

 

Use of Net Proceeds   $ (in millions)*     %  
Repay outstanding indebtedness                     
Acquisition of Fastback                
Acquisition of real estate                
Inventory production and marketing                
General corporate purposes and working capital                
Total             100  

____________

 

*Assuming the over-allotment option is not exercised.

 

We will allocate approximately              % of the net proceeds of this offering to repay in full the following outstanding indebtedness.  Additional information with respect to such indebtedness is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Line of Credit and Debt Agreements.”

 

Obligor  Outstanding
Principal
Amount at
June 30,
2020
   

Current
Contract
Interest Rate

   Maturity
Date
   

Principal Use of
Loan Proceeds

 
                 
                  
                 

 

We will allocate $1,250,000, or approximately             % of the net proceeds of this offering, to pay the entire cash portion of the purchase price of Fastback. Although we presently anticipate closing our acquisition of Fastback promptly following the consummation of this offering, there is no assurance we can do so at that time, if at all. If we do not consummate the acquisition of Fastback, we will use such proceeds for general corporate purposes. See “Prospectus Summary – Our Company – The ComSovereign Group.”

 

We will allocate $1,500,000, or approximately             % of the net proceeds of this offering, to pay a portion of the $6.125 million purchase price of our acquisition of a 140,000-square-foot building on 12.7 acres in Tucson, Arizona that we intend to use for manufacturing and office space for our DragonWave, VNC, Drone Aviation, InduraPower and Lextrum subsidiaries. Although we presently anticipate closing our acquisition of this building and real estate in September 2020, there is no assurance we can do so at that time, if at all. If we do not consummate the acquisition of this building and real estate, we will use such proceeds for general corporate purposes.

 

We would receive additional gross proceeds of $          if all of the warrants included in the units offered hereby are exercised, assuming no exercise of the underwriters’ over-allotment option. We intend to use any such proceeds for working capital and general corporate purposes. General corporate purposes may include capital expenditures.

 

Upon the completion of the offering, we expect to have sufficient working capital to support our growth strategies and fund ongoing operations for at least the next 12 months. While we intend to allocate the net funds available to us for the purposes outlined above, there may be circumstances under which for sound business reasons, a reallocation of funds may be necessary.  As a result, our management will retain broad discretion over the allocation of the net proceeds of this offering. See “Risk Factors.”.

 

Until we use the net proceeds of this  offering in our business, such funds will be managed through a treasury management program under the supervision of our Chief Financial Officer and invested in short-term, interest-bearing investments, which may include interest-bearing bank accounts, money market funds, certificates of deposit and U.S. government securities.

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

 

Market Information For Common Stock 

 

Our common stock is traded under the ticker symbol “COMS” on the OTCQB tier of the OTC Markets, Inc. Prior to January 13, 2020, our common stock traded under the ticker symbol “DRNE”.

 

Holders

 

As of July 31, 2020, there were approximately 369 stockholders of record, according to the records of our transfer agent, and an unknown number of additional holders of common stock held in ’street name’.

 

Dividends

 

We have not declared any common stock dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, is within the discretion of our board of directors and will depend upon, among other things, our earnings, capital requirements and financial condition, as well as other relevant factors. There are no material restrictions in our Articles of Incorporation, as amended, or Bylaws that restrict us from declaring dividends.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of June 30, 2020, there were 10,000,0000 shares authorized under equity incentive plans.

  

Options granted in the future under the Incentive Plan are within the discretion of our board of directors. The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans as of December 31, 2019.

 

Plan Category 

(a)

Number of

Securities to be

Issued Upon

Exercise of Outstanding

Options

  

(b)

Weighted-

Average

Exercise Price

of Outstanding

Options

  

(c)

Number of

Securities

Remaining

Available

for Future

Issuance Under

Equity

Compensation

Plans

 
Equity compensation plans approved by security holders   5,813,500   $N/A    6,186,500 
Equity compensation plans not approved by security holders   0    N/A    0 
Total   5,813,500    N/A    6,186,500 

 

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CAPITALIZATION

 

The following table sets forth our actual cash and capitalization, each as of June 30, 2020:

 

on an actual basis; and

 

on a pro forma as adjusted basis to reflect (i) the sale by us of             units at an assumed offering price to the public of $            per unit (the closing price of our common stock on                , 2020), and after deducting the underwriting discount and estimated offering expenses payable by us and the receipt by us of the expected net proceeds of such sale, and the application of such net proceeds as described herein under the caption “Use of Proceeds,” and (ii) our planned conversion of current liabilities in the aggregate amount of $             to common stock at or prior to the closing of this offering.

 

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.  You should read the information in this table together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

   As of June 30,
2020
 
   Actual   Pro forma
as adjusted
 
   (Unaudited) 
Cash and cash equivalents  $368,685           
           
Current portion of long-term debt, net of unamortized discounts and debt issuance costs   11,886,502      
           
Notes payable – related party   1,492,953      
           
Stockholders’ Equity:          
           
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2019         
Common stock, par value $0.0001 per share, 300,000,000 shares authorized, 128,846,064 shares issued and outstanding as of June 30, 2020 and                 shares issued and outstanding pro forma as adjusted.   12,885      
Additional paid-in capital   130,957,464      
Shares to be issued, common shares         
Accumulated deficit   (42,136,478)     
Accumulated other comprehensive loss   (21,699)     
Treasury stock, at cost, 100,000 shares as of June 30, 2020   (50,000)     
Total stockholders’ equity  $88,762,172      
Total capitalization  $102,141,627      

 

The preceding table does not include:

 

An aggregate of 406,508 shares of common stock issuable upon the exercise of outstanding stock purchase warrants with a weighted average exercise price of $1.62 per share that expire between November 20, 2020 and April 28, 2025;

 

An aggregate of 648,148 shares of common stock issuable upon the conversion of outstanding convertible indebtedness with a weighted average conversion price of $0.83 per share that matures prior to October 31, 2022;

 

An aggregate of 5,065,000 shares of common stock issuable upon the exercise of options with a weighted average exercise price of $0.65 per share granted under our long-term equity incentive plans as of June 30, 2020;

 

an estimated                  shares of common stock issuable upon the exercise of the warrants included in the units (or                  shares of common stock if the underwriters exercise their over-allotment option in full with respect to the warrants contained in the units); and

 

                 shares of common stock issuable upon the exercise of the underwriters’ over-allotment option to purchase additional shares of common stock included in the units (or             shares of common stock if the underwriters exercise their over-allotment option in full with respect to the common stock contained in the units).

 

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DILUTION

 

If you invest in our securities in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share of common stock and the as adjusted net tangible book value per share after giving effect to this offering.

 

The net tangible book value of our company as of June 30, 2020 was $(14,176,211), or approximately $(0.11) per share of common stock (based upon 128,846,064 shares of common stock outstanding). Net tangible book value per share is determined by dividing the net tangible book value of our company (total tangible assets less total liabilities) by the number of outstanding shares of our common stock.

 

After giving effect to the issuance and sale in this offering of            units at an assumed public offering price of $             per share of common stock included in each unit, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, but assuming no exercise of the warrants included in the units offered hereby or the warrants granted to the underwriter, our as adjusted net tangible book value on June 30, 2020, would have been approximately $         , or $             per share of common stock. This represents an immediate dilution in the as adjusted net tangible book value of $            per share of common stock to investors purchasing our common stock in this offering.

 

The following table illustrates the range of immediate dilution to new investors:

 

Assumed public offering price per share  $ 
Net tangible book value per share as of June 30, 2020  $ 
Increase in net tangible book value per share attributable to new investors in this offering  $  
As adjusted net tangible book value per share after this offering  $ 
Dilution per share to investors in this offering  $ 

 

The information above assumes that the underwriters do not exercise their over- allotment option. If the underwriters exercise their over- allotment option in full, the as adjusted net tangible book value will increase to $         per share, representing an immediate increase to existing stockholders of $         per share and an immediate dilution of $         per share to new investors. If any shares are issued upon exercise of outstanding options or warrants, new investors will experience further dilution.

 

The number of shares of our common stock that will be issued and outstanding immediately after this offering as shown above is based on 128,846,064 shares outstanding as of June 30, 2020.

 

A $1.00 increase in the assumed public offering price would increase our as adjusted net tangible book value per share after this offering by $          and decrease the dilution per share to investors purchasing shares by $         , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 decrease in the assumed public offering would decrease our as adjusted net tangible book value per share after this offering by $         and increase the dilution per share to investors purchasing shares by $         , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. A 100,000 share increase in the number of shares offered by us, at an assumed public offering price of $          per share, would increase our as adjusted net tangible book value per share after this offering by $         and would decrease the dilution per share to investors by $         , after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a 100,000 share decrease in the number of share offered by us, at an assumed public offering price of $         per share, would decrease our as adjusted net tangible book value per share after this offering by $          and would increase the dilution per share to investors purchasing shares by $       , after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If you purchase units in this offering, your interest will be immediately and substantially diluted to the extent of the difference between the assumed public offering price per share of our common stock included in each unit and the as adjusted net tangible book value per share of our common stock after giving effect to this offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 prospectus. 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 prospectus.

 

Business Overview

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency 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, broad product offerings, high-quality and cost-effective customer solutions, as well as 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.

 

Corporate History

 

We were incorporated in Nevada on April 17, 2014, as a wholly owned subsidiary of MacroSolve, Inc., an Oklahoma corporation (“MacroSolve”), and effective April 30, 2014, in order to consolidate our operations into an entity incorporated in Nevada, MacroSolve merged with and into us. On June 3, 2014, we acquired Drone Aviation Corp. through a share exchange transaction, and on March 26, 2015, Drone Aviation Corp. merged with and into us. As a result of the share exchange and merger with Drone Aviation Corp., we acquired Drone Aviation Corp.’s subsidiary, Lighter Than Air Systems Corp., which does business under the name Drone Aviation.

 

On November 27, 2019, we completed the ComSovereign Acquisition in a stock-for-stock transaction with a total purchase price of approximately $75 million. The ComSovereign Acquisition was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquirer and our company as the accounting acquiree. As a result, our consolidated financial statements included in this prospectus are those of ComSovereign from the date of its incorporation (January 10, 2019) through December 31, 2019. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only from the date of acquisition of ComSovereign, November 27, 2019.

 

ComSovereign Corp. was incorporated in the state of Delaware on January 10, 2019 and commenced operations through a series of acquisitions.

 

On January 31, 2019, ComSovereign acquired the capital stock of VEO, a San Diego, California-based research and development company innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment.

 

On January 31, 2019, ComSovereign acquired the capital stock of InduraPower, a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. 

 

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On March 4, 2019, ComSovereign acquired the capital stock of Silver Bullet, a California-based engineering firm that designs and develops next generation network systems and components, including large scale network protocol development, software-defined radio systems and wireless network designs.

  

On April 1, 2019, ComSovereign acquired the equity securities of DragonWave, a Dallas-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 the U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America.

 

On April 1, 2019, ComSovereign acquired the capital stock of Lextrum, a Tucson, 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 November 30, 2019, following our acquisition of ComSovereign, we changed our corporate name to ComSovereign Holding Corp.

 

On March 6, 2020, our newly-formed subsidiary, Sovereign Plastics, acquired substantially all of the assets of a Colorado 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 of our subsidiaries. We do not expect the revenues of Sovereign Plastics from sales to third parties to be material.

 

On July 6, 2020, we acquired the equity securities of VNC, a Virginia-based EDGE telecom access radio developer and a provider of both 4G LTE/Advanced and 5G capable radio equipment. Additionally, VNC has virtualized and patented an entire LTE Advanced network core solution that we believe eliminates much of the costly backbone equipment of telecom networks. VNC also has developed and is currently selling a rapidly-deployable network system that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world.

 

Each of our subsidiaries was acquired to address a different opportunity or sector within the North American telecom infrastructure and service market.

 

Principle of Consolidation

 

Our consolidated financial statements included in this prospectus include our accounts and those of our subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO and InduraPower.

 

Segment Information

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer, who currently reviews the financial performance and the results of operations of our operating subsidiaries on a consolidated basis when making decisions about allocating resources and assessing performance of our company. Accordingly, we currently consider ourselves to be in a single reporting segment for reporting purposes focused on the North American development, manufacturing and production of products and services for the telecom infrastructure market.

 

As we are still in the early stages of developing our company, we have historically managed our subsidiaries within this single operating segment and do not assess the performance of our product lines or geographic regions or other measures of income or expense, such as product expense, operating income or net income. Each of our subsidiaries is operated under the same senior management of our company, and we view the operations of our subsidiaries as a whole for making business decisions. Employees of one subsidiary, particularly mechanical engineers, are often called upon to assist in the operations of another subsidiary. As the development of our company matures and we move toward full scale production with increased marketing efforts, we will continue to evaluate additional segment disclosure requirements. 

 

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Significant Components of Our Results of Operations

 

Revenues

 

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

 

We expect our total revenues for the year ending December 31, 2020 (“fiscal 2020”) to materially exceed those of fiscal 2019 for the following reasons:

 

ComSovereign experienced working capital shortages during fiscal 2019 due in part to preparatory actions, including manufacturing line readiness and subsidiary integration actions, which impeded the ability of DragonWave to have products manufactured and shipped during the period. As of December 31, 2019, we had a backlog of orders for our mobile network backhaul products in the amount of $542,543 with the majority of the products shipped in the first quarter of 2020 and the remainder of the products shipped in the second quarter of 2020.

 

As discussed below, our fiscal 2019 revenues did not include the 2019 revenues of Drone Aviation prior to November 27, 2019. In 2020, we will include all of the revenues of Drone Aviation in our consolidated results of operations.

 

During fiscal 2019, we received only nominal revenues from the sale of prototype intelligent battery back-up power solutions. In 2020, we expect to commence commercial production of our intelligent batteries for the telecom, aerospace and transportation industries, which we expect will significantly increase our revenues from the sale of those products.

 

During the six-month period ended June 30, 2020 and fiscal 2019, on a pro forma basis giving effect to the ComSovereign Acquisition as if such acquisition had occurred on January 10, 2019, approximately 18% and 15%, respectively, of our revenues were derived from sales outside of the United States. While our near term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outside the United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.S. government and its agencies, even if such systems are for integration into foreign locations.

 

Cost of Goods Sold and Gross Profit 

 

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

 

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. 

 

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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 and development of our products, product certification, travel and recruiting. 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, 2020 as we ramp up our sales and marketing efforts in the third and fourth quarters 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 2020, we expect 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 are currently past due and, as a result, are accruing interest at increased interest rates, if we are able to refinance our debt or issue equity to reduce our outstanding debt, our interest expense would decrease due to lower interest rates on our debt or lower debt balances. 

 

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Provision for Income Taxes 

 

Current and deferred income tax expense or benefit in any given period will depend upon a number of events and circumstances, one of which is the income tax net income or loss from operations for the period which is usually different from the U.S. GAAP net income from operations for the period due to differences in tax laws and timing differences. See Note 16 – Income Taxes in the Notes to our financial statements included elsewhere in this prospectus for a reconciliation on U.S. GAAP income or loss and tax income or loss. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period. 

 

Results of Operations

 

(Amounts in US$’s, except share data)   Six
Months
Ended
June 30,
2020
    January 10,
2019

(Inception)
to
June 30,
2019
    January 10,
2019
(Inception)
to
December 31,
2019
 
    (unaudited)        
Revenue   $ 5,495,297     $ 1,002,911     $ 4,712,212  
Cost of Goods Sold (1)     2,613,632       888,270       2,990,716  
Gross Profit     2,881,665       114,641       1,721,496  
                         
Operating Expenses                        
Research and development  (1)     701,485       60.964       174,257  
Sales and marketing  (1)     29,625       3,815       6,222  
General and administrative  (1)     8,680,321       4,392,935       14,325,078  
Depreciation and amortization     5,745,063       2,478,219       7,567,184  
Gain on sale of fixed assets                 (98,410 )
Total Operating Expenses     15,156,494       6,935,933       21,974,331  
Net Operating Loss     (12,274,829 )     (6,821,292 )     (20,252,835 )
Other Income (Expenses)                        
Loss on conversion of debt                 (2,640,000 )
Net loss on extinguishment of debt                 (434,774 )
Foreign currency transaction gain     39,788       242,226       191,547  
Interest expense     (2,356,821 )     (362,602 )     (8,399,663 )
Other expense     639       197,089       (147,430 )
Total Other Expenses     (2,316,394 )     76,713       (11,430,320 )
Net Loss Before Income Taxes     (14,591,223 )     (6,744,579 )     (31,683,155 )
Deferred Tax Benefit           1,686,145       4,137,900  
Net Loss   $ (14,591,223 )   $ (5,058,434 )   $ (27,545,255 )
Basic and Diluted Loss Per Share   $ (0.11 )   $ (0.14 )   $ (0.57 )

 

(1)These are exclusive of depreciation and amortization

 

Six Month Ended June 30, 2020 Compared to January 10, 2019 (inception) to June 30, 2019

 

From the date of its incorporation (January 10, 2019) until the date of its first acquisition, as described above, ComSovereign had no business operations. ComSovereign’s entire activity after its inception date through the date of consummation of the ComSovereign Acquisition was limited to the evaluation of and consummation of business acquisition transactions as well as preparatory actions, including manufacturing line readiness and subsidiary integration actions, which impeded the ability of DragonWave to have products manufactured and shipped during the period. For the period January 10, 2019 (Inception) to June 30, 2019, ComSovereign generated only nominal revenues.

 

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Total Revenues

 

For the six months ended June 30, 2020, total revenues were $5,495,297 compared to $1,002,911 for the period January 10, 2019 (Inception) to June 30, 2019, both of which were derived primarily from mobile network backhaul products and to a lesser extent, from the sale of our aerostat products and accessories after November 27, 2019, the date of the ComSovereign Acquisition, and from the test-market sale of certain high-performance after-market models of our intelligent batteries.

 

Cost of Goods Sold and Gross Profit

 

For the six months ended June 30, 2020, cost of goods sold were $2,613,632 compared to $888,270 for the period January 10, 2019 (Inception) to June 30, 2019, both of which primarily consisted of the payment 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. Gross profit for the six months ended June 30, 2020 was $2,881,665 with a gross profit margin of 52% compared to $114,641 for the period January 10, 2019 (Inception) to June 30, 2019 with a gross profit margin of 11%.

 

These changes in gross profit margin resulted primarily from the increased gross profit margin of DragonWave during the six months ended June 30, 2020 and the acquisitions of Drone Aviation and Sovereign Plastics on November 27, 2019 and March 6, 2020, respectively. As described above, for the period January 10, 2019 (Inception) to June 30, 2019, ComSovereign generated only nominal revenues. DragonWave’s sales and gross profit margin increased following the preparatory actions performed in 2019, including manufacturing line readiness and subsidiary integration actions.

 

Research and Development Expense

 

For the six months ended June 30, 2020, research and development expenses were $701,485 compared to $60,964 for the period January 10, 2019 (Inception) to June 30, 2019, both of which primarily consisted of payroll and related costs. The increase in research and development expenses resulted from multiple new technology integration efforts across our subsidiaries, including expenses related to additional contracted engineering services teams.

 

Sales and Marketing Expense

 

For the six months ended June 30, 2020, sales and marketing expense was $29,625 compared to $3,815 for the period January 10, 2019 (Inception) to June 30, 2019, both of which primarily consisted of payroll and related costs.

 

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General and Administrative Expenses

 

For the six months ended June 30, 2020, general and administrative expenses were $8,680,321 compared to $4,392,935 for the period January 10, 2019 (Inception) to June 30, 2019. Such expenses primarily consisted of payroll and related costs of $4,040,431, business overhead costs of $1,498,897, professional fees of $2,090,216, rent of $483,582 and travel of $118,249 recorded during the first six months of 2020 and payroll and related costs of $327,485, share-based compensation of $352,000 and professional fees of $865,547 recorded during the period January 10, 2019 (Inception) to June 30, 2019.

 

Depreciation and Amortization

 

For the six months ended June 30, 2020, depreciation and amortization were $5,745,063 compared to $2,478,219 for the period January 10, 2019 (Inception) to June 30, 2019, which primarily included $5,226,119 and $2,370,996 of amortization on definite-lived intangible assets, respectively, and $518,944 and $107,223 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, respectively. 

 

Other Income and Expenses

 

For the six months ended June 30, 2020, total other expenses were $2,316,394 compared to total other income of $76,713 for the period January 10, 2019 (Inception) to June 30, 2019. This increase primarily consisted of $2,356,821 of interest expense and amortized discounts on our outstanding debt and a $24 loss on our investments, which was partially offset by a $39,788 gain on foreign exchange transactions and $663 of proceeds from the disposal of property and equipment recorded during the first six months of 2020 and $362,602 of interest expense and amortized discounts on our outstanding debt, which was partially offset by a $242,226 gain on foreign exchange transactions and $197,089 of proceeds from the disposal of property and equipment recorded during the period January 10, 2019 (Inception) to June 30, 2019.

 

Provision for Income Taxes 

 

For the six months ended June 30, 2020, there was no provision for income taxes due to an increase in the valuation allowance of $1,819,900 recorded on the total tax provision, because we believe that it is more likely than not that the tax asset will not be utilized during the next year.

 

Net Loss

 

For the six months ended June 30, 2020, we had net loss of $14,591,223 compared to a net loss of $5,058,434 for the period January 10, 2019 (Inception) to June 30, 2019, related to the items described above.

 

For the period January 10, 2019 (inception) to December 31, 2019

 

Total Revenues

 

Total revenues were $4,712,212 for the period from January 10, 2019 (inception) to December 31, 2019 (“fiscal 2019”), which were derived primarily from mobile network backhaul products and to a lesser extent, from the sale of our aerostat products and accessories after November 27, 2019, the date of the ComSovereign Acquisition, and from the test-market sale of certain high-performance after-market models of our intelligent batteries. Our fiscal 2019 revenues did not include 2019 revenues of Drone Aviation for the period prior to the ComSovereign Acquisition, which amounted to $5,783,956.

 

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Cost of Goods Sold and Gross Profit

 

Cost of goods sold were $2,990,716 for fiscal 2019, which primarily consisted of the payment 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 aerostat products and accessories and our intelligent batteries. Gross profit for the period was $1,721,496 with a gross profit margin of 37% for the same period. Our fiscal 2019 cost of goods sold did not include 2019 cost of goods sold of Drone Aviation for the period prior to the ComSovereign Acquisition, which amounted to $2,388,193.

 

Research and Development Expense

 

Research and development expense was $174,257 for fiscal 2019, which primarily consisted of payroll and related costs.

 

Sales and Marketing Expense

 

Sales and marketing expense was $6,222 for fiscal 2019, due to the limited sales and marking efforts we undertook in fiscal 2019.

 

General and Administrative Expense

 

General and administrative expense was $14,325,078 for fiscal 2019, which consisted of payroll and related costs of $3,896,325, business overhead costs of $2,497,008, share-based compensation of $258,256 and company formation costs of $7,673,489 that primarily consisted of consulting fees, legal fees and valuation services in connection with the five acquisitions completed by ComSovereign in fiscal 2019.

 

Depreciation and Amortization

 

Depreciation and amortization was $7,567,184 for fiscal 2019, which primarily included $6,943,300 of amortization on definite-lived intangible assets as well as $623,884 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements.

 

Gain on Sale of Fixed Asset

 

The gain on sale of fixed assets was $98,410 resulting from the sale of test equipment during fiscal 2019.

 

Other Income and Expenses

 

Total other expenses were $11,430,320 for fiscal 2019, which consisted of $8,399,663 of interest expense and amortized discounts and debt issuance costs on our outstanding debt, a $2,640,000 loss on the conversion of debt, a $434,774 net loss on extinguishment of debt, and other expense of $147,430, which was partially offset by a $191,547 gain on foreign exchange transactions.

 

Provision for Income Taxes 

 

The provision for income taxes for fiscal 2019 was a deferred tax benefit of $4,137,900 based on a pre-tax loss of $31,683,155 and a valuation allowance of $3,762,800 resulting in an effective tax rate of 13.1% for fiscal 2019.

 

Net Loss

 

Net loss was $27,545,255 for fiscal 2019 related to the items described above.

 

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Liquidity and Capital Resources 

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of June 30, 2020, we had $368,685 in cash compared to $812,452 at December 31, 2019, a decrease of $443,767. As of June 30, 2020, we had $1,741,018 in accounts receivable compared to $2,168,659 at December 31, 2019, a decrease of $427,641 resulting from increased collections in the first six months of 2020.

 

As of June 30, 2020, we had total current assets of $7,430,226 and total current liabilities of $24,448,860, or negative working capital of $16,730,537, compared to total current assets of $8,665,369 and total current liabilities of $17,018,634, or negative working capital of $6,477,230 at December 31, 2019. This is a decline of more than $10,541,404 over the working capital balance at the end of 2019.

 

On or prior to June 30, 2021, we have undiscounted obligations relating to the payment of indebtedness and past-due payroll and accounts payable, exclusive of interest, as of August 21, 2020, follows: 

 

  $19,695,170 related to amounts due in the third quarter of 2020, including amounts past due and indebtedness due on-demand related to debt covenant breaches;

 

  $5,242,684 related to indebtedness due in the fourth quarter of 2020;

 

  $594,803 related to indebtedness due in the first quarter of 2021; and

 

  $23,705 related to indebtedness due in the second quarter of 2021.

 

We intend to use $         million of the net proceeds of this offering to repay in full at or about closing of this offering certain outstanding indebtedness as set forth herein under the caption “Use of Proceeds.” We also intend to convert current liabilities in the amount of $        million to shares of our common stock at or prior to the closing of this offering. We anticipate meeting our cash obligations on our remaining indebtedness that is payable on or prior to June 30, 2021 from earnings from operations, including, in particular, DragonWave, which was acquired in April 2019, and VNC, which was acquired in July 2020, and possibly from the proceeds of additional indebtedness or equity raises. If we are not successful in obtaining additional financing when required, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our debt obligations as they become due, although there can be no assurance that we will be able to do so.

  

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. Our management has taken several actions to ensure that we will have sufficient liquidity to meet our obligations through December 31, 2020, including the reduction of certain general and administrative expenses such as travel, facilities cost and downsizing. Additionally, if our actual revenues are less than forecasted, we anticipate implementing headcount reductions to a level that more appropriately matches the then-current revenue and expense levels. We also are evaluating other measures to further improve our liquidity, including, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common shares. In March and April 2020, we entered into agreements with certain debt holders to extend the maturity dates on such debt. The net proceeds of this offering will enhance our liquidity position. Our management believes that these actions will enable us to meet our liquidity requirements through June 2021. Upon completion of this offering, there is no assurance that we will be successful in any additional capital-raising efforts that we may undertake to fund operations during the next 12 months.

 

We plan to generate positive cash flow from our recently-completed acquisitions to address some of our liquidity concerns. However, to execute our business plan, service our existing indebtedness, finance our proposed acquisitions and implement our business strategy, we anticipate that we will 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 period January 10, 2019 (inception) through December 31, 2019 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 $87,038 in fiscal 2019. 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. 

 

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Line of Credit and Debt Agreements

 

Line of Credit

 

In 2017, we issued a promissory note (the “CNB Note”) to City National Bank of Florida (“CNB”) in the principal amount of $2,000,000. Through various amendments, the CNB Note had a maturity date of August 2, 2020 and allowed for a CNB line of credit with advances that could have been requested until the maturity date of August 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 which U.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 of December 31, 2019, the interest rate on the CNB Note is 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 $1,600,000 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 by Mr. Nussbaum and his estate, who along with us were obligated to maintain an aggregate unencumbered liquidity of no less than $6,000,000. In addition, the CNB Note was secured by all of Drone Aviation’s accounts, inventory and equipment along with an assignment of a $120,000 bank account that we maintained at CNB. As of December 31, 2019, $2,000,000 was drawn against the CNB line of credit.

 

On March 19, 2020, we issued a promissory note to the estate of Mr. Nussbaum in the amount of $2,022,722 bearing interest at 5% per annum with a maturity date of August 31, 2020. Interest payments of $8,428 are due monthly while the full principal amount is due at maturity. We used the proceeds of the note to repay the balance of the CNB Note.

 

Secured Notes Payable

 

In August 2016, InduraPower issued a promissory note not to exceed the principal amount of $550,000 bearing interest at 8.5% per annum with a maturity date of August 31, 2018. InduraPower could draw funds under the note through February 28, 2017. Interest on this note was payable monthly and the full principal balance was due at maturity. On September 11, 2019, the note was amended and both parties agreed that the outstanding balance of $813,709 would be due on February 28, 2020. This promissory note is secured by substantially all of the assets of InduraPower. As of June 30, 2020, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note is currently past due. This promissory note is secured by substantially all of the assets of InduraPower.

 

In August 2016, InduraPower issued a promissory note in the principal amount of $50,000 with an interest of 7.785% per annum and a maturity date of September 1, 2021. Beginning April 1, 2017, equal monthly payments of $1,011 for interest and principal are 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 of June 30, 2020, an aggregate principal amount of $18,980 was outstanding under this note. This note is classified as current as of June 30, 2020. See Note 15 – Debt Agreements in the Notes to our consolidated financial statements included elsewhere in this prospectus.

 

In August 2016, InduraPower issued a promissory note in the principal amount of $450,000 that bears interest at 9.0% per annum and matures on March 1, 2022. Accrued interest only payments were due monthly beginning October 1, 2016 through March 1, 2017. Monthly payments of $9,341 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 of June 30, 2020, an aggregate principal amount of $201,179 was outstanding under this note. This note is classified as current as of June 30, 2020. See Note 15 – Debt Agreements in the Notes to our consolidated financial statements included elsewhere in this prospectus.

 

In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2,000,000 loan that bears interest at the rate of 9% per annum and matures on November 26, 2021. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal 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 by ComSovereign. As of June 30, 2020, an aggregate principal amount of $2,000,000 was outstanding under this note.

 

On February 26, 2020, we entered into a $600,000 secured business loan from TVT Capital, LLC bearing interest at 78.99% per annum which matures on December 26, 2020. The proceeds of such loan were used to pay past due payroll, accounts payable and notes payable. Principal and interest payments of $19,429 are due weekly. The loan is secured by our assets. As of June 30, 2020, an aggregate principal amount of $401,634 was outstanding under this note.

 

In connection with Sovereign Plastics’ acquisition of Fast Plastic Parts LLC and Spring Creek Manufacturing, Inc. on March 6, 2020, we assumed a secured loan with FirstBank in the principal amount of $979,381 bearing interest at 5% per annum and with a maturity date of June 1, 2020. The loan is secured by certain assets of Sovereign Plastics. This loan is subjected to covenants, whereby Sovereign Plastics is required to meet certain financial and non-financial covenants at the end of each fiscal year. Payments in the amount of $22,404 for interest and principal were due over the two months prior to maturity, with the balance due at maturity. As of June 30, 2020, an aggregate principal amount of $942,735 was past due under this loan. On August 5, 2020, the maturity date of this loan was extended to September 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.

 

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On March 19, 2020, we entered into a secured loan agreement in the amount of $2,007,971 bearing interest at 5% per annum with a maturity date of August 31, 2020. Interest payments of $8,428 are due monthly, with the full principal amount due at maturity. The loan is secured by certain intellectual property assets of our company. The proceeds of the note payable were used to repay the balance of the CNB Note (revolving line of credit) that was entered into in 2017. As of June 30, 2020, an aggregate principal amount of $2,007,971 was outstanding under this loan. On August 5, 2020, the maturity date of this loan was extended to October 15, 2020.

 

Notes Payable

 

We have one financing loan for certain of our equipment that bears interest at 8.775% per annum and is due September 15, 2020. As of June 30, 2020, the loan had an outstanding balance of $1,708.

 

In September 2017, InduraPower issued a promissory note in the principal amount of $137,500 that bore interest at a rate of 12% per annum and was due on October 17, 2017. The note was repaid during fiscal 2019. On June 10, 2019, InduraPower issued a new promissory note with the same lender for $200,000 with an original issue discount of $6,000 and a maturity date of July 9, 2019. The full $200,000 balance was due at maturity. Additionally, on August 14, 2019, InduraPower sold to the same lender an additional $200,000 promissory note that matured on September 1, 2019. As these notes are currently past due, interest is accrued at a rate of 18% per annum on each note. As of June 30, 2020, an aggregate principal amount of $400,000 was outstanding under these notes.

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of a promissory note in the principal amount of $500,000 bearing interest at 12.0% per annum with a maturity date of October 17, 2017. On October 1, 2019, the maturity date was extended until September 30, 2020 and the interest rate was reduced to 10% per annum. All unpaid accrued interest from October 2017 through September 30, 2019 was converted into 150,000 shares of common stock of ComSovereign. Accrued interest and the full principal balance are due at maturity. On April 30, 2020, we also issued 14,496 shares of common stock in lieu of an aggregate cash interest payment payable by ComSovereign through December 31, 2019 on this outstanding note payable. As of June 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note.

   

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of a promissory note in the principal amount of $175,000 that bore interest at the rate of 15% per annum and was due on November 30, 2017. The interest rate increased to 18% per annum when the note became past due. On October 1, 2019, ComSovereign amended the promissory note to extend the maturity date to September 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 10,000 shares of common stock of ComSovereign. Accrued interest and principal are due and payable at maturity. As of June 30, 2020, an aggregate principal amount of $175,000 was outstanding under this note.

 

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In October 2017, DragonWave issued a 90-day promissory note in the principal amount of $4,400,000 and received proceeds of $4,000,000. Through several amendments, accrued interest was charged at the rate of 8% per annum, payment terms were amended and the maturity date was extended to February 28, 2019. On September 3, 2019, the promissory note was increased to $5,000,000 as all unpaid accrued interest was added to the principal balance. Additionally, the maturity date was extended to March 30, 2020 and the interest rate was changed to 10% per annum. Under this new amendment, principal and interest payments are due and payable monthly. As of December 31, 2019, an aggregate principal amount of $5,000,000 was outstanding under this note. On April 21, 2020, the maturity date of this note was extended to August 31, 2020, the interest rate was increased to 12% per annum, and we issued to the lender 100,000 shares of our common stock that have been treated as debt issuance costs. As of June 30, 2020, an aggregate principal amount of $5,000,000 was outstanding under this note.

 

On June 10, 2019, ComSovereign issued a promissory note in the principal amount of $200,000 with an original issue discount of $6,000 and a maturity date of July 9, 2019. The full $200,000 balance was due at maturity. Since this note was not repaid and is currently past due, interest is being accrued at a rate of 18% per annum. As of June 30, 2020, an aggregate principal amount of $200,000 was outstanding under this note.

 

On November 7, 2019, ComSovereign issued several promissory notes in the aggregate principal amount of $450,100 that bore interest at 133% per annum which matured on December 6, 2019. An aggregate principal amount of $200,100 was owed to three related parties out of the $450,100 promissory notes. Accrued interest and principal were due and payable at maturity. These notes are currently past due, and we are using an interest rate of 18% per annum to accrue interest on these notes. We repaid $250,000 of the aggregate principal amount of this promissory note during the first quarter of the current fiscal year. As of June 30, 2020, the remaining aggregate principal amount of $200,100 is currently past due and outstanding.

 

On March 5, 2020, Sovereign Plastics issued a promissory note in the principal amount of $500,000 that matures on September 4 for $450,000. Additionally, in lieu of interest, we issued to the lender 50,000 shares of our common stock. As of June 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note. 

  

In connection with Sovereign Plastic’s acquisition of Fast Plastic Parts LLC and Spring Creek Manufacturing, Inc. on March 6, 2020:

 

we entered into several promissory notes with the sellers in the aggregate principal amount of $409,586 that do not bear interest and with a maturity date of June 30, 2020 and monthly principal payments. These notes are currently past due. However, there are no penalties associated with this default. As of June 30, 2020, the aggregate amount of $379,587 was outstanding under these notes.

 

we agreed to pay an aggregate of $165,987 to the sellers on or before June 30, 2020. The agreement was not interest bearing. This obligation is currently past due. However, there are no penalties associated with this default. As of June 30, 2020, an aggregate amount of $165,987 was outstanding.

 

we assumed a note payable in the amount of $86,866 bearing interest at 3% per annum and with a maturity date of February 16, 2023. Monthly payments in the amount of $3,773 for principal and interest are due over the term. This loan is currently past due. However, there are no penalties associated with this default. As of June 30, 2020, an aggregate principal amount of $83,309 was outstanding under this note.

 

we assumed an equipment financing loan with an aggregate principal balance of $64,865. Monthly principal and interest payments of approximately $1,680 are due over the term. This loan is currently past due. However, there are no penalties associated with this default. As of June 30, 2020, an aggregate amount of principal of $62,428 was outstanding under this loan.

 

we assumed an equipment financing loan with an aggregate principal balance of $95,810. Monthly principal and interest payments of approximately $2,361 are due over the term. This loan is currently past due. However, there are no penalties associated with this default. As of June 30, 2020, an aggregate amount of principal of $92,165 was outstanding under this loan.

 

we assumed an equipment financing loan with an aggregate principal balance of $43,957. Monthly principal and interest payments of approximately $1,063 are due over the term. This loan is currently past due. However, there are no penalties associated with this default. As of June 30, 2020, an aggregate amount of principal of $42,326 was outstanding under this loan.

 

On May 29, 2020, we issued a promissory note in the principal amount of $290,000 with an original issue discount of $40,000 and a maturity date of September 30, 2020. The full $290,000 balance is due at maturity, with interest accruing at a rate of 12% per annum for any principal balance remaining unpaid past the maturity date. As of June 30, 2020, an aggregate principal amount of $290,000 was outstanding under this note. 

 

On July 1, 2020, we borrowed $50,000 from Mr. Brent Davies and issued Mr. Davies a promissory note evidencing such loan that bears interest of $1,000 and matures on August 31, 2020.

  

Between July 2, 2020 and August 21, 2020, we borrowed an aggregate of $1,200,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes are between $50,000 and $200,000. The loans bear interest at a rate of 15% and have maturity dates between October 13, 2020 and November 20, 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 240,000 shares of common stock. On July 29, 2020, the Company sold 91,841 shares of common stock at a price of $1.00 per share to one of the accredited investors.

 

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Senior Debentures

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of $100,000 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) $8.00 or (2) 80% of the common stock price offered under the next equity offering. As of December 31, 2019, an aggregate principal amount of $100,000 was outstanding under these debentures. These debentures are past due and interest accrues at a rate of 15% per annum. On April 30, 2020, these debentures were modified to remove the conversion feature and provide for the settlement of these debentures only in cash. As of June 30, 2020, an aggregate principal amount of $100,000 was outstanding under these debentures. These debentures are past due and interest accrues at a rate of 15% per annum.

 

Convertible Notes Payable

 

On April, 29, 2020, we sold a $285,714 aggregate principal amount convertible promissory note with an original issue discount of $35,714 that bears interest at a rate of 12.5% per annum and matures on January 29, 2021. Accrued interest and principal are due on the maturity date. Upon maturity, the interest rate shall automatically increase to 18% per annum or the maximum amount permitted by applicable law on any unpaid principal and accrued interest. We also issued warrants to purchase 158,730 shares of common stock that are exercisable for a purchase price of $0.99 per share at any time on or prior to April 29, 2025. We also issued warrants to purchase up to 27,778 shares of common stock, at an exercise price of 110% of the initial conversion price of the notes (i.e., an exercise price of $0.99), at any time on or prior to April 29, 2025, to an unrelated third party as a placement fee for the transaction. In connection with this note, we recognized a BCF of $68,654, a debt discount of $36,906 associated with the issuance of warrants to the note holder, and debt issuance costs of $37,418, which were all recorded as debt discounts. During the three and six months ended June 30, 2020, $39,709 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of June 30, 2020, there were $138,901 of debt discounts remaining, and an aggregate principal amount of $285,714 was outstanding under this note. On July 7, 2020, we sold to the same investor an additional original issue discount note in the principal amount of $285,714 with a maturity date of January 29, 2021 and warrants to purchase an additional 158,730 shares of common stock, with similar terms.

 

On August 21, 2020, we sold a $1,700,000 aggregate principal amount convertible promissory note with an original issue discount of $200,000 that bears interest at a rate of 5.0% per annum and matures on November 20, 2020. Accrued interest and principal are due on the maturity date. Additionally, as debt issuance costs, we issued to the lender 400,000 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 53,571 shares of our common stock at an exercise price of $2.80 per share at any time on or prior to August 21, 2025.

 

Senior Convertible Debentures

 

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller of $25,000 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) $8.00 or (2) 80% of the common stock price offered under the next equity offering. As of December 31, 2019, an aggregate principal amount of $25,000 was outstanding under these debentures. These debentures are past due and interest accrues at a rate of 15% per annum. On April 30, 2020, these debentures were modified to remove the conversion feature and provide for the settlement of these debentures only in cash. The aggregate principal amount of $25,000 under these debentures was fully repaid during the first quarter of the current fiscal year.

 

On September 24, 2019, ComSovereign sold $250,000 aggregate principal amount of 10% Senior Convertible Debentures that bear interest at a rate of 10% per annum and mature on December 31, 2021. Interest is paid semi-annually in arrears in June and December of each year in cash or, at ComSovereign’s option, in shares of common stock at the conversion price that was equal to the lesser of (1) $2.50 or (2) a future effective price per share of any common stock sold. Upon an event of default, the interest rate shall automatically increase to 15% per annum. As of December 31, 2019, an aggregate principal amount of $250,000 was outstanding under these debentures. On April 30, 2020, these debentures were amended to provide for the conversion of the debentures into shares of our common stock instead of ComSovereign’s common stock. Additionally, the conversion price was changed from $2.50 per share to $0.756 per share. As of June 30, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures.

 

In connection with our acquisition of VNC, on July 2, 2020, we sold to accredited investors, including 19 Units to Dr. Dustin McIntire, our Chief Technology Officer, an aggregate of 29 units, each unit consisting of a 9% Senior Convertible Debenture of our company in the principal amount of $100,000 and warrants to purchase 10,000 shares of our common stock, for a purchase price of $100,000 per unit, or $2,900,000 in the aggregate. The debentures included in such units bear interest at the rate of 9% per annum, mature on September 30, 2020 and are convertible into shares of our common stock at a conversion price of $1.00 per share, subject to adjustment. The warrants included in such units are exercisable to purchase shares of our common stock at an exercise price of $1.00 per share, subject to adjustment, and expire on the earlier of (i) December 31, 2022 or (ii) the second anniversary of our consummation of a public offering of our common stock in connection with an up-listing of our common stock to a national securities exchange, which would include the offering of common stock pursuant to this prospectus. The proceeds from the sale of such securities were applied to the cash consideration we paid in the acquisition of VNC and related expenses.

 

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Payroll 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 $455,184 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. As of June 30, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans. On August 11, 2020, our subsidiary received PPP loan proceeds in the aggregate amount of $103,659 that has a maturity of five years.

 

Sources and Uses of Cash

 

(Amounts in US$’s)  For the Six
Months Ended
June 30,
2020
   January 10,
2019
(Inception) to
June 30,
2019
   January 10,
2019
(Inception) to
December 31,
2019
 
   (unaudited)     
Cash flows used in operating activities  $(1,432,896)  $(1,552,370)  $(6,853,247)
Cash flows provided by investing activities   (537,175)   2,025,914    2,838,235 
Cash flows provided by financing activities   1,526,304    7,692    4,850,847 
Effect of exchange rates on cash           (23,383)
Net increase in cash and cash equivalents  $(443,767)  $481,236   $812,452 

 

Operating Activities

 

Net cash used in operating activities for fiscal 2019 was $6,853,247. Net cash used in operating activities primarily consisted of the net operating loss of $27,545,255, which was partially offset by depreciation and amortization of $7,567,184 and amortized discounts and debt issuance costs on our outstanding debt of $8,458,341. Additionally, working capital changes provided $4,908,914 in cash during the period.

  

For the six months ended June 30, 2020, net cash used in operating activities was $1,432,896. Net cash used in operating activities primarily consisted of the net operating loss of $14,591,223 and gain on the sale of fixed assets of $663, which was partially offset by depreciation and amortization of $5,745,063, amortized discounts and debt issuance costs on our outstanding debt of $1,210,047 and right-of-use asset amortization of $267,835. Additionally, working capital changes provided $5,936,045 in cash during the period.

 

For the period January 10, 2019 (Inception) to June 30, 2019, cash used in operating activities was $1,552,370. Net cash provided by operating activities primarily consisted of the net operating loss of $5,058,434, which was partially offset by depreciation and amortization of $2,478,219, right-of-use asset amortization of $27,676 and $352,000 of shares issued for restricted stock awards. Additionally, working capital changes provided $819,682 in cash during the period.

 

Investing Activities

 

Net cash provided by investing activities for fiscal 2019 was $2,838,235. Net cash provided by investing activities primarily consisted of cash acquired from acquisitions of $2,925,273, which was offset by purchases of property and equipment of $87,038.

 

For the six months ended June 30, 2020, net cash used in investing activities was $537,175. Investing activities primarily consisted of the acquisition of the net assets of Fast Plastics Parts LLC for a purchase price of $829,347, representing cash paid on the closing date of $253,773 and short-term debt incurred to the sellers of $575,574, which was partially offset by proceeds from the disposal of property and equipment of $663, purchase of property and equipment of $34,065 and a note receivable for acquisition of $250,000.

 

For the period January 10, 2019 (Inception) to June 30, 2019, net cash provided by investing activities was $2,025,914. Investing activities primarily consisted of cash from ComSovereign’s acquisitions of VEO, InduraPower, Silver Bullett Technologies, DragonWave-X LLC and Lextrum, Inc.

 

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Financing Activities

 

Financing activities for fiscal 2019 provided cash of $4,850,847. Financing activities primarily consisted of $6,249,170 of proceeds from the issuance of debt and $485,000 of proceeds from the issuance of related party debt, which was offset by the repayment of $1,808,323 of debt and $80,000 of debt issuance costs.

  

For the six months ended June 30, 2020, financing activities provided cash of $1,526,304. Financing activities primarily consisted of $4,079,548 of proceeds from the issuance of debt, which was offset by the repayment of $2,501,330 of debt and $3,413 principal payment on finance leases.

 

For the period January 10, 2019 (Inception) to June 30, 2019, cash used in financing activities was $7,692. Financing activities primarily consisted of repayment 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

 

Management believes that there have not been any recently issued, but not effective, accounting standards which, if currently adopted, would have a material effect on the Company’s financial statements.

 

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.”

 

Accounts Receivable and Credit Policies

 

Trade accounts receivable consist of amounts due from the sale of our products. 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. At June 30, 2020, we characterized $1,061,211 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 allocate the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value of the BCF and warrants are recorded as a debt discount and is accreted over the expected term of the convertible debt as interest expense.

 

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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.

 

Long-Lived Assets and Goodwill

 

We account for long-lived assets in accordance with the provisions of ASC 360-10-35, 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.

 

We account for goodwill and intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other. 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.

 

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 in accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually 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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BUSINESS

 

Overview

 

We are a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and “next-Generation” (“nG”) networks of the future. We focus on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency 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, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.

 

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

 

Telecom and Network Products and Solutions. We design, develop, market and sell technologically-advanced products for telecom network operators, mobile device carriers and other enterprises, including the following:

 

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

 

  In-Band Full-Duplex Technologies. We have developed proprietary wireless transmission technologies that alleviate the performance limitations of the principal transmission technologies used by most networks today. Time Division Duplex (TDD) transmission technology used by many communications systems utilizes a single channel for transmission of data alternating between downlink or uplink, which limits capacity/throughput. Frequency Division Duplex (FDD) technologies in the marketplace today use two independent channels for downlink and uplink but require twice the spectrum. Neither TDD nor FDD can simultaneously transmit and receive on a single channel - a limitation that network advancements and 5G will require for optimal performance. In early 2021, we intend to commence offering products incorporating our proprietary In-Band Full-Duplex technologies that simultaneously transmit and receive data on a single channel, which resolves the limitation of current TDD and FDD transmissions by increasing network performance and doubling spectrum efficiency.
     
  “Front-Edge” & Small Cell 4G LTE and 5G Radios. We offer citizens broadband radio service (CBRS) frequency and other small cell radios that are designed to connect to other front edge radios or to connect directly to mobile devices such as mobile phones and other IoT devices. Recently, we developed the world’s first fully-virtualized 5G core network on a microcomputer the size of a credit card, enabling, for the first time, the ability to have the 5G network collocated on the front edge with the small cell communicating with the devices themselves.

 

Intelligent Batteries and Back-Up Power Solutions. We are developing for the telecom industry a full line of environmentally-friendly, non-volatile advanced intelligent lithium ion batteries and back-up power units that charge quickly, have a life span approximately five times longer than conventional lead-acid batteries and can be monitored remotely. We are also currently offering and developing models that provide power for a wide range of applications, including cellular towers and other radio access network (RAN) infrastructures, automobiles, boats, spacecraft and other vehicles.

 

Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications such as intelligence, surveillance and reconnaissance (“ISR”) and communications. We focus primarily on the development of a tethered aerostat known as the Winch Aerostat Small Platform (“WASP”), which is principally designed for military and security applications where they can provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high-strength armored tether.

 

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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 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 (ASIC) design and verification, SiP design and integration, system software development, hardware design, high-speed electronics design and network planning, installation, maintenance and servicing. 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 more than 700 customers include a majority of the leading global telecommunication operators, as well as many data center managers and leading multi-system operators (MSOs), and hundreds of enterprise customers, including many Fortune 500 companies. We have long-standing, direct relationships with our customers and serve them through a direct sales force and a global network of channel partners.

 

Our Operating Units

 

Through a series of acquisitions, we and our operating subsidiaries have expanded our service offerings and geographic reach over the past two years. On November 27, 2019, we completed the ComSovereign Acquisition in a stock-for-stock transaction with a total purchase price of approximately $75 million.  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 operating units, each of which was acquired to address a different opportunity or sector of the North American telecom infrastructure and service market:

 

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

 

  Virtual NetCom LLC. Virtual NetCom LLC (“VNC”) is a Virginia-based EDGE telecom access radio developer and a provider of both 4G LTE/Advanced and 5G capable radio equipment. Additionally, VNC has virtualized and patented an entire LTE Advanced network core solution that we believe eliminates much of the costly backbone equipment of telecom networks. VNC also has developed and is currently selling a rapidly-deployable network system that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world. We acquired VNC in July 2020 prior to the ComSovereign Acquisition.

 

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

 

InduraPower, Inc. InduraPower Inc. (“InduraPower”) is a Tucson, Arizona-based developer and manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for the aerospace, marine and automotive industries. ComSovereign acquired InduraPower in January 2019 prior to the ComSovereign Acquisition.

 

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

 

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

 

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

 

Sovereign Plastics LLC. Sovereign Plastics LLC (“Sovereign Plastics”), based in Colorado Springs, Colorado, operates as the material, component manufacturing and supply chain source for all of our subsidiaries, and also provides plastic and metal components to third-party manufacturers. Its ability to rapidly prototype new product offerings and machine moldings, metals and plastic castings has reduced the production cycle for many of our components from months to days. We acquired the business currently conducted by Sovereign Plastics in March 2020 prior to the ComSovereign Acquisition.

 

On August 24, 2020, we entered into the FN Merger Agreement pursuant to which, subject to the terms and conditions of the FN Merger Agreement, we have agreed to acquire Fastback.  We believe Fastback has been a leader in the development and commercialization of innovative 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. Fastback has a U.S. patent portfolio comprised of 65 granted and 12 pending patents. Collectively the patent portfolio covers key technologies including antenna arrays, signal processing, adaptive antennas, beamforming/steering, self-optimizing networks, spectrum sharing and hybrid band operations.

 

Pursuant to the FN Merger Agreement, the aggregate merger consideration we are obligated to pay for Fastback will consist of (i) $1,250,000 in cash, which we expect to pay from the net proceeds of this offering, (ii) $1,500,000 aggregate principal amount of our term debentures, and (iii) $11,150,000 aggregate principal amount of our convertible debentures that are convertible into our common stock at a conversion price of $1.74 per share, subject to adjustment. Our proposed acquisition of Fastback is subject to the condition that we raise at least $12 million of gross proceeds from the sale of our equity or debt securities, which would be satisfied upon the closing of this offering, and certain other customary closing conditions.

 

Our Industry

 

We participate in the large and growing global market for connectivity and essential communications infrastructure. This market is being driven by the growth in demand for data-intensive bandwidth and the necessity for reduced latency (the time it takes to send data from one point to another) associated with the continued demand of smartphones, tablets and machine-to-machine (M2M) communication, as well as the proliferation of data centers, big data, cloud-based services, streaming media content and IoT. In addition, video and gaming distribution over the broadband IP network is transforming how content is managed and consumed overall. This increase in data usage and demand is taxing available broadband of many service providers, which requires far more efficient technologies to meet demand. For example, in reaction to the COVID-19 pandemic, Netflix reduced the quality of videos from high definition to standard definition in order to free up additional bandwidth required by workers performing online functions from their homes.

 

Today’s cellular networks are predominantly based on 4G technologies. These networks constantly undergo expansion of coverage and densification with additional sites to cater to higher demands for speeds and to make more services available per given area. According to recent publications and as of the fourth quarter 2019, 33 operators across 18 countries, representing 8% of the global mobile connections base (excluding cellular IoT), have launched commercial 5G mobile services, and 77 operators have announced plans to launch 5G services in the coming months. These investments in 5G radio network infrastructure, and consequently, associated wireless data hauling, are expected to gradually increase during the next several years. In order to allocate spectrum resources for 4G and 5G, some operators are shutting down their 2G and/or 3G network (a “network sunset”) in order to re-allocate radio access network frequency bands to 4.5 and 5G services. These market dynamics of network expansion and densification have resulted in higher demand for wireless hauling capacity at increased density, requiring more sophisticated services over the network at far higher volumes than were available in recent years. Such services include the many 5G use cases, which among others, include enhanced mobile broadband, mission critical services, IoT and Industrial IoT, gigabit broadband to homes, multi gigabits services to enterprises and more.

 

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The term “5G” is misunderstood by most consumers who believe it is simply another layer of technology over the top of current 4G LTE infrastructures. However, this is not the case. While 4G LTE Advanced is a part of a large platform upon which 5G rests, according to many industry studies, significantly more 4G LTE/A will be required before 5G becomes a reality. 5G is an entirely new infrastructure that must be standardized for widespread adoption and must be agile enough to accommodate wireless devices of all kinds, not just cellular smartphones. This new 5G “IoT” will enable the connection of the internet to telemedical devices, gaming, video and television, smart-home devices, such as thermostats, alarms, lighting and garage doors, smartphones, driverless cars and traffic signals, laptops, desktops, Wi-Fi, logistic reporting devices on semi-tractor trucks and trains and a plethora of other use cases. It must do so seamlessly and with a fraction of the current “round-trip” response time of data. This requires that data centers be closer to this “edge” where the devices connect to the wireless small cells. As a result, data centers and many of the other functions will require virtualization and eventually artificial intelligence (AI) algorithms and machine learning to route data requests to these virtualized data centers to keep latency to a minimum.

 

There are several major trends that we expect to drive network deployments and investment. The GSM Association (“GSMA”), a mobile telecom association to which most large infrastructure participants and mobile carriers are members, nearly mirrors our findings and impressions in its report on the state of mobile internet connectivity. Many of these trends and findings follow.

 

The Challenges of Connectedness

 

It is said in business that to remain static is to die. To understand the need for technological advancements and infrastructure growth in the cellular telecommunications industry, one must first understand the market factors driving these changes. In 2018, nearly 300 million people connected to mobile internet data for the first time. This increased the total number of internet connected users to more than 3.5 billion people worldwide. This type of connectivity now drives the global economy as more and more diverse commerce is conducted through wireless data access. However, since lower-income countries and regions have only approximately 40% of their population connected to the internet compared to 75% in high-income regions, these lower income areas are finding it increasingly difficult to raise their social and economic status. Getting these deficient regions (and the approximately 4 billion people inhabiting those regions who are unable to connect to the internet) connected is only one challenge. The other and equally difficult challenge is the density of urban areas in the higher income areas and the sophistication of the electronic communications and computing devices in those areas that require increasingly faster data. We plan to target both challenges by providing economical solutions and infrastructure building blocks to lower-income geographic areas around the world, which we expect we will initially sell through our resellers, distributors and other partners, while leading the world in innovative new technologies to make the realization of 5G and nG a reality.

 

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Evolving Network Architecture and Technology

 

The pace of change in networking has increased in recent years as consumers and data-driven businesses utilize more bandwidth with increasingly-complex mobile and connected devices. Cellular networks are now experiencing exponential growth in network infrastructures, which is revolutionizing how consumers connect to each other and changing the network architecture needed to support consumer demand. This trend requires better network coverage, greater broadband access, increased capacity and larger data storage capacity.

 

Our customers are working to transition their networks to become faster, more responsive and more efficient. We believe the following findings will continue to impact our company and the industry during 2020 and beyond.

 

(1)Coverage Gaps Declining: Less than 10% of people globally (approximately 750 million) now have no access to a mobile broadband network as compared to approximately 24% only five years ago.

 

(2)Usage Gaps an Issue: Approximately 3.3 billion people live in areas in which internet coverage exists but do utilize it. In other words, the usage gap is four times greater than the coverage gap.

 

(3)Affordability: Mobile broadband usage is becoming more affordable across all regions, but its affordability is still short of the desired 2% or less of monthly per capita income. This cost of usage is keeping some users from participating online. There is also a perception in many low-income regions that internet usage will not contribute enough to their security, safety and commerce to warrant the expense. In addition, device cost remains high and thus a barrier to entry.

 

(4)Prevalence of Use: Social media and instant messaging account for the majority of mobile usage. Online calls, news links, YouTube and Vimeo videos, and gaming are the other most prevalent activities.

 

(5)Macro Level: The mobile industry contributed $4 trillion dollars to the global gross domestic product (GDP) last year (or almost 5% of the total GDP). A recent study conducted by Dr. Raul Katz and Fernando Collorda for the International Telecommunication Union, a specialized agency of the United Nations for information and communication technologies, concluded that a 10% increase in mobile broadband connectivity would lead to an increase in GDP of roughly 2% in both developed and underdeveloped regions.

 

(6)Micro Level: Gallup and GSMA polls both found that mobile ownership and internet connectivity is associated with an improvement in people’s lives, as evidence by increases in net positive emotions and average life evaluations (not the same as longevity).

 

Transition from Traditional to the IoT

 

The IoT wireless dream is evolving from an industry vision toward a tangible, next-generation wireless technology. Many operators have begun early transitions, or perhaps more accurately – are beginning to build a framework, to operable 5G networks and have announced trials and pre-standard deployments of 5G technology. This technology is primarily higher frequency, millimeter wave radios and higher order (more efficient) modulation methods, such as 4096 QAM. The number of 5G-enabled devices is expected to continue to increase during 2020 and accelerate beyond that. The primary benefits of 5G are expected to include:

 

enhanced mobile broadband to support significant improvement in data rates and user experience in both the uplink and downlink;

 

IoT communications to support the expected billions of connections between machines as well as short bursts of information to other systems; and

 

low latency, high-reliability to support applications that are critical or are needed in real time, like factory machines, virtual reality and augmentation.

 

Wireless operators will need to both acquire and launch new spectrum for 5G, as well as continue their strategy of re-allocation of spectrum from one generation to another. Some of this spectrum will be at much higher frequencies and will use new technologies to deliver exceptional amounts of bandwidth to subscribers. 5G also requires significant fiber infrastructure to connect wireless access points to each other to improve the response time of the network. As wireless operators transition toward 5G, they must also manage the fundamental network deployment issues of site acquisition, power, backhaul and in-building wireless proliferation.

 

In addition to investment required by wireless operators, the transition to 5G could also spark an investment cycle by cable operators as they upgrade their networks to compete with fixed wireless broadband, which could become a viable alternative to traditional broadband internet access.

 

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Our Growth Strategy

 

Under the leadership of our senior management team, we intend to address and exploit the large and growing market for internet connectivity and essential communications infrastructure as we begin to build our sales, marketing and operations groups to support our planned growth while focusing on increasing operating margins through cost control measures. While organic growth will be our primary focus in driving our business forward, we expect acquisitions and select teaming and partnering arrangements with other companies will play a strategic role in strengthening our existing product and service lines and providing cross-selling opportunities. We are pursuing several growth strategies, including:

 

Continue to Innovate and Extend our Technology Leadership. Mobile broadband infrastructure innovations are required to dramatically improve the commercial viability of both the 4G LTE and 5G buildouts. It is well documented that more 4G infrastructure is required for 5G to be viable. However, with the huge increase in front edge access radios required for an IoT/5G buildout, relative capital costs must come down to allow data to remain affordable. This requires doing more with less through “innovation.” We expect our continued investments in research and development will enable us to continue to provide innovative products to the marketplace. For example, early next year we expect to roll out our initial products incorporating our patented In-Band Full-Duplex technology, which doubles the efficiency, and as a result, the data throughput, of wireless spectrum channels. We also continue to pursue VEO’s SiP research, discoveries and developments, which we believe will not only eliminate the current log-jam many internet providers and data centers experience by providing significantly greater data speed and throughput in the switch that converts data bits from voltage modulations in the copper used in radios to light modulations that are used in fiber, and vice versa, but will also form the technological basis for the future of chip-to-chip light computing.

 

Enhance Sales Growth. We intend to generate additional growth opportunities by:

 

Growing our customer base and geographic marketsWe intend to drive new customer growth by expanding our direct sales force focused on the mobile infrastructure markets. The initial focus of our direct sales program will be North America, with foreign sales coming through licensed channel partners and advisory personnel. In addition, we expect to leverage our existing base of resellers and more than 700-plus existing customers to help proliferate the knowledge globally of our technical superiorities and increase our customer base.

 

Increasing penetration within existing customers. We plan to continue to increase our product penetration within our existing customer base by expanding the breadth of our product and service offerings to provide for continued cross-selling opportunities. For example, while we believe DragonWave is well known for its microwave backhaul radio products, we have recently added additional millimeter wave frequency designs that can be offered to existing customers, as well as new customers. Similarly, we will seek to cross-sell the back-up power supply units of our InduraPower subsidiary and the rapid deployable networks offered by our Drone Aviation subsidiary.

 

Focus on Innovation to Solve Critical Problems. We plan to build on our legacy of innovation and on our worldwide portfolio of patents and patent applications by continuing to invest in research and development. We expect to focus on expanding the functionality of our backhaul and access equipment products, while investing in capabilities that address new market opportunities. We believe this strategy will enable new high-growth opportunities and allow us to continue to deliver differentiated high-value products and services to our customers. We also intend to utilize our deep industry expertise to offer unique perspectives to solve customers’ challenges. We intend to focus our investment on high-growth markets.

 

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Become a Preferred Partner to our Customers. We plan to expand our position within the telecom industry by developing and enhancing value-creating partner relationships with our customers, suppliers and distributors, as well as our channel and technology partners. We intend to expand these relationships by innovating, collaborating and selling with our customers. We expect to meet our commitments and maintain our product quality while collaborating with our customers to ensure we are providing solutions to their key network challenges.

 

Pursue Strategic Relationships. We expect to continue to pursue strategic technology and distribution relationships, alliances and acquisitions that will help us align with the strategic priorities of our customers. We intend to continue to invest in technologies to ensure interoperability across the ecosystems that support our customers’ most critical business processes through our partner programs. We continue to work with current industry partners while exploring a range of new partnerships to expand the products and services we offer.

 

Grow Revenues and Market Share through Selective Acquisitions. We plan to continue to acquire private companies or technologies that will enhance our earnings and offer complementary products and services or expand our geographic and industry reach. We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths and capture and retain more work in-house as a prime contractor for our customers, thereby contributing to our profitability. We also believe that increased scale will enable us to bid and take on larger contracts.

 

Increase Operating Margins by Leveraging Operating Efficiencies. We believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our newly-acquired businesses, we will be positioned to offer more integrated end-to-end solutions and improve operating margins. We will also seek to reduce our manufacturing costs to increase our margins. For example, in March 2020, we acquired Sovereign Plastics, a supply chain company that will allow us to reduce our costs for metal and plastics used in our product manufacturing by up to 45% for certain products we manufacture, such as battery housings, and allow us to implement a just-in-time supply chain program that will significantly reduce our overall inventory sizes and hold times for those components.

 

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Our Products

 

All of our products enhance or directly contribute to the overall telecommunication infrastructure, and fall within the following three product groups:

 

Micro and Millimeter Microwave Technologies and Products

 

Through our DragonWave subsidiary, we design, manufacture and sell best-in-class (as defined by power, signal efficiency and range), microwave packet radio equipment for telecommunications and data. In addition to certain 3G legacy equipment that we offer under our Horizon-branded line of backhaul radios, we offer our Harmony-branded line of backhaul radios that are the most data efficient in existence and offer the most powerful, longest-range solution for backhaul in the industry. The Harmony Enhanced and the Harmony MC (for “Multi-Channel”) radios have the following characteristics:

 

Harmony Enhanced: Our Harmony Enhanced radios are high capacity, long reach, multi-service radios operating in the 6-42 gigahertz (GHz) spectrum bands. Each is a compact, all-outdoor radio that allows operators to cost effectively scale their networks with the industry’s leading system gain, highest spectral efficiency and increased capacity that is enabled through 112-megahertz (MHz) channel support, 4096QAM capability, Bandwidth Accelerator+ and multiple-input and multiple-output (MIMO).  These capabilities allow our Harmony Enhanced radios to deliver more than two billion bits per second (Gbps) in a single radio, with scalability to four Gbps via MIMO in a single channel. Bandwidth Accelerator+ provides more than two times throughput improvements with the inclusion of header optimization and the industry’s only bulk compression working in tandem. These radios also provide the highest output power in an all-outdoor microwave system, and leverage generative adversarial networks (GAN) technology to increase reach by more than 30%. Additionally, integrated ethernet switching with weighted random early detection (WRED) queuing, E-LINE and E-LAN support and upgradability to MPLS-TP, enables a true all-outdoor installation without the need for an additional access switch. 

 

Harmony MC: Our Harmony MC radios are high capacity packet microwave radios that build upon the Harmony Enhanced family of radios by delivering a multi-carrier channel system and doubling the capacity available in a single microwave outdoor unit. Because the radio and modem are integrated into a single highly-compact outdoor unit, Harmony EnhancedMC is a zero-footprint solution that eliminates rack congestion and minimizes colocation space. The ultra-high power increases the overall system gain and allows for deployment of smaller dishes, higher order modulations or increased link availability. Our Harmony MC radios also achieve the highest degree of spectral efficiency (through 4096 QAM, 4 x 4 MIMO and wider channels) in the marketplace, delivering more capacity per channel with a longer reach than any other all-outdoor microwave system. Our Harmony EnhancedMC radios also deliver capacities up to four Gbps in a single radio and eight Gbps in a single channel with MIMO or a single antenna with cross polarization interference cancellation (XPIC)

 

Engineering efforts are underway now with two additional enhancements – full-duplex and transpositional modulation waveforms that will be programmed to nearly triple the spectral efficiency of our microwave radios, which would far exceed our competitor’s offerings. These enhancements have the following characteristics:

 

In-Band Full-Duplex Technology: In early 2021, we expect to introduce our first microwave products incorporating our proprietary in-band full-duplex technology that was innovated by our Lextrum subsidiary. This technology, which is useful in almost any wireless communication system, functions by essentially doubling the data throughput on existing antennae by sending and receiving simultaneously on the same frequency. This capability is critical in backhaul networks (tower-to-tower applications) and is a fundamental component of 5G wireless technology if it is to operate most efficiently. Following commercial rollout of this technology in our own products, Lextrum will begin licensing its use to other radio designers and manufacturers, which we believe will generate license and royalty fee revenues commencing in 2021.

 

Transpositional Modulation Technology: In the first quarter of 2021, we also expect to introduce our first microwave products incorporating the transpositional modulation (TM) technology. This technology dramatically increases the capacity of an existing network through unique patented engineering and algorithm solutions while not requiring a new standard for integration. Its performance has been shown to increase waveform speed and capacity, and it can be used simultaneously and transparently with existing telecom waveforms with no appreciable interference with any co-existing modulation type. TM technology is the only known form of modulation that allows a single carrier to transmit two or more independent signals simultaneously in the same wave without destroying the integrity of the individual bit streams, thereby enabling transmission of significantly more data than existing modulations.

 

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Intelligent Batteries and Back-up Power Solutions

 

Through our InduraPower subsidiary, we offer and are further developing a line of environmentally-friendly, non-volatile advanced intelligent lithium ion batteries and back-up power units that charge quickly, have a life span approximately five times longer than conventional lead-acid batteries, can be monitored remotely and can provide power for a wide range of applications, including cellular towers and other RAN infrastructures, as well as automotive, aerospace and marine vehicles. Used in conjunction with our microwave radios, our batteries and back-up power solutions would ensure their seamless operation in the event of a power grid or local electrical failure or interruption. The use of lithium-ion phosphate chemistry in our batteries provides for an approximate 70% reduction in weight and 30% to 40% reduction in size over current lead-acid/ absorbent glass mat (AGM)-driven power supplies.

 

Tethered Drones and Aerostats

 

Through our Drone Aviation subsidiary, we design, develop, market, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications including ISR and communications. We focus primarily on the development of a tethered aerostat known as the WASP, which is principally designed for military and security applications where they can provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high strength armored tether.

 

Our core aerostat products are designed to provide real-time, semi-persistent situational awareness to various military and national security customers such as the U.S. Department of Defense and units of the U.S. Department of Homeland Security, such as the U.S. Customs and Border Protection, to improve security at the nation’s ports and borders. The WASP tethered aerostat system provides customers with tactical, highly mobile and cost-effective aerial monitoring and communications capabilities in remote or austere locations where existing infrastructure is lacking or not accessible. Current WASP products include the WASP tactical aerostat and WASP Lite, a rapidly deployable, compact aerostat system. WASP aerostats are either self-contained on a trailer that can be towed by a military all-terrain vehicle (MATV) or mine-resistant ambush-protected vehicle (MRAP) or other standard vehicle, operated from the bed of a pickup truck, UTV or mounted to a building rooftop. They are designed to provide semi-persistent, mobile, real-time day/night high definition video for ISR, detection of improvised explosive devices, border security and other governmental and civilian uses. We believe that all of our products can also be utilized for disaster response missions by supporting two-way and cellular communications and acting as a repeater or provider of wireless networking.

 

Both the WASP and WASP Lite aerostat systems employ a tethered envelope filled with helium gas for lift to carry either a stabilized ISR or communications payload, portable ground control station and a datalink between the ground station and the envelope. Hovering between 500 and 1,500 feet above the ground, the systems provide surveillance and communications capabilities with relatively low acquisition and operating costs. The systems require an operational crew of a minimum of two people, have relatively simple maintenance procedures, and feature quick retrieval and helium top-off for re-inflation.

 

Our Services

 

In addition to our products, we offer maintenance and support services, as well as a selection of other professional services. We utilize a multi-tiered support model to deliver services that leverage the capabilities of our own direct resources, channels partners and other third-party organizations.

 

Our professional services are provided primarily by our Silver Bullet subsidiary, which engineers, designs and develops a broad range of next-generation network systems and system components, including:

 

hardware and software design and development, including ISR, embedded designs, high-speed digital and radio frequency (RF), printed circuit board design, field-programmable gate array (FPGA) and application-specific integrated circuit (ASIC) designs;

 

large-scale network protocol development and software-defined radio systems; and

 

wireless communications designs in tactical communication systems, automotive telematics, cellular communication systems, municipal Wi-Fi/WiMAX, security systems, seismic detection and consumer electronics.

 

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We believe a broad range of services is essential to the successful customer deployment and ongoing support of our products, and we employ remote technical support engineers, spare parts planning and logistics staff and professional services consultants with proven network experience to provide our services.

 

Customers

 

We manufacture and sell our portfolio of telecommunications-related products on a global basis to over 700 customers. Our customers include a large percentage of mobile cellular carriers, large international corporations, governments and private network users. Some of the relationships with customers, such as within our DragonWave subsidiary, typically date back many years. We believe our diversified customer base provides us an opportunity to leverage our skills, experience and varied product lines across markets and reduces our exposure to a single end market. Additionally, we believe the diversity of our customer base is an important strength of our company.

 

We believe there has been a trend on the part of customers to consolidate their lists of qualified suppliers to companies that have the ability to meet certain technical, quality, delivery and other standards while maintaining competitive prices. We believe we have positioned our offerings and resources to compete effectively in this environment. As an industry participant in the telecommunications microwave backhaul segment, we have established close working relationships with many of our customers on a global basis. These relationships allow us to better anticipate and respond to the needs of these customer when designing new products and technical solutions. By working with customers in developing new products and technologies, we are able to identify and act on trends and leverage knowledge about next-generation technology across our portfolio of products. In addition, we have concentrated our efforts on service, procurement and manufacturing improvements designed to increase product quality and performance and lower product lead-time and cost.

 

Manufacturing, Suppliers and Vendors

 

The manufacturing of our microwave radios and other network communications products is outsourced to principally one third-party contract manufacturer, Benchmark Electronics, Inc. (“Benchmark”), a well-established contract manufacturer with expertise in the telecom equipment industry. This approach allows us to reduce our costs as it reduces our manufacturing overhead and inventory and also allows us to adjust quickly to changing customer demand. Benchmark assembles our products using design specifications, quality assurance programs and standards that we establish, and it procures components and assembles our products based on our demand forecasts. These forecasts represent our estimates of future demand for our products based upon historical trends and analysis from our sales and product management functions as adjusted for overall market conditions.

 

The manufacturing agreement we entered into with Benchmark does not provide for any minimum purchase commitments and had an initial term of two years, which now automatically renews for one-year terms, unless either party gives written notice to the other party not less than 90 days prior to the last day of the applicable term. Additionally, this agreement may be terminated by either party (i) with advance written notice provided to the other party, subject to certain notice period limitations, or (ii) with written notice, subject to applicable cure periods, if the other party has materially breached its obligations under the agreement.

 

We believe that this contract manufacturing relationship allows us to operate our business efficiently by focusing our internal efforts on the development of our technologies and products, and provides us with substantial scale-up capacity. We regularly test quality on-site at Benchmark’s facility, and we obtain full quality inspection reports. We also maintain a non-disclosure agreement with Benchmark.

  

We and our contract manufacturing partner purchase a wide variety of raw materials for the manufacture of our network communications products, including (i) precious metals such as gold, silver and palladium, (ii) aluminum, steel, copper, titanium and metal alloy products and (iii) plastic materials. We also purchase a wide variety of mechanical and electronic components for the manufacturing of such products. Such raw materials and components are generally available throughout the world and are purchased domestically when possible from a variety of suppliers. We are generally not dependent upon any one source for raw materials or components. We do not anticipate any difficulties in obtaining raw materials or components necessary for the production of our network communications products.

 

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However, certain materials and equipment for our Drone Aviation products are custom made for those products and are available only from a limited number of suppliers. Failure of a supplier could cause delays in delivery of the products if another supplier cannot promptly be found or if the quality of such replacement supplier’s components is inferior or unacceptable. For a discussion of certain risks related to raw materials and components, see “Risk Factors” in this prospectus.

 

Competition

 

The telecommunications and mobile broadband markets are highly competitive and rapidly evolving. We compete with domestic and international companies, many of which have substantially greater financial and other resources than we do. We encounter substantial competition in most of our markets, although we believe we have few competitors that compete with us in performance capabilities across all our product lines and markets. Our principal competitors in one or more of our product lines or markets include Ericsson, Nokia, Cambium, Ceragon, Aviat and Huawei. We also compete with internally developed network solutions of certain network equipment manufacturers, including Facebook, Google, AT&T, Verizon and T-Mobile. Finally, we face competition from working groups and associations that are the result of joint developments among certain of the competitors listed above. Consolidation in the telecommunications and mobile broadband industry has increased in recent years, and future consolidation could further intensify the competitive pressures that we face.

 

The principal competitive factors upon which we compete include performance, low power consumption, rapid innovation, breadth of product line, availability, product reliability, reputation, level of integration and cost, multi-sourcing and selling price. We believe that we compete effectively by offering high levels of customer value through high speed, high density, low power consumption, broad integration of wireless radio functions, software intelligence for configuration, control and monitoring, cost-efficiency, ease of deployment and collaborative product design. We cannot be certain we will continue to compete effectively.

 

We may also face competition from companies that may expand into our industry and introduce additional competitive products. The same standardization that allows for the integration of our products into wireless infrastructure systems carries the side effect of lowing the competitive threshold for new market entrants. Existing and potential customers and strategic partners are also potential competitors. These customers may internally develop or acquire additional competitive products or technologies, selectively, or through consolidation of the companies in our industry, which may cause them to reduce or cease their purchases from us.

 

Research and Development

 

We generally implement our product development strategy through product design teams and collaborative initiatives with customers, which can also result in our company obtaining approved vendor status for our customers’ new products and programs. We focus our research and development efforts primarily on those product areas that we believe have the potential for broad market applications and significant sales within a one–to–three–year period. We seek to have our products become widely accepted within the industry for similar applications and products manufactured by other potential customers, which we believe will provide additional sources of future revenue. By developing application specific products, we are able to decrease our exposure to standard products, which are more likely to experience greater pricing pressure. At June 30, 2020, our research, development and engineering efforts, which relate to the creation of new and improved products and processes, were supported by approximately 46 employees and consultants, of which 75% were engineers with advanced degrees. Our research and development activities are generally performed by individual operating units of our company focused on specific markets and product technologies.

 

Intellectual Property

 

Our success and ability to compete depend substantially upon our core technology and intellectual property rights. We generally rely on patent, trademark and copyright laws, trade secret protection and confidentiality agreements to protect our intellectual property rights. In addition, we generally require employees and consultants to execute appropriate nondisclosure and proprietary rights agreements. These agreements acknowledge our exclusive ownership of intellectual property developed for us and require that all proprietary information remain confidential.

 

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We maintain a program designed to identify technology that is appropriate for patent and trade secret protection, and we file patent applications in the United States and, when appropriate, certain other countries for inventions that we consider significant. As of June 30, 2020, we had 34 patents granted in the United States and foreign jurisdictions that expire between 2023 and 2029. As of such date, we also had four patent applications pending in the United States and foreign jurisdictions. We also continue to acquire patents through acquisitions or direct prosecution efforts and engage in licensing transactions to secure the right to use third-parties’ patents. Although our business is not materially dependent upon any one patent, our patent rights and the products made and sold under our patents, taken as a whole, are a significant element of our business.

 

In addition to patents, we also possess other intellectual property, including trademarks, know-how, trade secrets, design rights and copyrights. We control access to and use of our software, technology and other proprietary information through internal and external controls, including contractual protections with employees, contractors, customers and partners. Our software is protected by U.S. and international copyright, patent and trade secret laws. Despite our efforts to protect our software, technology and other proprietary information, unauthorized parties may still copy or otherwise obtain and use our software, technology and other proprietary information. In addition, we have expanded our international operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.

 

Companies in the industry in which we operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual property rights. We may receive such claims from companies, including from competitors and customers, some of which have substantially more resources and have been developing relevant technology similar to ours. As and if we become more successful, we believe that competitors will be more likely to try to develop products that are similar to ours and that may infringe on our proprietary rights. It may also be more likely that competitors or other third parties will claim that our products infringe their proprietary rights. Successful claims of infringement by a third party, if any, could result in significant penalties or injunctions that could prevent us from selling some of our products in certain markets, result in settlements or judgments that require payment of significant royalties or damages or require us to expend time and money to develop non-infringing products. We cannot assure you that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights, but will not and have never done so intentionally.

 

Regulation

 

As our customers operate around the world and, to a limited degree, we rely upon non-U.S. manufacturers to make our products, our business and ability to successfully compete for business in our industry may become dependent upon global, supply, manufacturing and customer relationships that are affected by the trade and tariff policies of each country in which we operate. Increased tariffs on parts and components imposed by the countries in which our product components may be sourced can increase our production costs, and increased tariffs imposed by the countries in which our products are sold can increase the cost of our products to our customers.

 

Certain of our products and services are subject to export controls, including the Export Administration Regulations of the U.S. Department of Commerce and economic and trade sanctions regulations administered by the Office of Foreign Assets Controls of the U.S. Treasury Department, and similar laws and regulations that apply in other jurisdictions in which we distribute or sell our products and services. Export control and economic sanctions laws and regulations include restrictions and prohibitions on the sale or supply of certain products and services and on the transfer of parts, components and related technical information and know-how to certain countries, regions, governments, persons and entities. U.S. regulators may also impose new restrictions on previously non-controlled emerging or foundational items and technologies for which exports to countries such as China are deemed to present undesirable national security risks. Even without such legislative or regulatory action, we would be prohibited from exporting our products to any foreign recipient if we have knowledge that a violation of U.S. export regulations has occurred, is about to occur or is intended to occur in connection with the item. Different countries may implement their own export control regulatory systems, which can affect the flow of parts, components, finished products and related technologies throughout the supply chain to and from suppliers, manufacturers, distributors and customers. In 2019, China published a proposed new comprehensive export control law that would, if adopted, create a system through which China may selectively restrict exports of products and technologies from China, perhaps in response to regulatory actions affecting China that may be imposed by adversary trading partners, such as the United States.

 

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In addition, various countries regulate imports of certain products through permitting, licensing and transaction review procedures, and may enact laws that could limit our ability to produce or distribute our products or the ability of our customers to produce or distribute products into which our products are incorporated. The exportation, re-exportation, transfers within foreign countries and importation of our products and the parts, components and technologies necessary to manufacture our products, including by our partners, must comply with these laws and regulations. Among these regulations are rules in the United States and other countries that prohibit companies such as Huawei from supplying products and services for national 5G telecommunications networks. Pursuant to an executive order issued in May 2019, the U.S. government is developing a new regulatory mechanism through which it may block imports into the United States of certain information and communications products and services designed, developed, manufactured or supplied by entities owned by, controlled by or subject to the jurisdiction or direction of a foreign adversary where the transaction presents an undue risk to U.S. information and communications technology or services, critical infrastructure or the digital economy of the United States, or other unacceptable risks to the national security of the United States or the security and safety of United States persons. U.S. government procurement supply chain risk management regulations prohibit U.S. government agencies from directly or indirectly contracting to obtain certain telecommunications and video surveillance equipment, systems or services produced or performed by certain designated Chinese companies, and this prohibition is expected to be extended to prohibit U.S. government agencies from contracting with entities that use such equipment, systems or services, and to prohibit the use of U.S. government grant or loan proceeds to acquire such equipment, systems or services.

 

We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery and anti-kickback laws and regulations in other places where we do business. These laws and regulations generally prohibit companies and their intermediaries from offering or making improper payments to governmental, political and certain international organization officials for the purpose of obtaining, retaining or directing business. Our exposure for violating these laws and regulations increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.

 

In addition, we are subject to, or are expected to facilitate our customers’ compliance with, environmental, health and safety laws and regulations in each of the jurisdictions in which we operate or sell our products. These laws and regulations govern, among other things, the handling and disposal of hazardous substances and wastes, employee health and safety and the use of hazardous materials in, and the recycling of, our products.

 

Employees

 

As of June 30, 2020, we employed 102 full-time employees, consisting of 34 employees in research and development, 32 employees in operations, which includes manufacturing, supply chain, quality control and assurance, and 36 employees in executive, sales, general and administrative. We have no part-time employees. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective bargaining arrangements. We consider our employee relations to be good. All employees are subject to contractual agreements that specify requirements on confidentiality and restrictions on working for competitors, as well as other standard matters.

 

Properties

 

Our principal executive offices are located in Dallas, Texas in segregated offices comprising an aggregate of approximately 15,289 square feet. We occupy our executive offices under a 63-month lease that expires in July 2025. In addition, our subsidiaries lease property in Jacksonville, Florida (Drone Aviation Executive Offices), Holly Hill, Florida (Drone Aviation Manufacturing Facility), Ottawa, Ontario, Canada (DragonWave), Tucson, Arizona (InduraPower), Chantilly, Virginia (VNC), San Diego, California (VEO) and Colorado Springs, Colorado (Sovereign Plastics). We believe our existing facilities are adequate to meet our current requirements. We do not own any real property.

 

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Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Neither our company nor any of our subsidiaries currently is a party to any legal proceeding that, individually or in the aggregate, is material to our company as a whole, except as follows.

 

On May 22, 2020, Michael Powell filed suit against DragonWave-X, LLC, DragonWave-X, Inc., Transform-X, Inc., ComSovereign Corp, and our company in the Pima County Arizona Superior Court, Case No. C20202216. Mr. Powell has alleged that he entered into an employment agreement with DragonWave-X, Inc. in July 2018, was terminated without cause in May 2019, and is owed approximately $182,000 in wages and $50,000 in bonuses. Mr. Powell is seeking approximately $697,000 in treble damages, punitive damages, consequential damages, interest and attorneys’ fees and costs. We dispute Mr. Powell’s allegations and we intend to vigorously defend the lawsuit.

 

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MANAGEMENT

 

Management and Board of Directors

 

The following table sets forth the names and ages of the members of our board of directors and our executive officers and the positions held by each. Our board of directors elects our executive officers annually by majority vote. Each director’s term continues until his or her successor is elected or qualified at the next annual meeting, unless such director earlier resigns or is removed.  

 

Name   Age   Positions and Offices
Daniel L. Hodges   54   Chairman of the Board and Chief Executive Officer
John E. Howell   50   President and Director
Brian T. Mihelich   53   Chief Financial Officer
Dr. Dustin McIntire   46   Chief Technology Officer
Mohan Tammisetti   51   Senior Vice President – Engineering
Keith Kaczmarek   64   Senior Vice President – Business Development
Kevin M. Sherlock   59   General Counsel and Secretary
David Aguilar   64   Director
Richard J. Berman   78   Director
Brent M. Davies   71   Director
James A. Marks   67   Director

 

The following is information about the experience and attributes of the members of our board of directors and senior executive officers as of the date of this prospectus. The experience and attributes of our directors discussed below provide the reasons that these individuals were selected for board membership, as well as why they continue to serve in such positions.

 

Daniel L. Hodges, 54, was appointed our Chairman and Chief Executive Officer upon the closing of the ComSovereign Acquisition on November 27, 2019. Prior to joining our company, beginning in January 2019, Mr. Hodges was the Chief Executive Officer and co-founder of ComSovereign. In 2016, prior to his tenure with ComSovereign, Mr. Hodges founded Transform-X, Inc., the former owner of ComSovereign’s DragonWave-X and Lextrum subsidiaries, and served as Chairman from 2016 to January 2019. Mr. Hodges also founded and served as Chief Executive Officer of Medusa Scientific LLC, a science and engineering research and development company (“Medusa”). When one of Medusa’s technologies showed commercial promise, he made the decision to spin it off and formed TM Technologies, Inc., a ’sister-company,’ in 2013 to commercialize the proprietary modulation technology owned by Medusa. He continues to serve as Board Chairman and Chief Executive Officer of TM Technologies, Inc. We believe Mr. Hodges has an extraordinary business development mind-set, strong investigative research experience and deep experience within both the commercial sector and the U.S. Department of Defense and related areas. In addition to his commercial successes, Mr. Hodges served for 26 years as a military member, rising to the rank of Lieutenant Colonel and spending his last 18 years in service as a senior flight instructor with the Air National Guard. Mr. Hodges retired from the military in September 2014. In addition, Mr. Hodges holds multiple U.S. patents as inventor, including a “Method and System for a Grass Roots Intelligence Program” along with numerous radar and communications and radar related technologies. As an author, he wrote and published a volume titled “Future Span” covering current and future U.S. energy paradigms. As the founder and leader of multiple enterprises, he has built organizations from inception that included subsidiaries covering focus areas of aerospace, marine, communications and scientific research and development.

 

John E. Howell, 50, was appointed our President and as a director of our company upon the closing of the ComSovereign Acquisition on November 27, 2019. Prior to joining our company, beginning in January 2019, Mr. Howell was President and a director of ComSovereign. In 2016, prior to his tenure with ComSovereign, Mr. Howell founded Transform-X, Inc., the former owner of ComSovereign’s DragonWave-X and Lextrum subsidiaries, and served as its President from 2016 to January 2019. Since November 2015, Mr. Howell also has held senior roles within TM Technologies, Inc., including as President of TM Global, LLC. Prior to joining TM Global, Mr. Howell was a Co-Founder of the Willowdale Family of boutique advisory companies. Mr. Howell continues to serve as Willowdale’s Non-Executive Chairman. Outside of leading efforts on behalf of Willowdale’s clients, Mr. Howell is also an active leader with a number of national non-profits, particularly in the fields of children’s health and veterans’ affairs. Mr. Howell was an early member of the Business Advisory Committee for the Muscular Dystrophy Association’s venture philanthropy activity. Mr. Howell also serves as one of the four directors of The Rip Van Winkle Foundation, the New York-based Foundation funded largely with proceeds from the estate of late New York Yankee, Henry “Lou” Gehrig and his wife Eleanor. Previously, Mr. Howell served the U.S. government in a variety of uniformed and civilian capacities worldwide for the United States Army and Central Intelligence Agency. Mr. Howell is both Airborne and Ranger Qualified. Mr. Howell is a Fulbright Scholar and alumnus of Davidson College in Davidson, North Carolina.

 

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Brian T. Mihelich, 53, was appointed our Chief Financial Officer on January 2, 2020. Prior to assuming the role of our Chief Financial Officer, Mr. Mihelich was, since September 2019, the Chief Financial Officer of our ComSovereign Corp. subsidiary, which we acquired in connection with the ComSovereign Acquisition on November 27, 2019. Prior to joining ComSovereign Corp., Mr. Mihelich was from July 2015 to February 2019 Vice President – Managed Services at Ericsson. From 2014 to July 2015, Mr. Mihelich was Head of Operations of the Vodafone account at Ericsson. We believe Mr. Mihelich has significant experience in the telecom sector where he has had senior management responsibilities for numerous business relationships, including with AT&T, Sprint, Vodafone, Napster, Google and Facebook. He has managed operations with sales of up to $750 million and up to 600 direct and indirect employee reports. Mr. Mihelich served with distinction in the U.S. Air Force, and has also worked for the U.S. Securities and Exchange Commission. Mr. Mihelich earned a B.S. in Business Administration from Northern Michigan University, and an MBA from the University of Texas.

 

Dr. Dustin McIntire, 46, was appointed our Chief Technology Officer upon the closing of the ComSovereign Acquisition on November 27, 2019. Dr. McIntire is an electrical design engineer with more than 20 years of experience designing hardware and software for embedded and consumer electronics, wireless communications systems, and the Internet of Things. Additionally, he has an acute broad area expertise over several technological fields and is a skilled technologist and systems architect with a history of successfully leading projects and teams from concept through production utilizing extensive background in computer architecture, low power circuits, embedded software, and communications protocols. He possesses a sharp ability to architect, design, fabricate, and manufacture successful products from concept to high volume production. Examples include co-founding of a cloud-based SaaS company providing IoT services, hosting hundreds of thousands of devices for multiple Fortune 500 companies, and developing a scalable edge computing system to perform distributed tracking using multimodal sensing assets. Companies he has led as either Chief Technologist, Chief Technology Officer or Chief Executive Officer include Tranzeo Wireless Technologies, Inc., Arrayent, Inc., Prodeo Systems, Inc. and Silver-Bullet Technology, Inc. He holds a B.S. from Stanford, and M.S. and Ph.D. degrees in Electrical Engineering from UCLA.

 

Mohan Tammisetti, 51, was appointed our Senior Vice President of Engineering on July 6, 2020 upon the closing of our acquisition of VNC. Prior to joining our company, Mr. Tammisetti founded VNC in 2015 and served as its Chief Executive Officer prior to our acquisition of that company.  Prior to founding VNC in 2015, Mr. Tammisetti build a test lab as an independent consultant while assisting in technology architecture for LTE cSON for Sprint. From May 2012 to August 2014, Mr. Tammisetti served as the Chief Architect of Thales Defence & Security for the Thales Group, where he was Engineering, Technology & Deployment lead in the United States for Thales LTE Mobile solution. Mr. Tammisetti has more than 18 years of proven success as a senior executive and technology strategist.  Mr. Tammisetti has received multiple U.S. patents for products he developed. He earned an MBA and an M.S. in telecommunications from Stratford University, and a B.E. in Electronics and Communications from Marathwada University.

 

Keith Kaczmarek, 64, was appointed our Senior Vice President of Business Development on July 6, 2020 upon the closing of our acquisition of VNC.. Prior to joining our company, Mr. Kaczmarek was the President of inPhase Wireless, beginning in April 2009, and currently serves as the Chief Strategy Officer at VNC. Mr. Kaczmarek has held prominent business development, technology strategy and operational leadership roles at Intrado, Powerwave, Cyren Call, FiberTower, inOvate Communications Group, Teligent, Nextel, AirTouch, PrimeCo and GTE. In addition, he was a general partner at two private equity funds: inOvate Communications Group, which was focused on early-stage wireless companies and Public Safety Ventures, which was focused on wireless for public safety networks and critical infrastructure markets. Mr. Kaczmarek is a recognized industry technologist and business leader who has led the roll-out of next generation technologies for multiple start-ups and large-scale wireless companies.  He was a co-founder of Cyren Call Communications, which focused on supporting public safety in the creation of a nationwide public safety broadband network. Cyren Call is largely viewed as the precursor to FirstNet.  He is a recognized expert and speaker at national wireless industry conferences on advanced wireless technologies and public safety systems and is a Radio Club of America Fellow. He earned an MBA, an M.S. in Electrical Engineering and a B.S. in Electrical Engineering from the University of Illinois.

 

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Kevin M. Sherlock, 59, was appointed our General Counsel and Secretary on January 2, 2020. Prior to joining our company, Mr. Sherlock was a partner in the law firm of Heurlin & Sherlock, PC, in Tucson, Arizona, which he co-founded in 2008 and where he focused primarily on business litigation, securities arbitration, and security clearance matters. While in the private practice of law, Mr. Sherlock also gained considerable experience in corporate structures and mergers and acquisition work. Mr. Sherlock is licensed to practice law in Washington D.C., Florida and Arizona. Mr. Sherlock earned a Bachelor of Science degree in Multinational Business Operations from Florida State University and a Juris Doctorate from Georgetown University Law Center.

 

David Aguilar, 64, was appointed to our board of directors on January 9, 2017. On September 4, 2019, following the demise of our former Chairman and Chief Executive Officer, Jay Nussbaum, Mr. Aguilar was appointed Chairman of the board and served in such capacity until the closing of the ComSovereign Acquisition, at which time Mr. Aguilar resigned as Chairman of our board but remained a director of our company. Since February 2013, Mr. Aguilar has been a principal at Global Security Innovation Strategies, LLC. In April 2010, Mr. Aguilar became Deputy Commissioner of U.S. Customs and Border Protection (“CBP”) and, from December 2011 until his retirement in February 2013, he served as acting Commissioner of CBP. From July 2004 to January 2010, he served as Chief of the U.S. Border Patrol within the CBP. As Acting Commissioner of CBP, Mr. Aguilar took the helm of a workforce of 60,000 agents, officers and other personnel with responsibility for strategic planning and oversight of an annual budget of nearly $12 billion. Mr. Aguilar is a recipient of the 2005 President’s Meritorious Excellence Award, and in 2008, was a recipient of the Presidential Rank Award. Prior to joining the CBP, Mr. Aguilar held a variety of operational and administrative positions within the U.S. Board Patrol since entering duty in June 1978. Mr. Aguilar holds an Associate Degree in Accounting from Laredo Community College and attended Laredo State University and the University of Texas at Arlington. He is a graduate of the Senior Executive Fellows program at Harvard University’s John F. Kennedy School of Government. Mr. Aguilar’s government and management experience qualifies him to serve on the board of directors.

 

Richard J. Berman, 78, was appointed to our board of directors on June 1, 2015. Mr. Berman’s business career spans over 35 years of venture capital, senior management, and merger and acquisitions experience. In the past five years, Mr. Berman has served as a director and/or officer of over a dozen public and private companies. In 2016, he was elected Chairman of Cevolva Biotech Inc. From 2014-2016, he was Chairman of MetaStat, Inc. From 2006-2011, he was Chairman of National Investment Managers, a company with $12 billion in pension administration assets. Mr. Berman is a director of four public healthcare companies: Advaxis, Inc., BioVie Inc., BriaCell Therapeutics Inc. and Cryoport Inc. From 2002 to 2010, he was a director of Nexmed Inc. (now called Seelos Therapeutics, Inc.) where he also served as Chairman and Chief Executive Officer in 2008 and 2009. From 1998-2000, he was employed by Internet Commerce Corporation (now Easylink Services) as Chairman and Chief Executive Officer, and was a director from 1998-2012. Previously, Mr. Berman worked at Goldman Sachs; was Senior Vice President of Bankers Trust Company, where he started the M&A and Leveraged Buyout Departments; he created the largest battery company in the world, in the 1980’s, by merging Prestolite, General Battery and Exide to form Exide Technologies (XIDE); he helped create SoHo, the lower Manhattan neighborhood in NYC, by developing five buildings; and he advised on over $4 billion M&A transactions, completing over 300 deals. Mr. Berman is a past Director of the Stern School of Business of NYU where he obtained his B.S. and M.B.A. degrees. He also has U.S. and foreign law degrees from Boston College and The Hague Academy of International Law, respectively. Notably, Mr. Berman was nominated for public company “Director of the Year” in 2012. Dr. Berman brings to the Board extensive leadership experience in the management of technology companies as well as experience in mergers and acquisitions.

 

Brent M. Davies, 71, was appointed to our board of directors upon the closing of the ComSovereign Acquisition on November 27, 2019. Mr. Davies is also a member of the board of directors of TM Technologies, Inc. and a partner in his accounting practice in Salt Lake City, Utah. He has previously served as Chief Financial Officer of Patient Central Technologies, Inc. and Chief Executive Officer of Robison, Hill & Co. Mr. Davies graduated from the University of Utah with a B.S. in Marketing and a B.S. in Management. After serving as a manager in the S. S. Kresge Co. (K-Mart), he returned to school and received a B.S. in Accounting and an MBA (accounting option) from the University of Wyoming. He is a Certified Management Accountant and has CPA certificates from California, Nevada, Utah and Wyoming. He has had more than 35 years of diversified public accounting, industry and teaching experience, including national accounting firm auditing experience; serving as a controller of a small privately-owned company; serving on the board of directors of several small public and private companies; and participating in accounting and marketing research projects that resulted in two of the articles which he wrote, being published in national magazines. During his career in public accounting he has been involved with various oil and gas, coal, gold, silver, phosphate, sand and gravel mining companies as a consultant, tax preparer, auditor (well over 300 audits) and in financial statement preparation. He has also served on the board of directors for two mining companies. He has taught various tax and accounting courses at the University of Wyoming and has been a frequent speaker at seminars and workshops sponsored by professional, civic and private groups. Mr. Davies brings to the Board extensive financial expertise and significant experience in public company financial leadership.

 

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James A. Marks, 67, was appointed to our Board of Directors upon the closing of the ComSovereign Acquisition on November 27, 2019. James A. “Spider” Marks is the President of The Marks Collaborative, an advisory firm dedicated to the development and transformation of corporate leaders and their organizations. He has led business ventures that included entrepreneurial efforts in education, energy, information technology, and primary research. General Marks spent over 30 years in the United States Army holding every command position from infantry platoon leader to commanding general. Significantly, in industry he was responsible for creating, training and managing a company that staffed over 10,000 linguists in Iraq generating annual revenues of over $700 million in less than a year. He has led large multinational organizations and universities within NATO, the European Union, Korea, Southeast Asia, and the Middle East. General Marks is a published author, routine guest speaker, leader and senior advisor for multiple corporations, and has been an on-air military and intelligence analyst to CNN. In governmental relations, he prepared and presented testimonies for intelligence, armed services, and appropriations committees of both houses of the U.S. Congress. He is an Honor Graduate of the U.S. Army’s Ranger School and a member of the Military Intelligence Hall of Fame. General Marks has a Bachelor of Science degree in Engineering from the United States Military Academy at West Point, NY and a Master of Arts degree in Foreign Affairs from the University of Virginia. Mr. Marks brings to the Board extensive leadership experience as well as significant experience in government relations and contracting.

 

Involvement in Certain Legal Proceedings

 

To our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years

 

1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses)

 

3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;

 

4. being found by a court of competent jurisdiction in a civil action, the SEC or the CFTC to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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Board Composition and Structure; Director Independence

 

Our business and affairs are managed under the direction of our board of directors. Our board of directors currently consists of six members. The term of office for each director will be until his or her successor is elected at our annual meeting or his or her death, resignation or removal, whichever is earliest to occur.

 

While we do not have a stand-alone diversity policy, in considering whether to recommend any director nominee, including candidates recommended by stockholders, we believe that the backgrounds and qualifications of the directors, considered as a group, should provide a significant mix of experience, knowledge and abilities that will allow our board of directors to fulfill its responsibilities. As set forth in our corporate governance guidelines, when considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our business and structure, the board of directors focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors and director nominees will provide an appropriate mix of experience and skills relevant to the size and nature of our business.

 

Our board of directors expects a culture of ethical business conduct. Our board of directors encourages each member to conduct a self-review to determine if he or she is providing effective service with respect to both our company and our stockholders. Should it be determined that a member of our board of directors is unable to effectively act in the best interests of our stockholders, such member would be encouraged to resign.

 

Board Leadership Structure

 

Our amended and restated bylaws and our corporate governance guidelines provide our board of directors with flexibility to combine or separate the positions of Chairman of the Board and Chief Executive Officer in accordance with its determination that utilizing one or the other structure is in the best interests of our company. Daniel L. Hodges currently serves as our Chief Executive Officer and Chairman of the Board.

 

As Chairman of the Board, Mr. Hodge’s key responsibilities will include facilitating communication between our board of directors and management, assessing management’s performance, managing board members, preparation of the agenda for each board meeting, acting as chair of board meetings and meetings of our company’s stockholders and managing relations with stockholders, other stakeholders and the public.

 

We will take steps to ensure that adequate structures and processes are in place to permit our board of directors to function independently of management. The directors will be able to request at any time a meeting restricted to independent directors for the purposes of discussing matters independently of management and are encouraged to do so should they feel that such a meeting is required.

 

Committees of our Board of Directors

 

The standing committees of our board of directors consist of an audit committee, a compensation committee and a nominating and corporate governance committee. Each of the committees reports to our board of directors as they deem appropriate and as our board may request. Each committee of our board of directors has a committee charter that will set out the mandate of such committee, including the responsibilities of the chair of such

 

The composition, duties and responsibilities of these committees are set forth below.

 

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Audit Committee

 

The audit committee is responsible for, among other matters:

 

appointing, retaining and evaluating our independent registered public accounting firm and approving all services to be performed by them;

 

overseeing our independent registered public accounting firm’s qualifications, independence and performance;

 

overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC;

 

reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements;

 

establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters; and

 

reviewing and approving related person transactions.

 

Our audit committee consists of three of our directors, Richard J. Berman, Brent M. Davies and James A. Marks, each of whom meets the definition of “independent director” for purposes of serving on an audit committee under Rule 10A-3 under the Exchange Act and NYSE American exchange rules. Mr. Davies serves as chairman of our audit committee. Our board of directors has determined that Mr. Davies qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K under the Securities Act. The written charter for our audit committee will be available on our corporate website at www.ComSovereign.com, upon the completion of this offering. The information on our website is not part of this prospectus.

 

Compensation Committee

 

The compensation committee is responsible for, among other matters:

 

reviewing key employee compensation goals, policies, plans and programs;

 

reviewing and approving the compensation of our directors, chief executive officer and other executive officers;

 

producing an annual report on executive compensation in accordance with the rules and regulations promulgated by the SEC;

 

reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and

 

administering our stock plans and other incentive compensation plans.

 

Our compensation committee consists of three of our directors, Messrs. Berman, Davies and Marks, each of whom meets the definition of “independent director” under the rules of the NYSE American exchange and the definition of non-employee director under Rule 16b-3 promulgated under the Exchange Act. Mr. Berman serves as chairman of our compensation committee. Our board of directors has adopted a written charter for the compensation committee in connection with this offering, which will be available on our corporate website at www.ComSovereign.com, upon the completion of this offering. The information on our website is not part of this prospectus.

 

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Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee will be responsible for, among other matters:

 

determining the qualifications, qualities, skills and other expertise required to be a director and developing and recommending to the board for its approval criteria to be considered in selecting nominees for director;

 

identifying and screening individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors;

 

overseeing the organization of our board of directors to discharge our board’s duties and responsibilities properly and efficiently;

 

reviewing the committee structure of the board of directors and the composition of such committees and recommending directors to be appointed to each committee and committee chairmen;

 

identifying best practices and recommending corporate governance principles; and

 

developing and recommending to our board of directors a set of corporate governance guidelines and principles applicable to us.

 

Our nominating and corporate governance committee consists of three of our directors, Messrs. Berman, Davies and Marks, each of whom meets the definition of “independent director” under the rules of the NYSE American exchange. Mr. Marks serves as chairman of our nominating and corporate governance committee. Our board of directors has adopted a written charter for the nominating and corporate governance committee in connection with this offering, which will be available on our corporate website at www.ComSovereign.com, upon the completion of this offering. The information on our website is not part of this prospectus.

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of another entity that had one or more of its executive officers serving as a member of our board of directors or compensation committee. None of the members of our compensation committee, when appointed, will have at any time been one of our officers or employees.

 

Other Committees

 

Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

 

Director Term Limits

 

Our board of directors has not adopted policies imposing an arbitrary term or retirement age limit in connection with individuals serving as directors as it does not believe that such a limit is in the best interests of our company. Our nominating and corporate governance committee will annually review the composition of our board of directors, including the age and tenure of individual directors. Our board of directors will strive to achieve a balance between the desirability of its members having a depth of relevant experience, on the one hand, and the need for renewal and new perspectives, on the other hand.

 

Gender Diversity Policy

 

Our board of directors is committed to nominating the best individuals to fulfill director and executive roles. Our board has not adopted policies relating to the identification and nomination of women directors and executives and as it does not believe that it is necessary in the case of our company to have such written policies at this time. Our board of directors believes that diversity is important to ensure that board members and senior management provide the necessary range of perspectives, experience and expertise required to achieve effective stewardship and management. We have not adopted a target regarding women on our board or regarding women in executive officer positions as our board believes that such arbitrary targets are not appropriate for our company. Currently, there are no women directors on our board and there is one woman holding an executive position within our company.

 

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Risk Oversight

 

Our board of directors oversees the risk management activities designed and implemented by our management. Our board of directors executes its oversight responsibility for risk management both directly and through its committees. The full board of directors also considers specific risk topics, including risks associated with our strategic plan, business operations and capital structure. In addition, our board of directors regularly receives detailed reports from members of our senior management and other personnel that include assessments and potential mitigation of the risks and exposures involved with their respective areas of responsibility.

 

Our board of directors has delegated to the audit committee oversight of our risk management process. Our other board committees also consider and address risk as they perform their respective committee responsibilities. All committees report to the full board of directors as appropriate, including when a matter rises to the level of a material or enterprise level risk.

 

Code of Ethics

 

Our board of directors has adopted a Code of Ethics that applies to all of our employees, including our chief executive officer, chief financial officer and principal accounting officer. Our Code of Ethics will be available on our website at www.ComSovereign.com by clicking on “Investors.” If we amend or grant a waiver of one or more of the provisions of our Code of Ethics, we intend to satisfy the requirements under Item 5.05 of Form 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Ethics that apply to our principal executive officer, financial and accounting officers by posting the required information on our website at the above address within four business days of such amendment or waiver. The information on our website is not part of this prospectus.

 

Our board of directors, management and all employees of our company are committed to implementing and adhering to the Code of Ethics. Therefore, it is up to each individual to comply with the Code of Ethics and to be in compliance of the Code of Ethics. If an individual is concerned that there has been a violation of the Code of Ethics, he or she will be able to report in good faith to his or her superior. While a record of such reports will be kept confidential by our company for the purposes of investigation, the report may be made anonymously and no individual making such a report will be subject to any form of retribution.

 

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Executive Compensation

 

Summary Compensation Table

 

The following table provides certain summary information concerning compensation awarded to, earned by or paid to the individuals who served as our principal executive officer at any time during fiscal 2019 and our two other most highly compensated officers in fiscal 2019. These individuals are referred to in this prospectus as the “named executive officers.”

 

Summary Compensation Table

 

Name and Principal Position  Year 

Salary

($)

  

Bonus

($)

  

Stock

Awards

($) (8)

  

Option

Awards

($) (9)

   All Other Compensation ($) (10)  

Total

($)

 
Daniel L. Hodges (1)  2019  $173,096   $   $6,833   $   $14,500   $194,429 
Chairman and Chief Executive Officer  2018                        
                                  
Daniyel Erdberg (2)  2019   179,167    395,833    650,000        63,569    1,288,569 
Former Chief Executive Officer and President  2018   165,833    175,000    232,750    347,904    17,525    939,012 
                                  
Jay Nussbaum (3)  2019   200,000    100,000                300,000 
Former Chief Executive Officer  2018   245,000    225,000    315,000    848,017    29,096    1,662,113 
                                  
John E. Howell (4)  2019   173,096        6,833        14,500    194,429 
President  2018                        
                                  
Dr. Dustin McIntire (5)  2019   163,562        6,833        11,500    181,895 
Chief Technology Officer  2018                        
                                  
Felicia Hess (6)  2019   160,000        130,000        12,303    302,303 
Former Chief Quality Officer  2018   150,833    25,000    302,050    347,904    22,744    848,531 
                                  
Kendall Carpenter (7)  2019   175,000        260,000        33,305    468,305 
Former Chief Financial Officer  2018   165,833    35,000    35,000    147,859    3,506    387,198 

 

  (1) Daniel L. Hodges was elected to our board of directors and was appointed our Chairman and Chief Executive Officer on November 27, 2019 in connection with the consummation of the COMSovereign Acquisition. As an incentive to commence employment with us as Chief Executive Officer, in December 2019, we issued to Mr. Hodges a restricted stock award of 300,000 shares of common stock, which shares shall vest annually in arrears in three equal installments on the first, second and third anniversaries of employment. The 2019 salary of Mr. Hodges reflected in this table includes the salary in the amount of $159,781 payable to Mr. Hodges by ComSovereign for the period from January 10, 2019 (inception) to November 27, 2019 in his capacity as Chairman and Chief Executive Officer of ComSovereign, and $13,315 that was payable by our company for the period November 28, 2019 to December 31, 2019, of which $3,000 was paid. As of December 31, 2019, $204,556 was accrued for payroll and payroll related expenses for Mr. Hodges.

 

  (2) Daniyel Erdberg served as our President, and from September 4, 2019, as our Chief Executive Officer and a Director, prior to his resignation from all positions with our company on November 27, 2019 in connection with the consummation of the ComSovereign Acquisition. For service as Chief Executive Officer and President in 2019, on November 12, 2019, Mr. Erdberg was awarded 1,000,000 shares of restricted common stock that were subject to a change of control vesting condition. On November 27, 2019, all of such shares fully vested in connection with the consummation of our ComSovereign Acquisition. We recognized a $650,000 expense in 2019 on the vesting of such restricted shares. In addition, Mr. Erdberg received a bonus of $63,569 for taxes paid on his behalf on November 27, 2019.

 

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For service as President, in 2018, Mr. Erdberg received one option award. On August 22, 2018, Mr. Erdberg was awarded a stock option to purchase 800,000 shares of our common stock with an exercise price of $1.00 per share and a performance vesting condition. On September 26, 2018, the August 22, 2018 option was cancelled and reissued as an option to purchase 1,000,000 of our common stock shares with an exercise price of $0.65 per share. On December 27, 2018, the option became fully vested. We recognized a $347,904 expense in 2018 on the September 26, 2018 option award. Mr. Erdberg received a bonus of $17,525 for taxes paid on his behalf on the March 28, 2018 vesting of 332,500 shares of stock issued in September 2016 valued at $232,750 on the date vested. Mr. Erdberg earned a 2018 year-end bonus of $175,000 of which $150,000 was paid in 2018 and the balance of $25,000 was paid in 2019.

 

  (3) On August 31, 2019, Jay H. Nussbaum, our Chairman of the Board and Chief Executive Officer on that date, passed away. For service as Chief Executive Officer in 2018, Mr. Nussbaum received one option award. On August 22, 2018, Mr. Nussbaum was awarded a stock option to purchase 1,950,000 shares of our common stock with an exercise price of $1.00 per share and a performance vesting condition. One September 26, 2018, the August 22, 2018 option was cancelled and reissued as an option to purchase 2,350,000 shares of common stock with an exercise price of $0.65 per share. On December 27, 2018, the option became fully vested. We recognized $848,017 expense in 2018 on the September 26, 2018 option award. Mr. Nussbaum received a bonus of $29,096 for taxes paid on his behalf on the March 28, 2018 vesting of 450,000 shares of stock issued in September 2016 valued at $315,000 on the date vested. Mr. Nussbaum earned a 2018 year-end bonus of $225,000, of which $125,000 was paid in 2018 and the balance of $100,000 was paid in 2019.

 

  (4) John E. Howell was appointed our President on November 27, 2019 in connection with the consummation of the ComSovereign Acquisition. As an incentive to commence employment with us as President, in December 2019, we issued to Mr. Howell a restricted stock award of 300,000 shares of common stock, which shares shall vest annually in arrears in three equal installments on the first, second and third anniversaries of employment. The 2019 salary of Mr. Howell reflected in this table includes the salary in the amount of $159,781 payable to Mr. Howell by ComSovereign for the period from January 10, 2019 (inception) to November 27, 2019 in his capacity as President of ComSovereign, and $13,315 that was payable by our company for the period November 28, 2019 to December 31, 2019, of which $3,000 was paid. As of December 31, 2019, $204,556 was accrued for payroll and payroll related expenses for Mr. Howell.

 

  (5) Dr. Dustin McIntire was appointed our Chief Technology Officer on November 27, 2019 in connection with the consummation of the ComSovereign Acquisition. As an incentive to commence employment with us as Chief Technology Officer, in December 2019, we issued to Dr. McIntire a restricted stock award of 200,000 shares of common stock, which shares shall vest annually in arrears in two equal installments on the first and second anniversaries of employment. The 2019 salary of Dr. McIntire reflected in this table includes the salary in the amount of $150,685 payable to Dr. McIntire by ComSovereign for the period from January 10, 2019 (inception) to November 27, 2019 in his capacity as Chief Technology Officer of ComSovereign, and $12,877 that was payable by our company for the period November 28, 2019 to December 31, 2019, of which $3,000 was paid. As of December 31, 2019, $191,840 was accrued for payroll and payroll related expenses for Dr. McIntire.

 

  (6) Felicia Hess served as our Chief Operating Officer, which title was on September 4, 2019 changed to Chief Quality Officer, prior to her resignation from such position on November 27, 2019 in connection with the consummation of our acquisition of COMSovereign LLC.

 

For service as Chief Quality Officer in 2019, on November 12, 2019, Ms. Hess was awarded a stock option to purchase 200,000 shares of restricted common stock that were subject to a change of control vesting condition. On November 27, 2019, all of such shares fully vested in connection with the consummation of the ComSovereign Acquisition. We recognized a $130,000 expense in 2019 on the vesting of such restricted shares. Ms. Hess received a bonus of $12,303 for taxes paid on her behalf on November 27, 2019.

 

For service as Chief Operating Officer in 2018, Ms. Hess received one option award. On August 22, 2018, Ms. Hess was awarded a stock option to purchase 800,000 shares of our common stock with an exercise price of $1.00 per share and a performance vesting condition. On September 26, 2018, the August 22, 2018 Option was cancelled and reissued as an option to purchase 1,000,000 shares of our common stock with an exercise price of $0.65 per share. On December 27, 2018, the option became fully vested. We recognized $347,904 expense in 2018 on the September 26, 2018 option award. Ms. Hess received a bonus of $22,744 for taxes paid on her behalf on the March 28, 2018 vesting of 431,500 shares of stock issued in September 2016 valued at $302,050 on the date vested. Ms. Hess earned a 2018 year-end bonus of $25,000, off which $0 was paid in 2018 and the balance of $25,000 was paid in 2019.

 

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  (7) Kendall Carpenter served as our Chief Financial Officer until January 2, 2020. For service as Chief Financial Officer in 2019, on November 12, 2019, Ms. Carpenter was awarded 400,000 shares of restricted common stock that were subject to a change of control vesting condition. On November 27, 2019, all of such shares fully vested in connection with the consummation of the ComSovereign Acquisition. We recognized a $260,000 expense in 2019 on the vesting of such restricted shares. Ms. Carpenter received a bonus of $33,305 for taxes paid on her behalf on November 27, 2019

 

For services in 2018, Ms. Carpenter received one option award. On August 22, 2018, Ms. Carpenter was awarded a stock option to purchase 300,000 shares of our common stock with an exercise price of $1.00 per share and a performance vesting condition. On September 26, 2018, the August 22, 2018 option was cancelled and reissued as an option to purchase 425,000 shares of our common stock with an exercise price of $0.65 per share. On December 27, 2018, the option became fully vested. We recognized $147,859 expense in 2018 on the September 26, 2018 option award. Ms. Carpenter received a bonus of $3,506 for taxes paid on her behalf on the March 28, 2018 vesting of 50,000 shares of stock issued in September 2016 valued at $35,000 on the date vested. Ms. Carpenter earned a 2018 year-end bonus of $35,000 that was paid in 2018.

 

  (8) Amounts shown in the “Stock Awards” column reflect the aggregate grant date fair value calculated in accordance with FASB ASC 718 for the respective fiscal year with respect to shares of restricted stock and immediately vested shares granted to our named executive officers. Amounts reflect our accounting for these awards and do not necessarily correspond to the actual values that may be realized by our named executive officers. The grant date fair values of shares of restricted stock and immediately vested shares were determined as of the grant date using the closing bid price of our common stock on the grant date. The assumptions used for the valuations are set forth in Note 12 – Shareholders’ Equity in the Notes included elsewhere in this prospectus. Pursuant to SEC rules, we disregarded the estimates of forfeitures related to service-based vesting conditions. See the “Outstanding Equity Awards at Fiscal Year-End” table in this prospectus and related notes for information with respect to equity awards made prior to fiscal 2018.

 

  (9) Amounts shown in the “Option Awards” column reflect the aggregate grant date fair value calculated in accordance with FASB ASC 718 for the respective fiscal year with respect to stock options granted to our named executive officers. Amounts reflect our accounting for these option grants and do not necessarily correspond to the actual values that may be realized by our named executive officers. The grant date fair values of these option grants were calculated at the grant date using the Black-Scholes option pricing model. The assumptions used for the valuations are set forth in Note 14 – Share-Based Compensation in the notes to  consolidated financial statements included elsewhere in this prospectus. Pursuant to SEC rules, we disregarded the estimates of forfeitures related to service-based vesting conditions. See the “Outstanding Equity Awards at Fiscal Year-End” table in this prospectus and related notes for information with respect to stock options granted prior to fiscal 2018.

 

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  (10) Categories and values of awards reported in “All Other Compensation” are set for in the following table:

 

Name and Principal Position 
Year
 
Health
Insurance
Coverage
   Taxes
Paid on
Behalf of
Name
Executive
Officer
  
Total All
Other
Compensation
 
Daniel L. Hodges  2019  $14,500   $   $14,500 
   2018            
Daniyel Erdberg  2019       63,569    63,569 
   2018       17,525    17,525 
Jay Nussbaum  2019            
   2018       29,096    29,096 
John E. Howell  2019   14,500        14,500 
   2018            
Dr. Dustin McIntire  2019   11,500        11,500 
   2018            
Felicia Hess  2019       12,303    12,303 
   2018       22,744    22,744 
Kendall Carpenter  2019       33,305    33,305 
   2018       3,506    3,506 

 

Employment Contracts and Potential Payments Upon Termination or Change in Control

 

On December 2, 2019, we entered into five-year employment agreements with Daniel L. Hodges, our Chief Executive Officer, John E. Howell, our President, Brian T. Mihelich, our Chief Financial Officer, and a three-year employment agreement with Dr. Dustin McIntire, Ph.D., our Chief Technology Officer. On January 2, 2020, we entered into a three-year employment agreement with Kevin M. Sherlock, our General Counsel and Secretary. The employment agreement of Mr. Mihelich became effective on January 2, 2020. Unless earlier terminated, at the end of the initial term, each agreement automatically renews for additional one-year terms until cancelled.

 

The following is a summary of the compensation arrangements set forth in each employment agreement described above:

 

Executive  Title  Annual Base
Salary
  

Initial
Restricted

Stock Grant
in Shares

 
Daniel L. Hodges  Chairman and Chief Executive Officer  $150,000    300,000 
John E. Howell  President   150,000    300,000 
Dr. Dustin McIntire  Chief Technology Officer   150,000    200,000 
Brian T. Mihelich  Chief Financial Officer   150,000    200,000 
Kevin M. Sherlock  General Counsel and Secretary   150,000    200,000 

 

As an incentive to commence employment with us, pursuant to such agreements, we issued to each of Messrs. Hodges and Howell a restricted stock award of 300,000 shares of common stock, and to each of Dr. McIntire, Mr. Mihelich and Mr. Sherlock a restricted stock award of 200,000 shares of common stock, which shares shall vest annually in arrears. In the case of Messrs. Hodges and Howell, the restricted stock awards will vest in three equal installments on the first, second and third anniversaries of employment. In the case of Dr. McIntire, Mr. Mihelich and Mr. Sherlock, the restricted stock awards will vest in two equal installments on the first and second anniversaries of employment. In addition, each executive is also eligible to receive an employee incentive stock option grant each year during the term, as determined by the Compensation Committee of our board of directors, with a strike price equal to that of the other corporate officers and directors under that current year’s approved option grants. The executives shall have no rights to any portions of any option grant until the vesting of such grant, which shall be on the same vesting terms as the options granted to our other officers and directors.

 

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Under each of these employment agreements, the executive will be entitled to severance in the event we terminate his employment without Cause (as defined in the employment agreement), he resigns from his employment for Good Reason (as defined in the employment agreement), or he is terminated as a result of death or disability. The severance amount for each executive would be (i) his pro rata base salary through the date of termination, (ii) a severance amount equal to six month’s salary if such termination is done within the first year and (iii) a severance amount equal to 12 month’s salary if such termination occurs thereafter.

 

In connection with the execution of his employment agreement, each executive also executed our standard employee agreements containing customary confidentiality restrictions and work-product provisions, as well as customary non-competition covenants and non-solicitation covenants with respect to our employees, consultants and customers.

 

Equity Compensation Plan Information

 

The following table provides information as of December 31, 2019, regarding our compensation plans under which equity securities are authorized for issuance:

 

Plan category  Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options, Warrants and Rights
   Weighted-Average
Exercise
Price of
Outstanding
Options, Warrants and Rights
   Number of Securities
Remaining
Available
for Future
Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected
in Column (a))
 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders  $--   $--    64,062 
Equity compensation plans not approved by security holders   11,098,523    0.55    -- 
Total  $11,098,523   $0.55    64,062 

 

Equity Incentive Plans

 

2015 Equity Incentive Plan. On September 4, 2015, our board of directors adopted our 2015 Equity Incentive Plan (the “2015 Plan”) to provide an additional means to attract, motivate, retain and reward selected employees and other eligible persons. Our stockholders approved the plan on or about October 1, 2015. Employees, officers, directors and consultants that provided services to us or one of our subsidiaries were eligible to receive awards under the 2015 Plan. Awards under the 2015 Plan were issuable in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards.

 

As of the date of this prospectus, stock grants of an aggregate of 9,935,938 shares of common stock had been made under the 2015 Plan, and 64,062 shares authorized under the 2015 Plan remained available for award purposes. However, in connection with the adoption and stockholder approval in May 2020 of our 2020 Long-Term Incentive Plan, which is described below, our board of directors determined that no further grants will be made under the 2015 Plan.

 

Our board of directors may amend or terminate the 2015 Plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant. Plan amendments will be submitted to stockholders for their approval as required by applicable law or any applicable listing agency. The 2015 Plan is not exclusive - our board of directors and the Compensation Committee of the Board may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.

 

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The 2015 Plan will terminate on September 4, 2025. However, the plan administrator will retain its authority until all outstanding awards are exercised or terminated. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2015 Plan is ten years after the initial date of the award.

 

2020 Long-Term Incentive Plan. On April 22, 2020, our board of directors adopted our 2020 Long-Term Incentive Plan (the “2020 Incentive Plan”) to provide an additional means to attract, motivate, retain and reward selected employees and other eligible persons. Our stockholders approved the plan on or about May 6, 2020. Employees, officers, directors and consultants that provide services to us or one of our subsidiaries may be selected to receive awards under the 2020 Incentive Plan.

 

Our board of directors, or one or more committees appointed by our Board or another committee (within delegated authority), administers the 2020 Incentive Plan. The administrator of the 2020 Incentive Plan has broad authority to:

 

select participants and determine the types of awards that they are to receive;

 

determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award and establish the vesting conditions (if applicable) of such shares or awards;

 

cancel, modify or waive our rights with respect to, or modify, discontinue, suspend or terminate any or all outstanding awards, subject to any required consents;

 

construe and interpret the terms of the 2020 Incentive Plan and any agreements relating to the Plan;

 

accelerate or extend the vesting or exercisability or extend the term of any or all outstanding awards subject to any required consent;

 

subject to the other provisions of the 2020 Incentive Plan, make certain adjustments to an outstanding award and authorize the termination, conversion, substitution or succession of an award; and

 

allow the purchase price of an award or shares of our common stock to be paid in the form of cash, check or electronic funds transfer, by the delivery of previously-owned shares of our common stock or by a reduction of the number of shares deliverable pursuant to the award, by services rendered by the recipient of the award, by notice and third party payment or cashless exercise on such terms as the administrator may authorize or any other form permitted by law.

 

A total of 10,000,000 shares of our common stock are authorized for issuance with respect to awards granted under the 2020 Incentive Plan. Any shares subject to awards that are not paid, delivered or exercised before they expire or are cancelled or terminated, or fail to vest, as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become available for other award grants under the 2020 Incentive Plan. As of the date of this prospectus, stock option grants to purchase an aggregate of 2,725,506 shares of common stock have been made under the 2020 Incentive Plan, and 7,274,494 shares authorized under the 2020 Incentive Plan remain available for award purposes.

 

Awards under the 2020 Incentive Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards. The administrator may also grant awards under the plan that are intended to be performance-based awards within the meaning of Section 162(m) of the U.S. Internal Revenue Code. Awards under the plan generally will not be transferable other than by will or the laws of descent and distribution, except that the plan administrator may authorize certain transfers.

 

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Nonqualified and incentive stock options may not be granted at prices below the fair market value of the common stock on the date of grant. Incentive stock options must have an exercise price that is at least equal to the fair market value of our common stock, or 110% of fair market value of our common stock in the case of incentive stock option grants to any 10% owner of our common stock, on the date of grant. These and other awards may also be issued solely or in part for services. Awards are generally paid in cash or shares of our common stock. The plan administrator may provide for the deferred payment of awards and may determine the terms applicable to deferrals.

 

As is customary in incentive plans of this nature, the number and type of shares available under the 2020 Incentive Plan and any outstanding awards, as well as the exercise or purchase prices of awards, will be subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the stockholders. In no case (except due to an adjustment referred to above or any repricing that may be approved by our stockholders) will any adjustment be made to a stock option or stock appreciation right award under the 2020 Incentive Plan (by amendment, cancellation and re-grant, exchange or other means) that would constitute a repricing of the per-share exercise or base price of the award.

 

Generally, and subject to limited exceptions set forth in the 2020 Incentive Plan, if we dissolve or undergo certain corporate transactions such as a merger, business combination or other reorganization, or a sale of all or substantially all of our assets, all awards then-outstanding under the 2020 Incentive Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the plan administrator provides for the assumption, substitution or other continuation of the award. The plan administrator also has the discretion to establish other change-in-control provisions with respect to awards granted under the 2020 Incentive Plan. For example, the administrator could provide for the acceleration of vesting or payment of an award in connection with a corporate event that is not described above and provide that any such acceleration shall be automatic upon the occurrence of any such event.

 

Our board of directors may amend or terminate the 2020 Incentive Plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant. Plan amendments will be submitted to stockholders for their approval as required by applicable law or any applicable listing agency. The 2020 Incentive Plan is not exclusive, and our board of directors and Compensation Committee may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.

 

The 2020 Incentive Plan will terminate on May 1, 2030. However, the plan administrator will retain its authority until all outstanding awards are exercised or terminated. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2020 Incentive Plan is ten years after the initial date of the award.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth outstanding equity awards to our named executive officers as of December 31, 2019.

 

   Option Awards   Stock Awards 
Name  Number of
Securities
Underlying
Unexercised
Options (#) Exercisable
   Option
Exercise
Price
   Option
Expiration
Date
   Number of
Shares or
Units of
Stock that
have not
Vested (1)
   Market
Value of
Shares of
Units of
Stock that
have not
Vested (2)
 
(a)  (b)   (e)   (f)   (g)   (h) 
Daniel H. Hodges                    
Restricted Stock Grant   --   $--    --    300,000   $246,000 
                          
Daniyel Erdberg                         
Option Grant   1,140,000    0.50    2/25/2020    --    -- 
Option Grant   200,000    0.50    2/25/2020    --    -- 
Option Grant   1,000,000    0.65    2/25/2020    --    -- 
                          
John F. Howell                         
Restricted Stock Grant   --    --    --    300,000    246,000 
                          
Dr. Dustin McIntire                         
Restricted Stock Grant   --    --    --    200,000    164,000 
                          
Felicia Hess                         
Option Grant   1,200,000    0.50    08/03/2021    --    -- 
Option Grant   300,000    0.50    11/09/2021    --    -- 
Option Grant   1,000,000    0.65    9/26/2020    --    -- 
                          
Kendall Carpenter                         
Option Grant   275,000    0.50    2/08/2020    --    -- 
Option Grant   170,000    0.50    2/08/2020    --    -- 
Option Grant   130,000    1.00    2/08/2020    --      
Option Grant   425,000    0.65    2/08/2020    --    -- 

 

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DIRECTOR COMPENSATION

 

General

 

The following discussion describes the significant elements of the expected compensation program for members of the board of directors and its committees. The compensation of our directors is designed to attract and retain committed and qualified directors and to align their compensation with the long-term interests of our shareholders. Directors who are also executive officers (each, an “Excluded Director”) will not be entitled to receive any compensation for his or her service as a director, committee member or Chair of our board of directors or of any committee of our board of directors.

 

Director Compensation

 

Our non-employee director compensation program is designed to attract and retain qualified individuals to serve on our board of directors. Our board of directors, on the recommendation of our compensation committee, will be responsible for reviewing and approving any changes to the directors’ compensation arrangements. In consideration for serving on our board of directors, each director (other than Excluded Directors) will be paid an annual retainer. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred while serving as directors.

 

Prior to the consummation of our acquisition of COMSovereign in November 2019, each of our non-employee directors received an annual cash retainer that ranged between $24,000 and $36,000. In addition, we reimbursed our non-employee directors for reasonable travel expenses incurred in attending Board and committee meetings. Our non-employee directors also participated in our equity compensation plans.

 

Following the consummation of the ComSovereign Acquisition, our board of directors approved the following new compensation program for the non-employee members of our board of directors.

 

Cash Compensation. Under such program, we will pay each non-employee director a cash fee, payable quarterly, of $25,000 per year for service on our board of directors.

 

Committee Fees. If a non-employee director is designated to participate on a committee of our board of directors as either a chairperson or non-chairperson member, such director will be entitled to compensation in addition to the quarterly cash fee in accordance with the following table:

 

   Chair   Member 
Audit Committee  $3,000/qtr  $1,500/qtr
Compensation Committee  $2,000/qtr  $1,500/qtr
Nominating and Governance Committee  $2,000/qtr  $1,500/qtr

 

Equity Awards. Each non-employee director will receive a one-time initial restricted stock award of 200,000 shares of our common stock, which shares shall vest in arrears in two equal tranches on the first and second anniversaries of service on our Board. Each non-employee director shall also be eligible to receive grants of stock options, each in an amount designated by the Compensation Committee of our board of directors, from any equity compensation plan approved by the Compensation Committee of our Board.

 

In addition to such compensation, we will reimburse each non-employee director for all pre-approved expenses within 30 days of receiving satisfactory written documentation setting out the expense actually incurred by such director. These include reasonable transportation and lodging costs incurred for attendance at any meeting of our Board of Directors.

 

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The following table sets forth the director compensation we paid in the year ended December 31, 2019 (excluding compensation to our executive officers set forth in the summary compensation table above).

 

Name   Fees
Earned
or Paid in
Cash
    Stock
Awards (1)
    Total
($)
 
David Aguilar (2)   $ 62,250     $ 65,000     $ 127,250  
Richard J. Berman (3)     --       6,833       6,833  
Brent M. Davies (4)     --       6,833       6,833  
James A. Marks (5)     --       6,833       6,833  
Robert Guerra (6)     16,000       --       16,000  
Timothy Hoechst (7)     28,250       65,000       93,250  
LTG John E. Miller (Ret.) (8)     39,250       65,000       104,250  
Total:   $ 145,750     $ 215,499     $ 361,249  

 

(1) The amounts reflected for Stock Awards in the table above represent the dollar amount recognized for financial statement reporting purposes with respect to the fair value of securities granted in accordance with ASC Topic 718, Compensation – Stock Compensation. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that may be realized upon exercise.

 

(2) On January 9, 2017, Mr. Aguilar was elected to our board of directors for a term of two years and, pursuant to the terms of a Director Agreement with Global Security Innovative Strategies, LLC, an affiliate of Mr. Aguilar, was paid an annual fee of $24,000 and was awarded stock options to purchase 100,000 shares of our common stock with an exercise price of $2.90 per share. In 2019, Mr. Aguilar was reappointed for another two-year term through January 2, 2021 at the same annual fee of $24,000. Effective September 4, 2019 Mr. Aguilar annual fee was increased to $120,000. Mr. Aguilar was granted a restricted stock award of 100,000 shares of our common stock, which shares vested on November 27, 2019. We recognized a $65,000 expense in 2019 related to such restricted stock grant. As a director, Mr. Aguilar is also expected to be paid the cash compensation referred to above under “- Director Compensation.”

 

(3) Mr. Berman was appointed to our board of directors in connection with the COMSovereign Acquisition on November 27, 2019. In connection with his appointment to our board of directors, Mr. Berman was granted a restricted stock award of 200,000 shares of our common stock, which shares will vest in two equal tranches on the first and second anniversaries of his service on our board of directors. We recognized a $6,833 expense in 2019 related to such restricted stock grant. As a director, Mr. Berman is also expected to be paid the cash compensation referred to above under “- Director Compensation.”

 

(4) Mr. Davies was appointed to our board of directors in connection with the ComSovereign Acquisition on November 27, 2019. In connection with his appointment to our board of directors, Mr. Davies was granted a restricted stock award of 200,000 shares of our common stock, which shares will vest in two equal tranches on the first and second anniversaries of his service on our board of directors. We recognized a $6,833 expense in 2019 related to such restricted stock grant. As a director, Mr. Davies is also expected to be paid the cash compensation referred to above under “- Director Compensation.”

 

(5) Mr. Marks was appointed to our board of directors in connection with the ComSovereign Acquisition on November 27, 2019. In connection with his appointment to our board of directors, Mr. Marks was granted a restricted stock award of 200,000 shares of our common stock, which shares will vest in two equal tranches on the first and second anniversaries of his service on our board of directors. We recognized a $6,833 expense in 2019 related to such restricted stock grant. As a director, Mr. Marks is also expected to be paid the cash compensation referred to above under “- Director Compensation.”

 

(6) On March 28, 2018, Mr. Guerra was appointed for a term of two years and, pursuant to the terms of a Director Agreement, was paid an annual fee of $24,000. Mr. Guerra resigned from our board of directors on September 4, 2019.

 

(7) On December 13, 2017, Mr. Hoechst was appointed to our board of directors for a term of two years and, pursuant to the terms of a Director Agreement, was paid an annual fee of $24,000. Mr. Hoechst was granted a restricted stock award of 100,000 shares of our common stock, which shares vested on November 27, 2019. We recognized a $65,000 expense in 2019 related to such restricted stock grant. Mr. Hoechst resigned from our board of directors in connection with the ComSovereign Acquisition on November 27, 2019 and any unvested options expired by their terms at that time.

 

(8) On December 13, 2017, Mr. Miller was appointed to our board of directors for a term of two years and, pursuant to the terms of a Director Agreement, was paid an annual fee of $36,000. Mr. Miller resigned from our board of directors in connection with the ComSovereign Acquisition on November 27, 2019 and any unvested options expired by their terms at that time. Mr. Miller was granted a restricted stock award of 100,000 shares of our common stock, which shares vested on November 27, 2019. We recognized a $65,000 expense in 2019 related to such restricted stock grant.

 

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PRINCIPAL STOCKHOLDERS 

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of July 31, 2020 by:

 

each person known by us to be a beneficial owner of more than 5% of our outstanding common stock;

 

each of our directors;

 

each of our named executive officers; and

 

all directors and executive officers as a group.

 

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after July 31, 2020. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as indicated by footnote, to our knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

 

In the table below, the percentage of beneficial ownership of our common stock is based on 140,584,274 shares of our common stock outstanding as of July 31, 2020. Unless otherwise noted below, the address of the persons listed on the table is c/o COMSovereign Holding Corp., 5000 Quorum Drive, Suite 400, Dallas, Texas 75254.

 

Name of Beneficial Owner   Amount and
Nature of
Beneficial
Ownership
    Percentage
of Class (%) (1
)
 
Named Executive Officers and Directors                
Daniel L. Hodges (2)     27,904,000       19.9 %
John E. Howell (3)     25,484,705       18.1  
Brian T. Mihelich (4)     150,000       *  
Dr. Dustin McIntire (5)     4,184,291       2.9  
Mohan Tammisetti (6)     7,907,995       5.6  
Keith Kaczmarek (7)     1,578,442       1.1  
Kevin M. Sherlock (8)     185,698       *  
David Aguilar (9)     231,939       *  
Richard J. Berman (4)     756,062       *  
Brent M. Davies (4)     1,455,619       1.0  
James A. Marks (10)     756,062       *  
                 
Other 5% Shareholders                
Dr. Phillip Frost (11)     13,664,818       9.7  
The Jay Harris Nussbaum Revocable Trust (12)     7,153,455       5.1  
                 
Executive Officers and Directors as a Group (11 persons)     70,594,813       48.8  

 

* less than 1%.

 

(1)The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our capital stock outstanding on July 31, 2020. On July 31, 2020, there were 140,584,274 shares of our common stock outstanding. To calculate a stockholder’s percentage of beneficial ownership, we include in the numerator and denominator the common stock outstanding and all shares of our common stock issuable to that person in the event of the exercise of out-standing options and other derivative securities owned by that person which are exercisable within 60 days of July 31, 2020. Common stock options and derivative securities held by other stockholders are disregarded in this calculation. Therefore, the denominator used in calculating beneficial ownership among our stockholders may differ. Unless we have indicated otherwise, each person named in the table has sole voting power and sole investment power for the shares listed opposite such person’s name.

 

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(2)Includes 25,202,875 shares held directly by Mr. Hodges, 73,725 shares of common stock held by Mr. Hodges’s spouse, 2,541,702 shares held by Medusa Scientific LLC, and 85,698 shares held by The Hodges Foundation. Mr. Hodges has voting and dispositive control over the shares held by Medusa Scientific LLC and The Hodges Foundation. Does not include 300,000 shares of restricted common stock that have not vested as of July 31, 2020 and will not vest within 60 days after such date.

 

(3) Includes 377,231 shares held directly by Mr. Howell, 25,100,000 shares held by New Bunker Hill LLC, and 7,474 shares held by Prometheus Partners Holdings LLC.  Mr. Howell has voting and dispositive control over the shares held by New Bunker Hill LLC and Prometheus Partners Holdings LLC. Does not include 300,000 shares of restricted common stock that have not vested as of July 31, 2020 and will not vest within 60 days after such date.

 

(4) Does not include 200,000 shares of restricted common stock that have not vested as of July 31, 2020 and will not vest within 60 days after such date.
   
(5) Includes 2,094,291 shares held directly by Dr. McIntire, 1,900,000 shares issuable upon the conversion of a convertible note and 190,000 shares that are issuable upon the exercise of warrants that were exercisable as of July 31, 2020. Does not include 300,000 shares of restricted common stock that were not vested as of July 31, 2020 and will not vest within 60 days after such date.
   
(6) Does not include 100,000 shares of common stock underlying options that were not vested as of July 31, 2020 and will not vest within 60 days after such date.

 

(7)Represents shares of common stock that are issuable upon the exercise of options that were exercisable as of July 31, 2020.

 

(8)Represents 185,698 shares held by the Kevin M Sherlock Revocable Trust. Mr. Sherlock has voting and dispositive control over the shares held by the trust. Does not include 200,000 shares of restricted common stock that have not vested as of July 31, 2020 and will not vest within 60 days after such date.

 

(9)Represents (i) 50,000 shares of common stock owned of record by the David V. Aguilar Traditional IRA, (ii) 181,939 shares of common stock owned of record by Global Security and Innovative Strategies, LLC (“GSIS”), and (iii) 360,000 shares of common stock underlying options that are exercisable as of July 31, 2020 or will become exercisable within 60 days of such date. Mr. Aguilar has voting and dispositive control over the shares held by GSIS. The address of GSIS is 1401 H Street NW, Suite 875, Washington, DC 20005.

 

(10)Represents 756,062 shares held by Spidernet, Inc. Mr. Marks has voting and dispositive control over the shares held by Spidernet, Inc. Excludes 200,000 shares of restricted common stock that have not vested as of July 31, 2020 and will not vest within 60 days after such date.

 

(11)Represents (i) 2,462,500 shares owned of record by Mr. Frost, (ii) 4,030,740 shares owned of record by Frost Nevada Investment Trust and (iii) 7,171,578 shares owned of record by Frost Gamma Investments Trust. Mr. Frost has voting and dispositive control over the shares held by Frost Nevada Investment Trust and Frost Gamma Investments Trust. The address of Mr. Frost, Frost Nevada Investment Trust and Frost Gamma Investments Trust is 4400 Biscayne Boulevard, 15th Floor, Miami, FL 33137.

 

(12)Ira S. Entis has voting and dispositive control over the shares held by The Jay Harris Nussbaum Revocable Trust. The address for Mr. Entis and The Jay Harris Nussbaum Revocable Trust is 3303 Fox Mill Road, Oakton, Virginia 22124.

 

From time to time, the number of our shares held in the “street name” accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares of our common stock outstanding.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Procedures for Approval of Related Party Transactions

 

A “related party transaction” is any actual or proposed transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to which we or our subsidiaries were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount involved exceeded or exceeds the lesser of (i) $120,000 or (ii) one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any related party had or will have a direct or indirect material interest. A “related party” includes:

 

any person who is, or at any time during the applicable period was, one of our executive officers or one of our directors;

 

any person who beneficially owns more than 5% of our common stock;

 

any immediate family member of any of the foregoing; or

 

any entity in which any of the foregoing is a partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest.

 

In April 2020, our board of directors adopted a written related-party transactions policy. Pursuant to this policy, the Audit Committee of our board of directors will review all material facts of all related-party transactions and either approve or disapprove entry into the related-party transaction, subject to certain limited exceptions. In determining whether to approve or disapprove entry into a related-party transaction, our Audit Committee shall take into account, among other factors, the following: (i) whether the related-party transaction is on terms no less favorable to us than terms generally available from an unaffiliated third-party under the same or similar circumstances, (ii) the extent of the related party’s interest in the transaction and (iii) whether the transaction would impair the independence of a non-employee director.

 

Related Party Transactions

 

Other than compensation arrangements for our named executive officers and directors, which we describe above, the only related party transactions to which we were a party during the six-month period ended June 30, 2020, or the fiscal years ended December 31, 2019 and 2018, since June 30, 2020, or any currently proposed related party transaction, are as follows, each of which was entered into prior to the adoption of the approval procedures described above.

 

Series 2016 Convertible Notes

 

On September 29, 2016, we issued Convertible Promissory Notes Series 2016 due October 1, 2017 (the “Series 2016 Convertible Notes”) in the aggregate principal amount of $3,000,000 in a private placement to Jay H. Nussbaum, the then Chairman of our board of directors, and to Frost Gamma Investment Trust (“Frost Gamma”), a trust that was controlled by Dr. Phil Frost, the then Chairman of our Strategic Advisory Board, both of whom also were greater than 10% shareholders of our company at that time. The Series 2016 Convertible Notes originally bore interest at the rate of 6% per annum and were convertible into shares of our common stock at a conversion price equal to the lesser of (i) $3.00 or (ii) 85% of the price per share of the common stock we sell in a private placement of our common stock in which we received gross proceeds of at least $3,000,000, subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate events. We were entitled to prepay the Series 2016 Convertible Notes at any time without penalty.

 

On August 3, 2017, we entered into amendments with the holders of the Series 2016 Convertible Notes to extend the maturity date for each of the notes to April 1, 2019 and revise the conversion price to $1.00 per share, subject to adjustment.

 

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On December 21, 2018, we entered into amendments with the holders of the Series 2016 Convertible Notes to reduce the conversion price under such notes to $0.50 per share in exchange for the agreement of such holders to convert the principal amount and accrued interest under such notes concurrently with the execution of the amendment. We issued 3,177,411 shares of common stock to Frost Gamma in full settlement of the $1,500,000 principal balance and $88,705 of accrued interest. We issued 3,000,000 shares of common stock to Jay H. Nussbaum in full settlement of the $1,500,000 principal balance and settled $88,212 of accrued interest in cash.

 

Series 2017 Convertible Note

 

On August 3, 2017, we issued a Secured Convertible Promissory Note Series 2017 due August 2, 2018 in the aggregate principal amount of up to $2,000,000 (the “Series 2017 Convertible Note”) in a private placement to Frost Nevada Investments Trust (“Frost Nevada”). Frost Nevada is a trust that was controlled by Dr. Phil Frost, a substantial shareholder of our company. The Series 2017 Convertible Note evidenced a revolving line of credit with advances that could have been requested by us until the maturity date of August 2, 2018 so long as no event of default existed under the loan.

 

During 2018, we borrowed an additional $1,000,000 on the Series 2017 Convertible Note bringing the total amount of principal to $2,000,000. On December 21, 2018, we entered into an amendment to the Series 2017 Convertible Note to reduce the conversion price under such note to $0.50 per share in exchange for Frost Nevada’s agreement to convert the principal amount and all accrued interest under such note concurrently with the execution of the amendment. We issued 4,030,740 shares of common stock to Frost Nevada in full settlement of the $2,000,000 principal balance and $15,370 of accrued interest.

 

Global Security Innovative Strategies, LLC

 

On November 10, 2017, we entered into an agreement with GSIS, an entity controlled by David Aguilar, a director of our company, whereby GSIS provides business development support and general consulting services for sales opportunities with U.S. government agencies and other identified prospects and consulting support services for our role and activities as part of the Security Center of Excellence in Orlando, Florida. The agreement was for a period of six months beginning on November 1, 2017. We agreed to pay GSIS a fee of $10,000 per month and to evaluate the fee after 90 days. On September 26, 2018, we amended the agreement to extend the period of service through September 2019 at the same monthly fee with automatic monthly extensions thereafter. We also agreed to issue to GSIS stock options to purchase 100,000 shares of our common stock, which were immediately vested, had a strike price of $1.00 and terminate on September 26, 2022. We also agreed to pay the expenses of GSIS incurred in connection with the performance of its duties under the agreement. Either party may terminate or renew the agreement at any time, for any reason or no reason, upon at least 30 days’ notice to the other party. GSIS was owed $71,263 for normal monthly retainers and expenses incurred as of June 30, 2020.

 

Kevin Hess Agreements

 

On March 21, 2019, we entered into a Voluntary Separation Agreement with Kevin Hess, our former Chief Technology Officer, pursuant to which Mr. Hess agreed to terminate his employment with our company effective March 31, 2019. On March 21, 2019, we also entered into an Independent Contractor Agreement with Cognitive Carbon Corporation, a company wholly owned by Felicia Hess, Mr. Hess’ spouse and our Chief Quality Officer, pursuant to which Mr. Hess agreed to provide to us certain technology consulting, sales and marketing services and we agreed to pay Cognitive Carbon Corporation a monthly fee of $19,750. In addition, Cognitive Carbon Corporation may receive a bonus of up to a maximum amount of $300,000 based on the criteria set forth in the Independent Contractor Agreement. Mr. Hess agreed to perform all services on behalf of Cognitive Carbon Corporation.

 

The Independent Contractor Agreement has a term of one year, with automatic 12-month renewals thereafter unless we notify Cognitive Carbon Corporation of our intent not to renew within 30 days of renewal. Either party may terminate the Independent Contractor Agreement upon written notice of material breach by the other party that is not cured within 15 days from the date of notice. Cognitive Carbon Corporation was owed $23,250 for normal monthly retainers and expenses as of June 30, 2020.

 

2018 Common Stock Issuance

 

On December 27, 2018, we completed the sale of 4,000,000 shares of our common stock for a purchase price of $0.50 per share, or an aggregate of $2,000,000, of which 1,000,000 shares were sold to Jay Nussbaum, our former Chief Executive Officer and Chairman of the board of directors, and 3,000,000 shares were sold to Frost Gamma, a trust for which Dr. Phillip Frost, a substantial shareholder of our company, is the trustee.

 

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2019 Common Stock Issuance

 

On January 25, 2019, we completed the sale of 4,015,500 shares of our common stock for a purchase price of $0.50 per share, or an aggregate of $2,007,750. The aggregate consideration consisted of (1) cash in the aggregate amount of $1,432,750, (2) a promissory note from a single non-affiliated investor in the aggregate principal amount of $500,000, which was repaid on February 8, 2019, including $575 of accrued interest, (3) a full-recourse promissory note from Daniyel Erdberg, our former Chief Executive Officer and President, in the principal amount of $50,000, which bore interest at the rate of 3% per year and was payable on January 25, 2020 but was cancelled on April 30, 2019 pursuant to the Stock Redemption and Note Cancellation Agreement described below, and (4) a full-recourse promissory note from Kendall Carpenter, our former Executive Vice President and Chief Financial Officer, in the principal amount of $25,000, which bore interest at the rate of 3% per year and was payable on January 25, 2020. The principal amount of the Kendall Carpenter note was reduced by $7,500 on January 28, 2019. On April 30, 2019, Kendall Carpenter repaid the remaining principal balance of the $17,500 note, including $134 of accrued interest.

 

2019 Common Stock Redemptions

 

On April 30, 2019, we entered into a Stock Redemption and Note Cancellation Agreement with Daniyel Erdberg pursuant to which we redeemed on such date the 100,000 shares of our common stock that were purchased by Mr. Erdberg on January 25, 2019 in consideration of the cancellation of the $50,000 promissory note we received from Mr. Erdberg as consideration for the purchase of such shares, including the related $267 of accrued interest.

 

On September 4, 2019, we entered into a Redemption Agreement with Robert Guerra, a former director of our company, pursuant to which we redeemed on such date 100,000 shares of our common stock for a redemption price of $0.50 per share, or an aggregate of $50,000.

 

TM Technologies, Inc. Relationships

 

Daniel L. Hodges, our Chairman and Chief Executive Officer, is also the founder, Chairman and Chief Executive Officer of TM Technologies, Inc. (“TM”), the licensee of proprietary TM/OFDM modulation technology owned by an affiliate of Mr. Hodges. Mr. Hodges also controls TM by virtue of his ownership or control of a majority of the capital stock of TM. Kevin Sherlock, our General Counsel, is also a member of the Board of Directors of TM. In addition, Brent Davies, a member of our board of directors, was formerly a member of the board of directors and Chief Financial Officer of TM.

 

During 2019, TM made loans to DragonWave in the aggregate principal amount of $1,292,953, none of which had been repaid as of the date of this prospectus, to emplace the modulation technology within DragonWave’s Harmony line of radios. This note bears interest at 5% per annum and matures on August 31, 2020. Interest and principal are due at maturity.

 

In August 2020, TM granted to us a development and use license to the intellectual property relating to its modulation technology for use in our products, including for DragonWave’s use in its microwave backhaul radios. The license is for an initial term of five years, is exclusive for a period of six months and is automatically renewable for subsequent two-year renewal terms until it is terminated in accordance with its terms. We are authorized to use the licensed technology throughout the world but the license excludes sales to the U.S. federal government or its agencies or representatives for the benefit of the U.S. government. We paid no cash consideration to TM upon the execution of this licensing agreement, but are obligated to pay TM a single-digit royalty on our gross profits from the sale or license of products incorporating or using the licensed technology and, commencing on the third anniversary of the date of the license agreement, a minimum annual royalty. Management believes the terms of such agreement are typical within our industry.

 

2020 Debt Securities and Warrants

 

In connection with our acquisition of VNC, on July 2, 2020, we sold an aggregate of 29 units (the “Units”) to accredited investors, including 19 Units to Dr. Dustin McIntire, our Chief Technology Officer, for a purchase price of $100,000 per Unit, or $2,900,000 in the aggregate. Each Unit consisted of a 9% Senior Convertible Debenture (the “July 9% Debentures”) in the principal amount of $100,000 and warrants to purchase 10,000 shares of our common stock. The July 9% Debentures bear interest at the rate of 9% per annum, mature on September 30, 2020 and are convertible into shares of our common stock at a conversion price of $1.00 per share, subject to adjustment. The warrants are exercisable to purchase shares of our common stock at an exercise price of $1.00 per share, subject to adjustment, and expire on the second anniversary of our consummation of this offering. The proceeds from the sale of the Units were applied to the cash consideration we paid in our acquisition of VNC and related expenses.

 

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DESCRIPTION OF SECURITIES

 

Our authorized capital stock consists of 300,000,000 shares of common stock, par value $0.0001 per share, and 100,000,000 shares of preferred stock, par value $0.0001 per share. As of June 30, 2020, 128,846,064 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, at such date, 406,508 shares of common stock were reserved for issuance upon the exercise of outstanding common stock purchase warrants and 648,148 shares of common stock were reserved for issuance upon the conversion of outstanding convertible debt.

 

Common Stock

 

Voting, Dividend and Other Rights. Each outstanding share of common stock entitles the holder to one vote on all matters presented to the shareholders for a vote. Holders of shares of common stock have no cumulative voting, preemptive, subscription or conversion rights. All shares of common stock to be issued pursuant to this registration statement will be duly authorized, fully paid and non-assessable. Our board of directors determines if and when distributions may be paid out of legally available funds to the holders. To date, we have not declared any dividends with respect to our common stock. Our declaration of any cash dividends in the future will depend on our board of directors’ determination as to whether, in light of our earnings, financial position, cash requirements and other relevant factors existing at the time, it appears advisable to do so. We do not anticipate paying cash dividends on the common stock in the foreseeable future.

 

Rights Upon Liquidation. Upon liquidation, subject to the right of any holders of the preferred stock to receive preferential distributions, each outstanding share of common stock may participate pro rata in the assets remaining after payment of, or adequate provision for, all our known debts and liabilities.

 

Majority Voting. The holders of a majority of the outstanding shares of common stock constitute a quorum at any meeting of the shareholders. A plurality of the votes cast at a meeting of shareholders elects our directors. The common stock does not have cumulative voting rights. Therefore, the holders of a majority of the outstanding shares of common stock can elect all of our directors. In general, a majority of the votes cast at a meeting of shareholders must authorize shareholder actions other than the election of directors. Most amendments to our articles of incorporation require the vote of the holders of a majority of all outstanding voting shares.

 

Preferred Stock

 

Authority of Board of Directors to Create Series and Fix Rights. Under our articles of incorporation, as amended, our board of directors can issue up to 100,000,000 shares of preferred stock from time to time in one or more series. The board of directors is authorized to fix by resolution as to any series the designation and number of shares of the series, the voting rights, the dividend rights, the redemption price, the amount payable upon liquidation or dissolution, the conversion rights, and any other designations, preferences or special rights or restrictions as may be permitted by law. Unless the nature of a particular transaction and the rules of law applicable thereto require such approval, our board of directors has the authority to issue these shares of preferred stock without shareholder approval.

 

Warrants to be issued in this Offering

 

The following summary of certain terms and provisions of the warrants included in the units offered hereby is not complete and is subject to, and qualified in its entirety by the provisions of the form of warrant, which is filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the form of warrant.

 

Exercisability. The warrants are exercisable at any time after their original issuance and at any time up to the date that is five years after their original issuance. The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to the warrant agent a duly executed exercise notice and payment in full in immediately available funds for the number of shares of common stock purchased upon such exercise. If a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is not effective or available, the holder may elect to exercise the warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.

 

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Exercise Limitation. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days following notice from the holder to us.

 

Exercise Price. The exercise price per share of common stock purchasable upon exercise of the warrants is $      per share, or 125 % of public offering price of a unit in this offering. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.

 

Transferability. Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.

 

Exchange Listing. We have applied for the listing of the warrants offered in this offering on the NYSE American exchange under the symbol “COMSW.” No assurance can be given that such listing will be approved or that a trading market will develop.

 

Warrant Agent. The warrants will be issued in registered form under a warrant agency agreement between ClearTrust, LLC, as warrant agent, and us. The warrants shall initially be represented by one or more global warrants deposited with a custodian for The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.

 

Fundamental Transactions. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the warrants immediately prior to such fundamental transaction.

 

Rights as a Stockholder. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of our common stock, the holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the warrant.

 

Governing Law. The warrants and the warrant agency agreement are governed by New York law.

 

Other Outstanding Warrants

 

At June 30, 2020, the following warrants were outstanding:

  

Warrants to purchase 70,000 shares of common stock at any time on or prior to November 20, 2020 at an initial exercise price of $5.00 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.

 

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Warrants to purchase 30,000 shares of common stock at any time on or prior to August 3, 2021 at an initial exercise price of $0.50 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.

 

Warrants to purchase 20,000 shares of common stock at any time on or prior to November 9, 2021 at an initial exercise price of $0.50 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.

 

  Warrants to purchase 100,000 shares of common stock at any time on or prior to September 26, 2022 at an initial exercise price of $1.00 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.
     
  Warrants to purchase 150,000 shares of common stock at any time on or prior to December 31, 2021 at an initial exercise price of $0.01 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.

 

  Warrants to purchase 158,730 shares of common stock at any time on or prior to April 29, 2025 at an initial exercise price of $0.99 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.

 

Anti-Takeover Effects of Certain Provisions of Our Articles of Incorporation, as Amended, and Our Bylaws

 

Provisions of our articles of incorporation, as amended, and our bylaws could make it more difficult to acquire us by means of a merger, tender offer, proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, which are summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

 

Calling of Special Meetings of Stockholders. Our bylaws provide that special meetings of the stockholders may be called only by the chief executive officer, if any, or the president or the board of directors.

 

Removal of Directors; Vacancies. Our bylaws provide that a director may be removed either for or without cause at any special meeting of stockholders by the affirmative vote of at least two-thirds of the voting power of the issued and outstanding stock entitled to vote; provided, however, that notice of intention to act upon such matter shall have been given in the notice calling such meeting.

 

Amendment of Bylaws. The bylaws provide that the bylaws may be altered, amended or repealed at any meeting of the board of directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting.

 

Preferred Stock. Our articles of incorporation, as amended, authorize the issuance of up to 100,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors in their sole discretion. Our board of directors may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock and the warrant agent for the warrants issued pursuant to this prospectus is ClearTrust, LLC. ClearTrust, LLC’s address is 16540 Pointe Village Dr., Suite 210, Lutz, FL 33558 and its telephone number is (813) 235-4490.

 

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UNDERWRITING

 

ThinkEquity, a division of Fordham Financial Management, Inc. is acting as representative of the underwriters of the offering. We have entered into an underwriting agreement dated                 , 2020 with the representative. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below, and each underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discounts set forth on the cover page of this prospectus, the number of units listed next to its name in the following table:

 

Underwriter  Number of
Units
 
ThinkEquity, a division of Fordham Financial Management, Inc.     
Total            

 

The underwriters are committed to purchase all the units offered by us, other than those covered by the over-allotment option to purchase additional shares of common stock and/or warrants described below, if they purchase any units. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.

 

The underwriters are offering the units, shares of common stock and warrants subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

 

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase up to an aggregate of        additional shares of common stock and/or warrants to purchase up to             additional shares of common stock (equal to 15% of the common stock and warrants included in the units sold in the offering) in any combination thereof, at the public offering price per share and per warrant, respectively, less underwriting discounts and commissions, solely to cover over-allotments, if any. The purchase price to be paid per additional share of common stock shall be equal to the public offering price of one unit, less the underwriting discount, and the purchase price to be paid per additional warrant shall be $0.00001. If this option is exercised in full, the total price to the public will be $         and the total net proceeds, before expenses, to us will be $         .

 

Discounts, Commissions and Reimbursement

 

The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

   Per Unit   Total with no
Over-Allotment
   Total with
Over-Allotment
 
Public offering price  $                 $               $          
Underwriting discount (7.5%)  $    $    $  
Non-accountable expense allowance (1%)(1)  $    $    $  
Proceeds, before expenses, to us  $    $    $  

 

(1)We have agreed to pay a non-accountable expense allowance to the representative equal to 1% of the gross proceeds received in this offering.

 

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The underwriters propose to offer the units to the public at the public offering price set forth on the cover of this prospectus. In addition, the underwriters may offer some of the units to other securities dealers at such price less a concession not in excess of $            per unit. If all of the units offered by us are not sold at the public offering price, the representative may change the offering price and other selling terms by means of a supplement to this prospectus.

 

We have also agreed to pay certain expenses of the representative relating to the offering, including (a) fees, expenses and disbursements relating to background checks of our officers and directors, in an amount not to exceed $5,000; (b)  fees and expenses of the representative’s legal counsel, up to $100,000; (c) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, up to $3,000; (e)  $20,500 for costs associated with the underwriters’ use of book-building, prospectus tracking and compliance software for this offering; (f) $10,000 for data services and communications expenses; and (g) up to $10,000 of the representative’s actual accountable road show expenses for the offering.

 

 

We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount, will be approximately $             .

 

Underwriter’s Warrants

 

We have also agreed to issue to the representative or its designees, at the closing of this offering, warrants (the “Underwriter’s Warrants”) to purchase shares of common stock (5% of the number of shares sold in the offering, excluding the over-allotment option). The Underwriter’s Warrants will be exercisable at any time and from time to time, in whole or in part, during a four and a half-year period commencing six months from the effective date of this offering. The Underwriter’s Warrants will be exercisable at a price equal to 125% of the public offering price per share. The Underwriter’s Warrants have been deemed compensation by FINRA and are, therefore, subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The representative or its permitted assignees under this Rule 5110(g)(1) shall not sell, transfer, assign, pledge or hypothecate the Underwriter’s Warrants, nor engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Underwriter’s Warrants, for a period of 180 days from the effective date of the offering, except that they may be assigned, in whole or in part, as specifically set forth in the underwriting agreement. The Underwriter’s Warrants will provide for cashless exercise and customary anti-dilution provisions (for share dividends, splits and recapitalizations and the like) consistent with FINRA Rule 5110, and the number of shares underlying the Underwriter’s Warrants shall be reduced, or the exercise price increased, if necessary, to comply with FINRA rules or regulations. Further, the Underwriter’s Warrants will provide for a one-time demand registration right and unlimited piggyback rights. The Underwriter’s Warrants and underlying shares are included in this prospectus.

 

The representative will also be entitled to the cash fee and warrants set forth above with respect to any public or private offering or other financing or capital-raising transaction of any kind (“Tail Financing”) to the extent that such financing or capital is provided to us by investors whom the representative had introduced to us during the term of our engagement agreement with the representative, if such Tail Financing is consummated at any time within the 6-month period following the expiration or termination of such agreement.

 

Discretionary Accounts

 

The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.

 

Lock-Up Agreements

 

Pursuant to “lock-up” agreements, we and our executive officers, directors and 5% or greater holders of outstanding common stock have agreed, subject to limited exceptions, without the prior written consent of the underwriters’ representative not to directly or indirectly offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of) our common stock, enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any of our other securities or publicly disclose the intention to do any of the foregoing, subject to customary exceptions, for a period of 180 days from the date of this prospectus, in the case of our directors and officers, and for a period of 90 days from the date of this prospectus, in the case of us and any 5% or greater holder of outstanding common stock.

 

Right of First Refusal

 

We have granted the representative a right of first refusal, for a period of 15 months from the consummation of this offering, to act as sole investment banker, book-runner and/or placement agent, at the representative’s sole discretion, for each and every future public and private equity offering, including all equity linked financings (each, a “Subject Transaction”), during such 15 month period, of our company, or any successor to or subsidiary of our company, on terms and conditions customary to the representative for such Subject Transactions.

 

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Electronic Offer, Sale and Distribution of Securities

 

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members. The representative may agree to allocate a number of securities to underwriters and selling group members for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us, and should not be relied upon by investors.

  

Listing

 

Our common stock quoted on the OTCQB under the symbol “COMS” We have applied to list our common stock and warrants included within the units on the NYSE American under the symbol “COMS” and “COMSW,” respectively.

 

Stabilization

 

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.

 

Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress.

 

Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing shares in the open market.

 

Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over-allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.

 

Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

 

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Passive market making

 

In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock on the NYSE American in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.

 

Other Relationships

 

Certain of the underwriters and their affiliates have in the past and may in the future provide various investment banking, commercial banking and other financial services for us and our affiliates for which they have in the past and may in the future receive customary fees. Without limiting the generality of the foregoing, the representative served as our placement agent for private placements we completed in May 2020 and August 2020.

 

Offer restrictions outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

LEGAL MATTERS

 

Certain legal matters in connection with this offering will be passed upon for us by Pryor Cashman LLP, New York, New York. The legality of the issuance of the shares of common stock and warrants comprising the units offered in this prospectus will be passed for us by Flangas Law Group, Las Vegas, Nevada. Certain legal matters in connection with this offering will be passed upon for the underwriters by Sichenzia Ross Ference LLP, New York, New York.

 

EXPERTS

 

The financial statements included in this prospectus as of December 31, 2019 and for the period from January 10, 2019 through December 31, 2019 have been audited by Haskell & White LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The financial statements included in this prospectus for the three- and six-month periods ended June 30, 2020, have not been audited.

 

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WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the securities being offered by this prospectus. This prospectus does not contain all of the information in the registration statement of which this prospectus is a part and the exhibits to such registration statement. For further information with respect to us and the securities offered by this prospectus, we refer you to the registration statement of which this prospectus is a part and the exhibits to such registration statement. Statements contained in this prospectus as to the contents of any contract or any other document are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement of which this prospectus is a part. Each of these statements is qualified in all respects by this reference.

 

The registration statement of which this prospectus is a part is available at the SEC’s website at http://www.sec.gov. You may also request a copy of these filings, at no cost, by writing us at 1110 NE Circle Blvd., Corvallis, Oregon  97330, Attention:  Chief Financial Officer or telephoning us at (800) 674-3612.

 

We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance with this law, file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available at the SEC’s website referred to above. We also maintain a website at www.ComSovereign.com. You may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

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COMSOVEREIGN HOLDING CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

Audited Financial Statements for the period January 10, 2019 (Inception) to December 31, 2019

 

Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheet F-3
   
Consolidated Statement of Operations F-4
   
Consolidated Statement of Comprehensive Loss F-5
   
Consolidated Statement of Changes in Stockholders’ Equity F-6
   
Consolidated Statement of Cash Flows F-7
   
Notes to the Consolidated Financial Statements F-8 – F-36

 

Unaudited Interim Condensed Financial Statements for the Three- and Six-Month Periods Ended June 30, 2020

 

Consolidated Balance Sheet F-37
   
Consolidated Statement of Operations F-38
   
Consolidated Statement of Comprehensive Loss F-39
   
Consolidated Statement of Changes in Stockholders’ Equity F-40
   
Consolidated Statement of Cash Flows F-41
   
Notes to the Consolidated Financial Statements F-42 – F-71

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

ComSovereign Holding, Corp.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of ComSovereign Holding, Corp. (the “Company”) as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the period from January 10, 2019 (inception) through December 31, 2019 and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and the consolidated results of its operations and its cash flows for the period then ended, in conformity with U.S. generally accepted accounting principles.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has experienced losses, negative cash flows from operations, has limited capital resources, and an accumulated deficit. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

HASKELL & WHITE LLP

 

We have served as the Company’s auditor since 2019.

 

Irvine, California

July 5, 2020