As filed with the Securities and Exchange Commission on December 17, 2020

Registration No. 333-248490

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________________________

Amendment No. 3
to
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
incorporation or organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(IRS Employer
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.
Pryor Cashman LLP
7 Times Square
New York, NY 10036
(212) 421-4100

 

Andrew M. Tucker, Esq.

Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue, NW, Suite 900

Washington, DC 20001

(202) 689-2800

___________________

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:  S

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

 

S

 

Smaller reporting company

 

S

           

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.  £

 

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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)

 

$

28,750,000

(4)

 

$

3,612.72

 

Common Stock, $0.0001 par value per share, included in the Units

 

 

(5)

 

 

 

Warrants to purchase Common Stock(6)

 

 

(5)

 

 

 

Common Stock underlying Warrants

 

 

35,937,500

 

 

 

4,515.91

 

Representative’s Warrants(7)

 

 

 

 

 

 

Common Stock underlying Representative’s Warrants(8)

 

 

1,581,250

 

 

 

198.39

 

Total Registration Fee

 

$

66,268,750

 

 

$

8,327.02

(9)

____________

(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 Representative’s Warrants will represent the right to purchase 5% of the aggregate number of shares of common stock sold in this offering at an exercise price equal to 110% of the offering price per share.

(9)      Previously paid.

___________________

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.

 

 

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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 DECEMBER 17, 2020

3,968,253 Units

ComSovereign Holding Corp.

We are offering 3,968,253 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 $6.30 per unit (based upon the last reported sale price of our common stock on the OTCQB on December 4, 2020, as adjusted for a reverse stock split of 1-for-3). 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 December 4, 2020, the last reported sales price of our common stock as reported on the OTCQB was $2.10 per share ($6.30 per share assuming a reverse stock split of 1-for-3). We have applied to list our common stock and the warrants included with the units on the Nasdaq Capital Market 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.

Unless otherwise noted and other than in our financial statements and the notes thereto, the share and per share information in this prospectus reflects a proposed reverse stock split of the outstanding common stock at an assumed 1-for-3 ratio to occur following the effective date but prior to the closing of this offering.

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 9.

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

 

$

6.30

 

 

$

25,000,000

 

Underwriting discounts and commissions(1)

 

$

(0.50

)

 

$

(2,000,000

)

Proceeds to us, before expenses

 

$

5.80

 

 

$

23,000,000

 

____________

(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 97 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 595,237 additional shares of common stock and/or 595,237 additional warrants (equal to 15% of the common stock and warrants included in 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 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.

Kingswood Capital Markets

division of Benchmark Investments, Inc.

The date of this prospectus is December     , 2020.

 

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ABOUT THIS PROSPECTUS

The registration statement of which this prospectus forms a part, which we have filed with the Securities and Exchange Commission (the “SEC”), includes exhibits that provide more detail on 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 electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.

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

•        Telecom and Network Products and 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. Our solutions enable service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product portfolio is wireless network 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.

•        Edge-based Small Cell 4G LTE and 5G Access Radios.    We offer Citizens Broadband Radio Service (CBRS) frequency and other small cell radios that are designed to connect to other access radios or to connect directly to mobile devices such as mobile phones and other 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 co-located on the front edge with the small cell communicating with the devices themselves.

•        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 mid-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.

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•        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.

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 Network Communications Inc.    Virtual Network Communications Inc. (“VNC”) is an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones offered by 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 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.

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

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

•        VEO.    VEO, based in San Diego, California, is a research and development company innovating Silicon photonics (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 $5.22 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.

Risks Associated With Our Business

Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section captioned “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock and warrants. In particular, risks associated with our business include, but are not limited to, the following:

•        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.

•        We incurred net losses in the nine-month period ended September 30, 2020 and in 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.

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

•        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.

•        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.

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

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

•        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.

•        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.

•        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.

•        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.

•        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.

•        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.

Reverse Stock Split

We will effect a reverse stock split of our common stock at a ratio of 1-for-3 following the effectiveness of the registration statement of which this prospectus forms a part and prior to the closing of this offering. No fractional shares will be issued in connection with the reverse stock split and all such fractional interests will be rounded up to the nearest whole number of shares of common stock. The conversion or exercise prices of our issued and outstanding convertible securities, stock options and warrants will be adjusted accordingly. All information presented in this prospectus other than in our consolidated financial statements and the notes thereto assumes a 1-for-3 reverse stock split of our outstanding shares of common stock, and unless otherwise indicated, all such amounts and corresponding conversion price or exercise price data set forth in this prospectus have been adjusted to give effect to such assumed reverse stock split.

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 (469) 930-2661. 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

 

3,968,253 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 $7.87 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

 

$6.30

Over-Allotment

 

We have granted the underwriters a 45-day option to purchase up to an aggregate of 595,237 additional shares of common stock and/or 595,237 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

 

51,907,548 shares (or 52,502,695 shares) if 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 $22.0 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, working capital and general corporate purposes. See “Use of Proceeds” on page 31 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 9.

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 90 days, 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 Nasdaq Capital Market under the symbols “COMS” and “COMSW,” respectively.

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After giving effect to the planned reverse stock split of our common stock at a ratio of 1-for-3, the number of shares of common stock to be outstanding immediately after this offering is based on 47,939,205 shares of common stock outstanding as of September 30, 2020, and excludes an aggregate of up to approximately 10,067,289 shares of common stock based upon the following:

•        An aggregate of 890,385 shares of common stock issuable upon the exercise of outstanding stock purchase warrants with a weighted average exercise price of $1.46 per share that expire between August 2, 2021 and August 20, 2025, which excludes an aggregate of 41,906 shares of common stock underlying warrants outstanding at September 30, 2020 that have since expired or were exercised;

•        An aggregate of 974,833 shares of common stock issuable upon the conversion of outstanding convertible indebtedness with a weighted average conversion price of $3.41 per share that matures prior to January 29, 2021;

•        An aggregate 3,440,169 shares of common stock issuable upon the exercise of options with a weighted average exercise price of $1.59 per share granted under our long-term equity incentive plans as of September 30, 2020;

•        an aggregate 3,968,253 shares of common stock issuable upon the exercise of the warrants included in the units (or 4,563,490 shares of common stock if the underwriters exercise their over-allotment option in full with respect to the warrants contained in the units);

•        595,237 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

•        198,412 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 September 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 September 30, 2020 and the selected consolidated statements of operations data for the period January 10, 2019 (inception) to September 30, 2019 and for the nine-month period ended September 30, 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed 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 condensed 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. All share and per share amounts presented herein have been restated to reflect the implementation of the proposed 1-for-3 reverse stock split as if it had occurred at the beginning of the earliest period presented.

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Consolidated Statement of Operations Data

(Amounts in US$’s, except share data)

 

Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

 

January 10,
2019
(Inception) to
December 31,
2019

   

(unaudited)

 

(unaudited)

   

Revenue

 

$

7,513,660

 

 

$

3,576,342

(1)

 

$

4,712,212

(1)

Cost of Goods Sold(2)

 

 

3,473,293

 

 

 

2,019,020

 

 

 

2,990,716

 

Gross Profit

 

 

4,040,367

 

 

 

1,557,322

 

 

 

1,721,496

 

   

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(2)

 

 

1,263,427

 

 

 

179,599

 

 

 

174,257

 

Sales and marketing(2)

 

 

30,523

 

 

 

4,202

 

 

 

6,222

 

General and administrative(2)

 

 

13,151,442

 

 

 

9,027,646

 

 

 

14,325,078

 

Depreciation and amortization

 

 

8,653,635

 

 

 

4,918,800

 

 

 

7,567,184

 

Gain on sale of fixed assets

 

 

(663

)

 

 

(325,838

)

 

 

(98,410

)

Total Operating Expenses

 

 

23,098,364

 

 

 

13,804,409

 

 

 

21,974,331

 

Net Operating Loss

 

 

(19,057,997

)

 

 

(12,247,087

)

 

 

(20,252,835

)

   

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Loss on conversion of debt

 

 

 

 

 

 

 

 

(2,640,000

)

Net loss on extinguishment of debt

 

 

(21,882)

 

 

 

 

 

 

(434,774

)

Foreign currency transaction gain (loss)

 

 

(6,799)

 

 

 

108,333

 

 

 

191,547

 

Interest expense

 

 

(5,707,840

)

 

 

(1,961,334

)

 

 

(8,399,663

)

Other income (expense)

 

 

(127,534

)

 

 

95,273

 

 

 

(147,430

)

Total Other Expenses

 

 

(5,864,055

)

 

 

(1,757,728

)

 

 

(11,430,320

)

Net Loss Before Income Taxes

 

 

(24,922,052

)

 

 

(14,004,815

)

 

 

(31,683,155

)

Deferred Tax Benefit

 

 

 

 

 

3,501,204

 

 

 

4,137,900

 

Net Loss

 

$

(24,922,052

)

 

$

(10,503,611

)

 

$

(27,545,255

)

Basic and Diluted Loss Per Share

 

$

(0.56

)

 

$

(0.81

)

 

$

(1.70

)

Weighted Average Shares Outstanding – Basic and Diluted

 

 

44,155,511

 

 

 

13,034,574

 

 

 

16,238,033

 

Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma Basic and Diluted Loss Per Share(3)

 

$

(0.54

 

 

 

 

 

$

(1.67

Pro Forma Weighted Average Shares Outstanding – Basic and Diluted(3)

 

 

45,153,983

 

 

 

 

 

 

16,436,986

 

Pro Forma Basic and Diluted Loss Per Share(4)

 

$

(0.56

 

 

 

 

$

(1.68

Pro Forma Weighted Average Shares Outstanding – Basic and Diluted(4)

 

 

44,355,583

 

 

 

 

 

 

16,436,446

 

____________

(1)      Does not include 2019 revenues of Drone Aviation for the period prior to the ComSovereign Acquisition, which amounted to $4,120,646 for the period January 10, 2019 (Inception) to September 30, 2019 and $5,783,956 for the period January 10, 2019 (Inception) to December 31, 2019.

(2)      Exclusive of depreciation and amortization.

(3)      The pro forma loss per share data gives effect to (i) the repayment in full at closing of certain notes payable as set forth under “Use of Proceeds” on page 31 as if such repayment occurred at the beginning of the period and (ii) the issuance of 3,968,253 units in this offering the net proceeds of which will be required to repay such indebtedness based upon an assumed offering price to the public of $6.30 per unit (the closing price of our common stock on December 4, 2020). For the nine-month period ended September 30, 2020, the repayment of such notes payable as of January 1, 2020 would have reduced interest expense for such period by $244,794 to $5,463,046, reduced the net loss on extinguishment of debt by $241,000 to a gain of $219,118, reduced the net loss for such period by $485,794 to $24,436,258 and increased the total outstanding shares of common stock as of September 30, 2020 by 999,738 shares, based upon an assumed offering price to the public of $6.30 per unit (the closing price of our common stock on December 4, 2020). For the period inception (January 10, 2019 through December 31, 2019), the repayment of such notes payable as of January 10, 2019 would have reduced interest expense for such period by $144,024 to $8,255,639, reduced the tax benefit for such period by $18,810 to

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$4,119,090, reduced the net loss for such period by $125,214 to $27,420,041, and increased the total outstanding shares of common stock as of December 31, 2019 by 198,953 shares, based upon an assumed offering price to the public of $6.30 per unit (the closing price of our common stock on December 4, 2020).

(4)      The pro forma loss per share data gives effect to the issuance of 198,413 units in this offering the net proceeds of which will be required to pay the cash portion of the purchase price of our proposed acquisition of Fastback upon the closing of this offering, based upon an assumed offering price to the public of $6.30 per unit (the closing price of our common stock on December 4, 2020), as if such shares had been outstanding on the last day of the period.

Consolidated Balance Sheet Data

 

September 30, 2020
(unaudited)

   
   

Actual

 

Pro Forma
as Adjusted
(1)

 

December 31,
2019

Cash

 

$

505,053

 

 

$

5,523,704

 

 

$

812,452

 

Total current assets

 

 

7,403,605

 

 

 

12,422,256

 

 

 

8,665,369

 

Total assets

 

 

132,561,263

 

 

 

141,099,914

 

 

 

119,987,435

 

Total current liabilities

 

 

26,382,134

 

 

 

5,174,494

 

 

 

15,142,599

 

Total liabilities

 

 

28,867,975

 

 

 

7,660,335

 

 

 

17,040,060

 

Accumulated deficit and other comprehensive loss

 

 

(52,467,307

)

 

 

(55,146,077

)

 

 

(27,568,638

)

Total stockholder’s equity

 

 

103,693,288

 

 

 

133,439,579

 

 

 

102,947,375

 

____________

(1)      The pro forma adjusted balance sheet data gives effect to (i) the receipt of $22.0 million in net proceeds from our sale of 3,968,253 units in this offering at an assumed offering price of $6.30 per unit (the closing price of our common stock on December 4, 2020) after deducting underwriting discount and estimated offering expenses payable by us and the use of $17.0 million of such net proceeds for the payment of indebtedness and payables outstanding at September 30, 2020 and the acquisition of assets as set forth under “Use of Proceeds” on page 31 and (ii) the conversion of outstanding promissory notes in the aggregate principal amount of $10.4 million to common stock at a weighted average conversion price of $5.23 per share at or prior to the closing of this offering as set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” beginning on page 44.

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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 nine-month period ended September 30, 2020 and in 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 nine-month period ended September 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 September 30, 2020, we had a cumulative net loss of approximately $52.5 million since our inception (which included non-cash accounting charges of approximately $26.3 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

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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.

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 operations to date have been funded primarily through sales of our debt and equity securities. As of September 30, 2020, we had negative working capital of approximately $19.0 million and limited available cash. We have converted to common stock, or expect to convert to common stock at or prior to the closing of this offering, liabilities outstanding at September 30, 2020 in the aggregate principal amount of $10.4 million and we expect to use approximately $7.4 million of the net proceeds of this offering to repay in full $6.3 million of indebtedness outstanding at September 30, 2020 and an additional $1.1 million of indebtedness we incurred subsequent to such date 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 September 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 June 1, 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 September 30, 2020, we had total undiscounted debt obligations, excluding related-party debt, of approximately $16.5 million, excluding forgivable debt under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Of this debt, $7.4 million was past due and unpaid as of September 30, 2020 and $6.6 million of the additional debt obligations mature on or prior to December 31, 2020. Since September 30, 2020, we incurred an additional $0.55 million of indebtedness. While we plan to reduce our outstanding debt obligations by approximately $7.4 million with a portion of the net proceeds of this offering and have converted or expect to convert to common stock at or prior to the closing of this offering an additional $10.4 million aggregate principal amount of our outstanding debt (including $1.3 million of related party debt), our remaining outstanding 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;

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•        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.

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.

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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.

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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.

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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.

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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.

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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

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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.

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 nine-month period ended September 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 international 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;

•        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;

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•        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.

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

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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. 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.

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.

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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.

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.

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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.

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

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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 sightings 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.

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

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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.

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.

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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 Nasdaq 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 Nasdaq Capital Market, even if our common stock is listed on the Nasdaq Capital Market, 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.

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.

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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.

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 31,666,667 shares of our common stock, all of which shares were restricted shares that may currently be sold in the public markets pursuant to Rule 144 under the Securities Act. As a result of such acquisition, an additional 766,667 restricted shares of our common stock held by certain current and former employees vested, which shares may currently be sold in the public markets pursuant to Rule 144 under the Securities Act. In addition, as of September 30, 2020, there were outstanding options and warrants to purchase an aggregate of 4,329,888 shares of our common stock at a weighted-average exercise price of $1.57 per share, which excludes an aggregate of 41,906 shares of common stock underlying warrants outstanding at September 30, 2020 that have since expired or were exercised. Of these outstanding options and warrants, 4,296,555 outstanding options and warrants were

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exercisable at a weighted-average exercise price of $1.55 per share on such date. At such date, we also had outstanding $3,324,137 aggregate principal amount of convertible debt plus accrued interest thereon, with a weighted average conversion price of $3.41 per share of common stock. The sale in the public markets of shares issuable upon exercise of options or warrants or upon conversion of convertible debt 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 44.1% 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 44.1% of our outstanding common stock, or approximately 43.6% if 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.

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 $6.30 per share, you will experience immediate dilution of $6.04 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.”

The proposed reverse stock split could cause our stock price to decline relative to its value before the split and decrease the liquidity of shares of our common stock.

We will effect a 1-for-3 reverse stock split of our issued and outstanding common stock immediately following the effectiveness but prior to the closing of this offering in order to achieve a sufficient increase in our stock price to enable us to qualify for listing on Nasdaq. There is no assurance that that the reverse stock split will not cause an actual decline in the value of our outstanding common stock. The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

Following the proposed reverse stock split, we cannot assure you that we will be able to continue to comply with Nasdaq’s listing standards.

We have applied for listing of our common stock and warrants on Nasdaq in connection with this offering. Following the proposed reverse stock split, we expect that our common stock and warrants will be eligible to be quoted on Nasdaq. To be so listed, we must meet the current Nasdaq listing standards, including the minimum bid price requirement. There can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with the minimum bid price requirement of Nasdaq. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In addition, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain Nasdaq’s minimum bid price requirement. If we fail to comply with the minimum bid price requirement, our securities could be delisted.

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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.

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.

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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;

•        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;

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•        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.

EXPLANATORY NOTE REGARDING REVERSE STOCK SPLIT

We will effect a reverse stock split of our common stock at a ratio of 1-for-3 following the effectiveness of the registration statement of which this prospectus forms a part and prior to the closing of this offering. No fractional shares will be issued in connection with the reverse stock split and all such fractional interests will be rounded up to the nearest whole number of shares of common stock. The conversion or exercise prices of our issued and outstanding convertible securities, stock options and warrants will be adjusted accordingly. All information presented in this prospectus other than in our financial statements and the notes thereto assumes a 1-for-3 reverse stock split of our outstanding shares of common stock, and unless otherwise indicated, all such amounts and corresponding conversion price or exercise price data set forth in this prospectus have been adjusted to give effect to such assumed reverse stock split.

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $22,000,000 (or approximately $25,750,000 if the underwriter exercises in full its option to purchase up to 595,237 additional shares of common stock) based upon an assumed offering price per unit of $6.30 (the closing price of our common stock on December 4, 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

 

$

7.40

 

33.6

%

Accounts payable and accrued liabilities

 

 

7.16

 

32.6

 

Acquisition of Fastback

 

 

1.25

 

5.7

 

Acquisition of real estate

 

 

2.27

 

10.3

 

Working capital and general corporate purposes

 

 

3.92

 

17.8

 

Total

 

$

22.00

 

100.0

%

____________

*        Assuming the over-allotment option is not exercised.

We will allocate approximately 33.6% 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.”

(Amounts in US$’s)

 

Maturity
Date

 

Principal Amount Outstanding*

 

Interest Rate

 

Principal Amount to be Repaid

 

Original
Use of Proceeds

Secured Notes Payable

     

 

     

 

 

 

     

Secured note payable

 

February 28, 2020

 

$

788,709

 

12.5

%

 

$

788,709

 

Working Capital

Secured note payable

 

March 1, 2022

 

 

186,709

 

9.0

%

 

 

186,709

 

Working Capital

Secured note payable

 

September 1, 2021

 

 

18,980

 

7.9

%

 

 

18,980

 

Working Capital

Secured note payable

 

December 26, 2020

 

 

211,667

 

78.99

%

 

 

211,667

 

Working Capital

Secured note payable

 

September 15, 2020

 

 

855,120

 

36.0

%

 

 

855,120

 

Acquisition Financing

Secured note payable

 

January 6, 2021

 

 

1,100,000

 

10.0

%

 

 

1,100,000

 

Working Capital

Total notes payable

     

 

3,161,185

   

 

 

 

3,161,185

   
       

 

     

 

 

 

     

Notes Payable

     

 

     

 

 

 

     

Note payable

 

September 30, 2020

 

 

175,000

 

10.0

%

 

 

175,000

 

Working Capital

Note payable

 

September 30, 2020

 

 

290,000

 

0.0

%

 

 

290,000

 

Working Capital

Notes payable

 

October 13 through November 30, 2020

 

 

1,200,000

 

15.0-18.0

%

 

 

1,200,000

 

Working Capital

Notes payable

 

November 30, 2020

 

 

50,000

 

4.8

%

 

 

50,000

 

Acquisition Financing

Note payable

 

November 9, 2023

 

 

61,287

 

8.5

%

 

 

61,287

 

Acquisition Financing

Note payable

 

December 19, 2023

 

 

89,912

 

6.7

%

 

 

89,912

 

Acquisition Financing

Note payable

 

January 17, 2024

 

 

41,390

 

6.7

%

 

 

41,390

 

Acquisition Financing

Notes payable

 

June 30, 2020

 

 

545,574

 

0.0

%

 

 

545,574

 

Acquisition Financing

Total notes payable

     

 

2,453,163

   

 

 

 

2,453,163

   
       

 

     

 

 

 

     

Senior Debentures

     

 

     

 

 

 

     

Senior debenture

 

December 31, 2019

 

 

84,000

 

15.0

%

 

 

84,000

 

Working Capital

Total senior debentures

     

 

84,000

   

 

 

 

84,000

   
       

 

     

 

 

 

     

Convertible Notes Payable

     

 

     

 

 

 

     

Convertible note payable

 

November 20, 2020

 

 

1,700,000

 

5.0

%

 

 

1,700,000

 

Working Capital

Total convertible notes payable

     

 

1,700,000

   

 

 

 

1,700,000

   
       

 

     

 

 

 

     

Total indebtedness

     

$

7,398,348

   

 

 

$

7,398,348

   

____________

*        As of September 30, 2020, except for the secured note payable that matures on January 6, 2021, which was issued on December 8, 2020.

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We will allocate $1,250,000, or approximately 5.7% 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 $2,270,000, or approximately 10.3% 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 December 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 $31,230,151 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 and future acquisitions.

Upon the completion of the offering, we expect to have sufficient working capital to support our growth strategies and fund ongoing operations through June 1, 2021. 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 September 30, 2020, there were approximately 386 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 September 30, 2020, there were 3,333,334 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

 

 

$

 

21,354

Equity compensation plans not approved by security holders

 

3,699,508

 

 

1.65

 

Total

 

3,699,508

 

$

1.65

 

21,354

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CAPITALIZATION

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

•        on an actual basis; and

•        on a pro forma as adjusted basis to reflect (i) the sale by us of 3,968,253 units at an assumed offering price to the public of $6.30 per unit (the closing price of our common stock on December 4, 2020, as adjusted for a reverse stock split of 1-for-3), 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,” including the repayment of indebtedness and the recognition of a loss with respect thereto in the amount of $1.3 million relating to the write off of unamortized debt discounts, and (ii) our conversion or planned conversion at or prior to the closing of this offering of promissory notes outstanding at September 30, 2020 in the aggregate principal amount of $10.4 million (including related party, see page 45 for detail) to common stock at a weighted average conversion price of $5.23 per share as set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”, and the recognition of a loss with respect thereto in the amount of $1.4 million relating to the write off of unamortized debt discounts.

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 September 30, 2020

   

Actual

 

Pro forma as adjusted

   

(Unaudited)

Cash and cash equivalents

 

$

505,053

 

 

$

5,523,704

 

Current portion of long-term debt, net of unamortized discounts and debt issuance costs

 

 

13,123,317

 

 

 

421,630

 

Notes payable – related party

 

 

1,542,953

 

 

 

200,000

 

   

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2020

 

 

 

 

 

 

Common stock, par value $0.0001 per share, 300,000,000 shares authorized, 47,939,205 shares issued and outstanding as of September 30, 2020 and 51,907,458 shares issued and outstanding pro forma as adjusted.

 

 

14,382

 

 

 

14,980

 

Additional paid-in capital

 

 

156,196,213

 

 

 

188,620,676

 

Accumulated deficit

 

 

(52,467,307

)

 

 

(55,146,077

)

Treasury stock, at cost, 33,334 shares as of September 30, 2020

 

 

(50,000

)

 

 

(50,000

)

Total stockholders’ equity

 

$

103,693,288

 

 

$

133,439,579

 

Total capitalization

 

$

118,359,558

 

 

$

134,061,209

 

The preceding table does not include:

•        An aggregate of 890,385 shares of common stock issuable upon the exercise of outstanding stock purchase warrants with a weighted average exercise price of $1.46 per share that expire between August 2, 2021 and August 20, 2025, which excludes an aggregate of 41,906 shares of common stock underlying warrants outstanding at September 30, 2020 that have since expired or were exercised;

•        An aggregate of 974,833 shares of common stock issuable upon the conversion of outstanding convertible indebtedness with a weighted average conversion price of $3.41 per share that matures prior to October 31, 2022;

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•        An aggregate of 3,440,169 shares of common stock issuable upon the exercise of options with a weighted average exercise price of $1.59 per share granted under our long-term equity incentive plans as of September 30, 2020;

•        an aggregate of 3,968,253 shares of common stock issuable upon the exercise of the warrants included in the units (or 4,563,490 shares of common stock if the underwriters exercise their over-allotment option in full with respect to the warrants contained in the units); and

•        an aggregate of 198,412 shares of common stock issuable upon the exercise of the warrants to be issued to the underwriters.

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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 September 30, 2020 was $(16,209,105), or approximately $(0.34) per share of common stock (based upon 47,939,205 shares of common stock outstanding after giving effect to the proposed 1-for-3 reverse stock split). 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 3,968,253 units at an assumed public offering price of $6.30 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 September 30, 2020, would have been approximately $13,537,186, or $0.26 per share of common stock. This represents an immediate dilution in the as adjusted net tangible book value of $6.04 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

 

 

 

 

 

$

6.30

Net tangible book value per share as of September 30, 2020

 

$

(0.34

)

 

 

 

Increase in net tangible book value per share attributable to new investors in this offering

 

 

0.60

 

 

 

 

As adjusted net tangible book value per share after this offering

 

 

 

 

 

 

0.26

Dilution per share to investors in this offering

 

 

 

 

 

$

6.04

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 $0.32 per share, representing an immediate increase to existing stockholders of $0.06 per share and an immediate dilution of $5.98 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 47,939,205 shares outstanding as of September 30, 2020, as adjusted to give effect to a 1-for-3 reverse stock split.

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 $3,611,110 and decrease the dilution per share to investors purchasing shares by $0.93, 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 $3,611,110 and increase the dilution per share to investors purchasing shares by $0.93, 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 $6.30 per share, would increase our as adjusted net tangible book value per share after this offering by $573,300 and would decrease the dilution per share to investors by $0.01, 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 $6.30 per share, would decrease our as adjusted net tangible book value per share after this offering by $573,300 and would increase the dilution per share to investors purchasing shares by $0.01, 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 RES
ULTS 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. All share and per share amounts presented herein have been restated to reflect the implementation of the proposed 1-for-3 reverse stock split as if it had occurred at the beginning of the earliest period presented.

Business Overview

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

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 audited 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.

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.

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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, an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones offered by 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. and Lighter Than Air Systems Corp. (from the date of consummation of the ComSovereign Acquisition), and DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics and VNC from their respective dates of acquisition.

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

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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.

Significant Components of Our Results of Operations

Revenues

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

We expect our revenues for the year ending December 31, 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 the first quarter of 2021, 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 nine-month period ended September 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.

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

Operating Expenses

We classify our operating expense as research and development, sales and marketing, and general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions, benefits and bonuses. 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, 2021 as we ramp up our sales and marketing efforts to correspond to our increased production efforts relating to certain of our telecom products.

General and Administrative

In addition to personnel costs, general and administrative expense consists of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs. We expect general and administrative expense to increase in absolute dollars as we continue to expand our product offerings and expand into new markets. During fiscal 2020, we incurred, and during fiscal 2021 we expect to continue to incur increases in supporting overhead costs, professional fees, transfer agent fees and expenses; development costs and other expenses related to operating as a public company.

Depreciation and Amortization

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

Interest Expense

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

 

Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

 

January 10,
2019
(Inception) to
December 31,
2019

   

(unaudited)

 

(unaudited)

   

Revenue

 

$

7,513,660

 

 

$

3,576,342

 

 

$

4,712,212

 

Cost of Goods Sold(1)

 

 

3,473,293

 

 

 

2,019,020

 

 

 

2,990,716

 

Gross Profit

 

 

4,040,367

 

 

 

1,557,322

 

 

 

1,721,496

 

   

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

1,263,427

 

 

 

179,599

 

 

 

174,257

 

Sales and marketing(1)

 

 

30,523

 

 

 

4,202

 

 

 

6,222

 

General and administrative(1)

 

 

13,151,442

 

 

 

9,027,646

 

 

 

14,325,078

 

Depreciation and amortization

 

 

8,653,635

 

 

 

4,918,800

 

 

 

7,567,184

 

Gain on sale of fixed assets

 

 

(663

)

 

 

(325,838

)

 

 

(98,410

)

Total Operating Expenses

 

 

23,098,364

 

 

 

13,804,409

 

 

 

21,974,331

 

Net Operating Loss

 

 

(19,057,997

)

 

 

(12,247,087

)

 

 

(20,252,835

)

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Loss on conversion of debt

 

 

 

 

 

 

 

 

(2,640,000

)

Net loss on extinguishment of debt

 

 

(21,882

)

 

 

 

 

 

(434,774

)

Foreign currency transaction gain (loss)

 

 

(6,799

)

 

 

108,333

 

 

 

191,547

 

Interest expense

 

 

(5,707,840

)

 

 

(1,961,334

)

 

 

(8,399,663

)

Other income (expense)

 

 

(127,534

)

 

 

95,273

 

 

 

(147,430

)

Total Other Expenses

 

 

(5,864,055

)

 

 

(1,757,728

)

 

 

(11,430,320

)

Net Loss Before Income Taxes

 

 

(24,922,052

)

 

 

(14,004,815

)

 

 

(31,683,155

)

Deferred Tax Benefit

 

 

 

 

 

3,501,204

 

 

 

4,137,900

 

Net Loss

 

$

(24,922,052

)

 

$

(10,503,611

)

 

$

(27,545,255

)

Basic and Diluted Loss Per Share

 

$

(0.56

)

 

$

(0.81

)

 

$

(1.70

)

____________

(1)      These are exclusive of depreciation and amortization

Nine Months Ended September 30, 2020 Compared to January 10, 2019 (inception) to September 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 September 30, 2019, ComSovereign generated only nominal revenues.

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Total Revenues

For the nine months ended September 30, 2020, total revenues were $7,513,660 compared to $3,576,342 for the period January 10, 2019 (Inception) to September 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 nine months ended September 30, 2020, cost of goods sold were $3,473,293 compared to $2,019,020 for the period January 10, 2019 (Inception) to September 30, 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 intelligent batteries. Gross profit for the nine months ended September 30, 2020 was $4,040,367 with a gross profit margin of 54% for the same period compared to $1,557,322 for the period January 10, 2019 (Inception) to September 30, 2019 with a gross profit margin of 44% for the same period.

These changes in gross profit margin resulted primarily from the increased gross profit margin of DragonWave during the nine months ended September 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 September 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 nine months ended September 30, 2020, research and development expense was $1,263,427 compared to $179,599 for the period January 10, 2019 (Inception) to September 30, 2019, which primarily consisted of payroll and related costs.

The increase in research and development expense 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 nine months ended September 30, 2020, sales and marketing expense was $30,523 compared to $4,202 for the period January 10, 2019 (Inception) to September 30, 2019, both of which primarily consisted of payroll and related costs.

General and Administrative Expense

For the nine months ended September 30, 2020, general and administrative expense was $13,151,442 compared to $9,027,646 for the period January 10, 2019 (Inception) to September 30, 2019. Such expense primarily consisted of payroll and related costs of $6,573,104, business overhead costs of $520,674, professional fees of $3,818,351, rent of $909,226 and travel of $139,347 recorded during the first nine months of 2020 and payroll and related costs of $3,978,082, shared based compensation of $352,000 and professional fees of $2,653,223 recorded during the period January 10, 2019 (Inception) to September 30, 2019. The increase is due mostly to higher head-count related expenses due to acquisitions and higher legal and accounting fees related to public company expense.

Depreciation and Amortization

For the nine months ended September 30, 2020, depreciation and amortization were $8,653,635 compared to $4,918,800 for the period January 10, 2019 (Inception) to September 30, 2019, which primarily included $7,847,434 and $4,614,131 of amortization on definite-lived intangible assets, respectively, $8,400 of amortization of finance lease right-of-use asset in current year and none in previous, and $797,801 and $304,669 of depreciation on test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, respectively.

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Other Income (Expense)

For the nine months ended September 30, 2020, total other expense was $5,864,055 compared to total other expense of $1,757,728 for the period January 10, 2019 (Inception) to September 30, 2019. This increase primarily consisted of $5,707,840 of interest expense and amortized discounts on our outstanding debt, which was partially offset by a $6,799 loss on foreign exchange transactions recorded during the first nine months of 2020 and $1,961,334 of interest expense and amortized discounts on our outstanding debt, which was partially offset by a $108,333 gain on foreign exchange transactions recorded during the period January 10, 2019 (Inception) to September 30, 2019.

Provision for Income Taxes

For the nine months ended September 30, 2020, there was no provision for income taxes due to an increase in the valuation allowance of $2,648,200 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 nine months ended September 30, 2020, we had net loss of $24,922,052 compared to a net loss of $10,503,611 for the period January 10, 2019 (Inception) to September 30, 2019, related to the items described above.

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

Revenues

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.

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.

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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 (Expense)

Total other expense was $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.

Liquidity and Capital Resources

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of September 30, 2020, we had $505,053 in cash compared to $812,452 at December 31, 2019, a decrease of $307,399. As of September 30, 2020, we had $893,407 in accounts receivable compared to $2,168,659 at December 31, 2019, a decrease of $1,275,252 resulting from increased collections in the first nine months of 2020.

As of September 30, 2020, we had total current assets of $7,403,605 and total current liabilities of $26,382,134, or negative working capital of $18,978,529, compared to total current assets of $8,665,369 and total current liabilities of $15,142,599, or negative working capital of $6,477,230 at December 31, 2019. This is a decline of more than $12,501,299 over the working capital balance at the end of 2019.

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

•        $4,241,553 related to payroll, accrued liabilities and accounts payable that are past due;

•        $1,849,518 related to secured notes payable that are past due;

•        $5,115,676 related to notes payable that are past due;

•        $84,000 related to senior debentures that are past due;

•        $374,137 related to convertible notes payable that are past due;

•        $8,185,333 related to indebtedness that is due in the fourth quarter of 2020;

•        $23,043 related to indebtedness that is due in the first quarter of 2021;

•        $23,348 related to indebtedness that is due in the second quarter of 2021; and

•        $23,657 related to indebtedness that is due in the third quarter of 2021.

We intend to use $7.4 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 have converted or have

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agreements to convert at or prior to the closing of this offering outstanding promissory notes in the principal amount of $10.4 million to shares of our common stock at a weighted average conversion price of $5.23 per share, as follows:

(Amounts in US$’s)

 

Maturity Date

 

Principal Amount Outstanding*

 

Interest Rate

 

Original Use of Proceeds

 

Principal Amount Converting

 

Conversion Price

 

Number of Shares

Secured Notes Payable

     

 

     

 

     

 

   

 

     

 

Secured Note payable

 

November 26, 2021

 

$

2,000,000

 

9.0

%

 

Working Capital

 

$

1,000,000

 

$

6.30

 

163,493

(1)

Secured Note payable

 

October 15, 2020

 

 

2,007,971

 

5.0

%

 

Working Capital

 

 

2,007,971

 

 

6.30

 

327,422

(1)

Total secured notes
payable

     

 

4,007,971

   

 

     

 

3,007,971

 

 

   

490,915

 

       

 

     

 

     

 

   

 

     

 

Notes Payable

     

 

     

 

     

 

   

 

     

 

Note payable

 

September 30, 2020

 

 

500,000

 

10.0

%

 

Working Capital

 

$

500,000

 

$

3.00

 

177,812

(1)

Note payable

 

August 31, 2020

 

 

3,500,000

 

12.0

%

 

Working Capital

 

$

3,500,000

 

$

6.30

 

638,670

(1)

Note payable

 

November 30, 2020

 

 

500,000

 

0.0

%

 

Working Capital

 

 

500,000

 

 

6.30

 

79,366

(1)

Total notes payable

     

 

4,500,000

   

 

     

 

4,500,000

 

 

   

895,848

 

       

 

     

 

     

 

   

 

     

 

Convertible Notes Payable

     

 

     

 

     

 

   

 

     

 

Convertible note payable

 

January 29, 2021

 

 

374,137

 

24.0

%

 

Working Capital

 

 

374,137

 

 

2.70

 

144,482

(1) 

Total convertible notes payable

     

 

374,137

   

 

     

 

374,137

 

 

   

144,482

 

       

 

     

 

     

 

   

 

     

 

Senior Convertible Debentures

     

 

     

 

     

 

   

 

     

 

Senior convertible debenture

 

December 31, 2021

 

 

250,000

 

10.0

%

 

Working Capital

 

 

250,000

 

 

3.00

 

89,601

(1)

Senior convertible debenture

 

November 30, 2020

 

 

1,000,000

 

9.0

%

 

Acquisition Financing

 

 

1,000,000

 

 

3.00

 

340,731

(1)

Total senior convertible debentures

     

 

1,250,000

   

 

     

 

1,250,000

 

 

   

430,332

 

       

 

     

 

     

 

   

 

     

 

Related Party Note

     

 

     

 

     

 

   

 

     

 

Related party note

 

December 31, 2020

 

 

1,292,953

 

5.0

%

 

Working Capital

 

 

1,292,953

 

 

7.50

 

188,574

(1) 

Total Related Party Notes

     

 

1,292,953

   

 

     

 

1,292,953

 

 

   

188,574

 

Total debt obligations converting

     

$

11,425,061

   

 

     

$

10,425,061

 

 

   

2,150,151

 

____________

*        As of September 30, 2020.

(1)      Includes accrued interest and any penalties to be converted to shares of common stock in addition to the principal amount shown.

We anticipate meeting our cash obligations on our remaining indebtedness that is payable on or prior to September 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 September 30, 2021, including the reduction of certain general and administrative expenses such as

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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. Since April 2020, we have entered into agreements with certain debt holders to extend the maturity dates on such debt. In the third quarter of 2020, we converted or exchanged $4.85 million of outstanding indebtedness for equity, in October 2020, we agreed to exchange an additional $1.4 million of indebtedness for equity, and we are in discussions with certain other creditors regarding the conversion or exchange of additional indebtedness for equity. 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 September 30, 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 $96,852 for the nine-month period ended September 30, 2020 and 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.

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.

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As discussed below, on March 19, 2020, we issued a promissory note to the estate of Mr. Nussbaum in the principal amount of $2,007,971, the proceeds of which, were used 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 September 30, 2020, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note is currently past due and accruing interest at an increased default rate of 12.5% per annum. This promissory note is secured by substantially all of the assets of InduraPower. This note will be repaid with a portion of the net proceeds of this offering.

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 September 30, 2020, an aggregate principal amount of $186,709 was outstanding under this note. This note is classified as current as of September 30, 2020. See Note 15 — Debt Agreements in the Notes to our consolidated financial statements for September 30, 2020 included elsewhere in this prospectus. This note will be repaid with a portion of the net proceeds of this offering.

In August 2016, InduraPower issued a promissory note in the principal amount of $50,000 with an interest of 7.9% 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 September 30, 2020, an aggregate principal amount of $18,980 was outstanding under this note. This note is classified as current as of September 30, 2020. See Note 15 — Debt Agreements in the Notes to our consolidated financial statements for September 30, 2020 included elsewhere in this prospectus. This note will be repaid with a portion of the net proceeds of this offering.

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 September 30, 2020, an aggregate principal amount of $2,000,000 was outstanding under this note. A total of $1,000,000 of this note will be converted to shares of common stock in conjunction with this offering.

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 September 30, 2020, an aggregate principal amount of $211,667 was outstanding under this note. This loan will be repaid with a portion of the net proceeds of this offering.

In connection with the acquisition of the business by Sovereign Plastics 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. 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. The loan is secured by certain assets of Sovereign Plastics. This loan is subject to covenants, whereby Sovereign Plastics is required to meet certain financial and non-financial covenants at the end of each fiscal year. As of September 30, 2020, an aggregate principal amount of $855,120 was past due under this loan. This loan will be repaid with a portion of the net proceeds of this offering.

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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 were due monthly, with the full principal amount due at maturity. On August 5, 2020, the maturity date of this loan was extended to October 15, 2020. The loan is secured by certain intellectual property assets of our company. The proceeds of the loan were used to repay the balance of the CNB Note (revolving line of credit) that was entered into in 2017. As of September 30, 2020, an aggregate principal amount of $2,007,971 was outstanding under this loan. This loan will be converted to shares of common stock in conjunction with this offering.

On December 8, 2020, we entered into a secured loan agreement pursuant to which we received a loan in the amount of $1,000,000 that is evidenced by a promissory note in the principal amount of $1,100,000, including $100,000 of original issue discount, that bears interest at the rate of 10% per annum and matures on January 6, 2021. Interest and principal are payable in full at maturity. The loan is guaranteed by VNC and is secured by our equity in VNC, substantially all of the assets of VNC and certain intellectual property assets of our company. As additional consideration for such loan, Daniel L. Hodges, our Chairman and Chief Executive Officer, transferred to the lender 16,667 shares of common stock. The proceeds of the loan were used to for working capital purposes, including the acquisition of certain inventory. This loan will be repaid with a portion of the net proceeds of this offering.

Notes Payable

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 50,000 shares of common stock of ComSovereign. Accrued interest and the full principal balance are due at maturity. On April 30, 2020, we also issued 4,832 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 September 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note. This note will be converted to shares of common stock in conjunction with this offering.

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 3,334 shares of common stock of ComSovereign. Accrued interest and principal were due and payable at maturity. As of September 30, 2020, an aggregate principal amount of $175,000 was outstanding under this note. This note will be repaid with a portion of the net proceeds of this offering.

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 were 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 33,334 shares of our common stock that have been treated as debt issuance costs.On August 5, 2020, $1,500,000 principal amount of this note was extinguished in exchange for 333,334 shares of common stock with a fair value of $4.53 per share. This loan is currently past due. However, there are no penalties associated with this default. As of September 30, 2020, an aggregate principal amount of $3,500,000 was outstanding under this note. This note will be converted to shares of common stock in conjunction with this offering.

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. An additional $133,400 of the aggregate principal amount of this promissory

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note, along with accrued interest and associated late fee penalties of $51,516, was fully extinguished on August 5, 2020 in exchange for 41,093 shares of common stock with a fair value of $4.53 per share. As of September 30, 2020, the remaining aggregate principal amount of $66,700 is currently past due and outstanding.

On March 5, 2020, we issued a promissory note for consideration totaling $446,000 in the principal amount of $500,000 that matures on November 30, 2020. Additionally, in lieu of interest, we issued to the lender 16,667 shares of our common stock. As of September 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note. This note will be converted to shares of common stock in conjunction with this offering.

In connection with the acquisition of the business by Sovereign Plastics 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 September 30, 2020, the aggregate amount of $379,588 was outstanding under these notes. These notes will be repaid with a portion of the net proceeds of this offering.

•        we agreed to pay an aggregate of $165,986 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 September 30, 2020, an aggregate amount of $165,986 was outstanding. This amount will be repaid with a portion of the net proceeds of this offering.

•        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 September 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 September 30, 2020, an aggregate amount of principal of $61,287 was outstanding under this loan. This loan will be repaid with a portion of the net proceeds of this offering.

•        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 September 30, 2020, an aggregate amount of principal of $89,912 was outstanding under this loan. This loan will be repaid with a portion of the net proceeds of this offering.

•        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 September 30, 2020, an aggregate amount of principal of $41,390 was outstanding under this loan. This loan will be repaid with a portion of the net proceeds of this offering.

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 was 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 September 30, 2020, the aggregate principal amount of $290,000 was outstanding under this note. This note will be repaid with a portion of the net proceeds of this offering.

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% to 18% and have maturity dates between October 13, 2020 and November 30, 2020. As additional consideration for such loans, Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, transferred to such investors an aggregate of 96,634 shares of common stock. As of September 30, 2020, the aggregate principal amount of $1,200,000 was outstanding under these notes. On July 29, 2020, we sold 30,614 shares of common stock at a price of $3.00 per share to one of the accredited investors. These notes will be repaid with a portion of the net proceeds of this offering.

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Between November 4, 2020 and November 24, 2020, we borrowed an aggregate of $550,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes are between $50,000 and $100,000. The loans bear interest at a rate of 15% and have maturity dates between January 31, 2021 and February 23, 2021. As additional consideration for such loans, Daniel L. Hodges, our Chairman and Chief Executive Officer, guaranteed the notes and transferred to such investors an aggregate of 38,334 shares of common stock.

On July 1, 2020, we borrowed $50,000 from Mr. Brent Davies and issued to Mr. Davies a promissory note evidencing such loan that bears interest at 4.8% and matures on November 30, 2020. As of September 30, 2020, $50,000 plus accrued interest was outstanding under the loan. This note will be repaid with a portion of the net proceeds of this offering.

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 embed the modulation technology within DragonWave’s Harmony line of radios. This note bears interest at 5% per annum and matures on December 31, 2020. Interest and principal are due at maturity. This note will be converted to shares of common stock in conjunction with this offering.

On August 5, 2019, Mr. Hodges and his wife loaned DragonWave $200,000 at an interest rate of 5.0% per annum with a maturity date of December 31, 2020. Interest is payable monthly while the full principal balance is due at maturity. As of September 30, 2020, $200,000 plus accrued interest was outstanding under the loan.

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) $24.00 or (2) 80% of the common stock price offered under the next equity offering. As of December 31, 2019, an aggregate principal amount of $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 September 30, 2020, an aggregate principal amount of $84,000 was outstanding under these debentures. These debentures are past due and interest accrues at a rate of 15% per annum. These debentures will be repaid with a portion of the net proceeds of this offering.

Convertible Notes Payable

On July 7, 2020, we sold a convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 that bears interest at a rate of 12.5% per annum, and warrants to purchase an additional 52,910 shares of common stock. Warrants to purchase up to 9,260 shares of common stock were also issued to an unrelated third party as a placement fee for the transaction. In connection with this note, we recognized a Beneficial Conversion Feature (“BCF”) of $139,810, a debt discount of $50,128 associated with the issuance of warrants to the note holder, and debt issuance costs of $35,539, which were all recorded as debt discounts. On July 28, 2020, we defaulted on this note under the related Registration Rights Agreement by not filing a registration statement within 90 days of the initial April 29, 2020 note origination date. As a result, the aggregate principal balance increased by $88,423, which was composed of an $86,339 penalty payment-in-kind and a $2,084 interest payment-in-kind, representing 130% of the outstanding principal and accrued interest balance on the default date. In addition, the interest rate was increased to 24% per annum, and the note and accrued interest is due on-demand. During the three and nine months ended September 30, 2020, $261,191 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of September 30, 2020, the note was due on-demand from the default not being cured and an aggregate principal amount of $374,137 was outstanding under this note. This note will be converted to shares of common stock in conjunction with this offering.

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 matured on November 20, 2020. Accrued interest and principal were due on the maturity date. Additionally, as additional consideration for the loan, we issued to the lender 133,334 shares of our common stock. We also issued to an unrelated third party as a placement fee for the transaction warrants to purchase up to 17,857 shares of our common stock at an exercise price

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of $8.40 per share at any time on or prior to August 21, 2025. As of September 30, 2020, the aggregate principal amount of $1,700,000 was outstanding under the loan. This note will be repaid with a portion of the net proceeds of this offering.

Senior Convertible Debentures

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) $7.50 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 $7.50 per share to $2.27 per share. As of September 30, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures. These debentures will be converted to shares of common stock in conjunction with this offering.

On July 2, 2020, we sold $1,000,000 aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor that bears interest at a rate of 9% per annum and a maturity date of September 30, 2020. On September 30, 2020, the maturity date of these debentures was extended to November 30, 2020. Accrued interest and principal are due on the maturity date, with interest paid in cash or, at our option, in shares of common stock at the conversion price of $3.00 per share. Upon an event of default, the interest rate shall automatically increase to 15% per annum. The debentures are convertible into shares of common stock at a conversion price of $3.00 per share. We also issued warrants to purchase 33,334 shares of common stock that are exercisable for a purchase price of $3.00 per share, at any time on or prior to the earlier of December 31, 2022 or the second anniversary of our consummation of a public offering of our common stock in connection with an up-listing of the common stock to a national securities exchange. As of September 30, 2020, an aggregate principal amount of $1,000,000 was outstanding under these debentures. This debenture will be converted to shares of common stock in conjunction with this offering.

Paycheck Protection Program of the CARES Act

Between April 30 and May 26, 2020, six of our subsidiaries received loan proceeds in the aggregate amount of $455,184 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 September 30, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans.

In connection with the VNC acquisition on July 6, 2020, we assumed a PPP loan in the principal amount of $24,028 bearing interest at 1% per annum and with a maturity date of May 14, 2022. Terms are consistent with our other PPP loans. As of September 30, 2020, an aggregate amount of principal of $24,028 was outstanding under this loan.

On August 11, 2020, one of our subsidiaries received loan proceeds in the aggregate amount of $103,659 under the PPP. The PPP loan has a maturity of five years and an interest rate of 1% per annum. Terms are consistent with our other PPP loans. As of September 30, 2020, an aggregate amount of principal of $103,659 was outstanding under this loan.

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Sources and Uses of Cash

(Amounts in US$’s)

 

For the
Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception)
to
September 30,
2019

 

January 10,
2019
(Inception)
to
December 31,
2019

   

(unaudited)

Cash flows used in operating activities

 

$

(4,462,866

)

 

$

(11,657,063

)

 

$

(6,853,247

)

Cash flows (used in) provided by investing activities

 

 

(3,242,689

)

 

 

1,629,519

 

 

 

2,838,235

 

Cash flows provided by financing activities

 

 

7,374,773

 

 

 

10,711,153

 

 

 

4,850,847

 

Effect of exchange rates on cash

 

 

23,383

 

 

 

(21,699

)

 

 

(23,383

)

Net (decrease)/increase in cash and cash equivalents

 

$

(307,399

)

 

$

661,910

 

 

$

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 nine months ended September 30, 2020, net cash used in operating activities was $4,462,866. Net cash used in operating activities primarily consisted of the net operating loss of $24,922,052 and gain on the sale of fixed assets of $663, which was partially offset by depreciation and amortization of $8,653,635, amortized discounts and debt issuance costs on our outstanding debt of $4,287,794 and right-of-use asset amortization of $444,436. Additionally, working capital changes provided $5,697,103 in cash during the period.

For the period January 10, 2019 (Inception) to September 30, 2019, cash used in operating activities was $11,657,063. Net cash provided by operating activities primarily consisted of the net operating loss of $10,503,611, which was partially offset by depreciation and amortization of $4,918,800, right-of-use asset amortization of $76,557 and $352,000 of shares issued as vendor compensation. Additionally, working capital changes used $4,694,005 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 nine months ended September 30, 2020, net cash used in investing activities was $3,242,689. Investing activities primarily consisted of the acquisition of the net assets of Sovereign Plastics and VNC for a purchase prices of $829,347 and $19,728,781, respectively. The purchase price of the assets of Sovereign Plastics included 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 $96,852 and a note receivable for acquisition of $251,247. The purchase price of VNC included cash paid on the settlement date of $2,892,727, shares with values at acquisition date of $12,677,267, warrants and options with values at acquisition date of $3,907,746 and a note receivable of $251,042.

For the period January 10, 2019 (Inception) to September 30, 2019, net cash provided by investing activities was $1,629,519. Investing activities primarily consisted of cash from ComSovereign’s acquisitions of VEO, InduraPower, Silver Bullet Technologies, DragonWave-X LLC and Lextrum, Inc.

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.

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For the nine months ended September 30, 2020, financing activities provided cash of $7,374,773. Financing activities primarily consisted of $8,008,026 of proceeds from the issuance of debt and $331,843 from the sale of common stock, which was offset by the repayment of $902,661 of debt, net payments on line of credit of $2,000,000 and $12,634 principal payment on finance leases.

For the period January 10, 2019 (Inception) to September 30, 2019, cash provided by financing activities was $10,711,153. Financing activities primarily consisted of proceeds 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 September 30, 2020, we characterized $1,654,356 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

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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.

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.

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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 electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S.-based providers of telecommunications equipment and services.

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

•        Telecom and Network Products and 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. Our solutions enable service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product portfolio is wireless network 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 mid-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.

•        Edge-based Small Cell 4G LTE and 5G Access Radios.    We offer Citizens Broadband Radio Service (CBRS) frequency and other small cell radios that are designed to connect to other access radios or to connect directly to mobile devices such as mobile phones and other 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

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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.

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 Network Communications Inc.    Virtual Network Communications Inc. (“VNC”) is an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones offered by our Drone Aviation subsidiary and enabled and operated in nearly any location in the world. We acquired VNC in July 2020.

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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 prior to the ComSovereign Acquisition.

•        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 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 $5.22 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

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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, in certain regions 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.

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 2021 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 evidenced 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 2021 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.

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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.

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 markets.    We 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 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.

•        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

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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.

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

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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 mid-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 third 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.

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

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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.

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.

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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.

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.

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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 September 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.

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 September 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

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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 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.

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Employees

As of September 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.

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.

On January 17, 2020, Arrow Electronics, Inc. (“Arrow”) filed suit against DragonWave and our company in the United States District Court for the District of Colorado, Case No. 1:20-cv-00149-NRN. In its complaint, Arrow alleged that in November and December 2018, DragonWave took delivery of merchandise from Arrow worth approximately $124,000 and ordered additional merchandise from Arrow worth approximately $520,000, but that DragonWave defaulted in December 2018 on its obligations to pay Arrow. Arrow further alleged that in November 2019, Arrow and DragonWave entered into a forbearance agreement in which DragonWave acknowledged indebtedness to Arrow of approximately $124,000 and made an additional commitment to purchase inventory of $520,000 plus fees of $10,000, to be paid in certain instalments. On June 12, 2020, Arrow and DragonWave entered into a settlement agreement whereby DragonWave was obligated to pay Arrow $503,500 on or before August 15, 2020, DragonWave gave a consent judgment to Arrow in the amount of $503,000, and we guaranteed DragonWave’s payment obligation to Arrow. The consent judgment against DragonWave was entered on June 15, 2020. Also on June 15, 2020, we were dismissed from the case. On August 14, 2020, we, Arrow and DragonWave entered into an amendment to the June 12, 2020 settlement agreement pursuant to which we and DragonWave were obligated to pay Arrow $200,000 on or before August 17, 2020 and $313,000 on or before September 18, 2020. The $200,000 payment was paid to Arrow. On September 28, 2020, we, Arrow and DragonWave entered into an amendment to the June 12, 2020 settlement agreement pursuant to which we and DragonWave were obligated to pay Arrow a remaining balance of $323,500 on or before November 6, 2020, which remains unpaid. Also on September 28, 2020, Daniel Hodges, our Chairman and Chief Executive Officer, provided Arrow a personal guaranty for the obligation owed by DragonWave and our company to Arrow.

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On December 1, 2020, Arrow filed suit against DragonWave, Daniel Hodges and us in the United States District Court for the District of Colorado, Case No. 1:20-cv-03532-NYW. In its complaint, Arrow alleges that we and DragonWave breached the June 12, 2020 settlement agreement, as amended, by failing to pay the remaining balance due, and that Daniel Hodges breached his personal guaranty. Arrow is seeking damages of approximately $340,000. On December 3, 2020, we, DragonWave and Daniel Hodges provided waivers of service of process in the case. We intend to pay to Arrow the amount of its claim out of the net proceeds of this offering.

Also on December 1, 2020, Arrow filed suit against Elitise, LLC, the research and development arm of our wholly-owned subsidiary InduraPower, in the United States District Court for the Southern District of New York, Case No. 1:20-cv-10045. In its complaint, Arrow alleges that Elitise breached an August 19, 2016 secured promissory note and a September 11, 2019 forbearance agreement. In such action, Arrow is seeking damages of approximately $900,000. On December 3, 2020, Elitise provided a waiver of service of process in the case. We intend to pay to Arrow the amount of its claim out of the net proceeds of this offering.

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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

Kevin M. Sherlock

 

59

 

General Counsel and Secretary

David Aguilar

 

64

 

Director

Richard J. Berman

 

78

 

Director

Brent M. Davies

 

71

 

Director

Kay Kapoor

 

57

 

Director*

James A. Marks

 

67

 

Director

____________

*        Effective as of the closing of this offering.

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,

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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.

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 September 2014 and served as its Chief Executive Officer prior to our acquisition of that company. Prior to founding VNC, Mr. Tammisetti was an independent consultant was a consultant to various mobile operators, such as Nextel, Sprint and Clearwire, assisting in technology strategy and architectures. 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 and Technology 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.

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,

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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 March 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 upon the closing of the ComSovereign Acquisition on November 27, 2019. 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 to 2016, he was Chairman of MetaStat, Inc. From 2006 to 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 to 2000, he was employed by Internet Commerce Corporation (now Easylink Services) as Chairman and Chief Executive Officer, and was a director from 1998 to 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. 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 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.

Kay Kapoor, 57, will join our board of directors upon the closing of this offering. Since January 2018, Ms. Kapoor has been the Chief Executive Officer of Arya Technologies, LLC, an advisory and consulting firm that provides expertise in 5G communications, cyber, digital platforms, smart infrastructure, IoT, secure communications and big data/analytics technologies to government, public and private clients. From January 2013 to October 2017, Ms. Kapoor was the Executive Vice President and President of AT&T’s Global Public Sector organization, a $15 billion segment of its business that provides technology and communications solutions to government and education customers across federal, state, local and international markets. From January 2011 to October 2012, Ms. Kapoor served as

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chairman and Chief Executive Officer of Accenture Federal Services (AFS), a wholly-owned subsidiary of Accenture LLC. From November 1990 to October 2010, she was employed at Lockheed Martin Corporation where she led complex organizational units and government relations. She ultimately served as Vice President and Chief Operating Officer of Lockheed Martin’s $4 billion, 13,000-employee Information Systems & Global Solutions (IS&GS — Civil) unit. Ms. Kapoor is the recipient of numerous industry awards, including the Stevie Award for Woman of the Year in Business Services, the Women in Technology Leader Award, the prestigious Janice K. Mendenhall Spirit of Leadership Award from the American Council for Technology/Industry Advisory Council, the FCW Fed100 Award and the Asian American Engineer of the Year Award. Ms. Kapoor has an advisory role with Harvard’s John F. Kennedy School of Government and has a seat on the Dean’s Council. She is also on the Board of the Belfer Center for Science and International Affairs and is a member of the Dean’s Council at Johns Hopkins University. Ms. Kapoor earned a master’s degree in business from Johns Hopkins University complemented by executive programs at MIT and Harvard University and earned her bachelor’s degree in information systems from the University of Maryland. Ms. Kapoor will bring to our board of directors significant experience across the technology, telecommunications and defense markets, including expertise in government programs, mergers and acquisitions and telecom technology.

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 the 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

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6.      being the 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.

Board Composition and Structure; Director Independence

Our business and affairs are managed under the direction of our board of directors. At the closing of this offering, our board of directors will consist of seven 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.

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;

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•        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 Nasdaq 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 Nasdaq 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.

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;

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•        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 Nasdaq. 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. Upon the closing of this offering, there will be one woman director on our board and one woman holding an executive position within our company.

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.

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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 100,000 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 333,334 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 266,667 shares of our common stock with an exercise price of $3.00 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 333,334 of our common stock shares with an exercise price of $1.95 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 110,834 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 650,000 shares of our common stock with an exercise price of $3.00 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 783,334 shares of common stock with an exercise price of $1.95 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 150,000 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 100,000 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 66,667 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 66,667 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 266,667 shares of our common stock with an exercise price of $3.00 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 333,334 shares of our common stock with an exercise price of $1.95 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 143,834 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.

(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 133,334 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

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For services in 2018, Ms. Carpenter received one option award. On August 22, 2018, Ms. Carpenter was awarded a stock option to purchase 100,000 shares of our common stock with an exercise price of $3.00 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 141,667 shares of our common stock with an exercise price of $1.95 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 16,667 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.

(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.

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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

 

100,000

John E. Howell

 

President

 

 

150,000

 

100,000

Dr. Dustin McIntire

 

Chief Technology Officer

 

 

150,000

 

66,667

Brian T. Mihelich

 

Chief Financial Officer

 

 

150,000

 

66,667

Kevin M. Sherlock

 

General Counsel and Secretary

 

 

150,000

 

66,667

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 100,000 shares of common stock, and to each of Dr. McIntire, Mr. Mihelich and Mr. Sherlock a restricted stock award of 66,667 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.

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 months’ salary if such termination is done within the first year and (iii) a severance amount equal to 12 months’ 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

 

 

$

 

21,354

Equity compensation plans not approved by security holders

 

3,699,508

 

 

1.65

 

Total

 

3,699,508

 

$

1.65

 

21,354

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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 3,311,980 shares of common stock had been made under the 2015 Plan, and 21,354 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.

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.

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A total of 3,333,334 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 908,503 shares of common stock have been made under the 2020 Incentive Plan, of which 33,334 were forfeited, and 2,424,832 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.

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

 

 

$

 

 

100,000

 

$

246,000

       

 

           

 

 

Daniyel Erdberg

     

 

           

 

 

Option Grant

 

380,000

 

 

1.50

 

8/3/2021

 

 

 

Option Grant

 

66,667

 

 

1.50

 

11/9/2021

 

 

 

Option Grant

 

333,334

 

 

1.95

 

9/26/2022

 

 

 

       

 

           

 

 

John F. Howell

     

 

           

 

 

Restricted Stock Grant

 

 

 

 

 

100,000

 

 

246,000

       

 

           

 

 

Dr. Dustin McIntire

     

 

           

 

 

Restricted Stock Grant

 

 

 

 

 

66,667

 

 

164,000

       

 

           

 

 

Felicia Hess

     

 

           

 

 

Option Grant

 

400,000

 

 

1.50

 

08/03/2021

 

 

 

Option Grant

 

100,000

 

 

1.50

 

11/09/2021

 

 

 

Option Grant

 

333,334

 

 

1.95

 

9/26/2020

 

 

 

       

 

           

 

 

Kendall Carpenter

     

 

           

 

 

Option Grant

 

91,667

 

 

1.50

 

2/08/2020

 

 

 

Option Grant

 

56,667

 

 

1.50

 

2/08/2020

 

 

 

Option Grant

 

43,334

 

 

3.00

 

2/08/2020

 

 

 

 

Option Grant

 

141,667

 

 

1.95

 

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 66,667 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 33,334 shares of our common stock with an exercise price of $8.70 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 33,334 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 66,667 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 66,667 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 66,667 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 33,334 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 33,334 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 December 7, 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 December 1, 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 49,432,827 shares of our common stock outstanding as of December 7, 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)

 

8,290,808

 

16.8

%

John E. Howell(3)

 

8,594,903

 

17.4

 

Brian T. Mihelich(4)

 

216,667

 

*

 

Dr. Dustin McIntire(5)

 

1,487,097

 

3.0

 

Mohan Tammisetti(6)

 

2,652,666

 

5.4

 

Kevin M. Sherlock(7)

 

195,233

 

*

 

David Aguilar(8)

 

197,314

 

*

 

Richard J. Berman(9)

 

385,354

 

*

 

Brent M. Davies(10)

 

556,621

 

1.1

 

Kay Kapoor(11)

 

 

 

James A. Marks(12)

 

318,688

 

*

 

   

   

 

Other 5% Shareholders

 

   

 

Dr. Phillip Frost(13)

 

4,554,940

 

9.2

 

   

   

 

Executive Officers and Directors as a Group (11 persons)

 

22,895,352

 

46.3

 

____________

*        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 December 7, 2020. On December 7, 2020, there were 49,432,827 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 outstanding options and other derivative securities owned by that person which are exercisable within 60 days of December 7, 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 7,471,025 shares held directly by Mr. Hodges, of which 100,000 shares are restricted share awards, 24,575 shares of common stock held by Mr. Hodges’s spouse, 578,068 shares held by Medusa Scientific LLC, 28,566 shares held by The Hodges Foundation, and 188,574 held by TM Technologies, Inc. Mr. Hodges has voting and dispositive control over the shares held by Medusa Scientific LLC, The Hodges Foundation, and TM Technologies, Inc. Mr. Hodges has current voting control over all 100,000 restricted share awards, of which 33,334 are fully vested.

(3)      Includes 125,744 shares held directly by Mr. Howell, of which 100,000 shares are restricted share awards, 100,000 shares held by M. Howell’s father, 8,366,667 shares held by New Bunker Hill LLC, and 2,492 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. Mr. Howell has current voting control over all 100,000 restricted share awards, of which 33,334 are fully vested.

(4)      Includes 66,667 shares of restricted share awards. Mr. Mihelich has current voting control over all 66,667 restricted share awards, of which 33,334 are fully vested.

(5)      Includes 66,667 shares of restricted share awards and 63,334 shares issuable upon the exercise of outstanding warrants held by Mr. McIntire. Mr. McIntire has current voting control over all 66,667 restricted share awards, of which 33,334 are fully vested.

(6)      Includes 16,667 shares of common stock underlying options that will vest fully within 60 days.

(7)      Represents 195,233 shares held by the Kevin M. Sherlock Revocable Trust, of which 66,667 shares are restricted share awards. Mr. Sherlock has voting and dispositive control over the shares held by the trust. Mr. Sherlock has current voting control over all 66,667 restricted shares awards, of which 33,334 are fully vested.

(8)      Represents (i) 16,667 shares of common stock owned of record by the David V. Aguilar Traditional IRA, (ii) 60,647 shares of common stock owned of record by Global Security and Innovative Strategies, LLC (“GSIS”), (iii) 86,667 shares of common stock underlying options that are exercisable by Mr. Aguilar, and (iv) 33,334 shares of common stock underlying options that are exercisable by GSIS. Mr. Aguilar is a partner in GSIS and has voting input regarding the shares held by GSIS. The address of GSIS is 1401 H Street NW, Suite 875, Washington, DC 20005.

(9)      Includes 66,667 shares of restricted share awards. Mr. Berman has current voting control over all 66,667 restricted share awards, of which 33,334 are fully vested.

(10)    Includes 66,667 shares of restricted share awards. Mr. Davies has current voting control over all 66,667 restricted share awards, of which 33,334 are fully vested. Also includes 4,748 shares held by Dasepi LLC. While Mr. Davies has no ownership interest in Dasepi LLC, he has voting and dispositive control over the shares held by Dasepi LLC.

(11)    Ms. Kapoor will become a director effective upon the closing of this offering.

(12)    Represents 318,688 shares held by Spidernet, Inc., of which 66,667 shares are restricted share awards. Mr. Marks has voting and dispositive control over the shares held by Spidernet, Inc. Mr. Marks has current voting control over all 66,667 restricted share awards, of which 33,334 are fully vested.

(13)    Represents (i) 820,834 shares owned of record by Mr. Frost, (ii) 1,343,580 shares owned of record by Frost Nevada Investment Trust and (iii) 2,390,526 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.

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 nine-month period ended September 30, 2020, or the period January 10, 2019 (inception) to December 31, 2019, since September 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) $9.00 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 $3.00 per share, subject to adjustment.

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 $1.50 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

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amendment. We issued 1,059,137 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 1,000,000 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 $1.50 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 1,343,580 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 33,334 shares of our common stock, which were immediately vested, had a strike price of $3.00 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. There was no outstanding balance owed to GSIS as of September 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 $46,500 for normal monthly retainers and expenses as of September 30, 2020.

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2018 Common Stock Issuance

On December 27, 2018, we completed the sale of 1,333,334 shares of our common stock for a purchase price of $1.50 per share, or an aggregate of $2,000,000, of which 333,334 shares were sold to Jay Nussbaum, our former Chief Executive Officer and Chairman of the board of directors, and 1,000,000 shares were sold to Frost Gamma, a trust for which Dr. Phillip Frost, a substantial shareholder of our company, is the trustee.

2019 Common Stock Issuance

On January 25, 2019, we completed the sale of 1,338,500 shares of our common stock for a purchase price of $1.50 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 33,334 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 33,334 shares of our common stock for a redemption price of $1.50 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.

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. These loans bear interest at 5% per annum and mature on December 31, 2020. Interest and principal are due at maturity. TM has agreed to convert $1,292,953 aggregate principal amount plus all accrued interest and penalty from these loans to common stock at a conversion price of $7.50 per share in connection with the closing of this offering.

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.

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Daniel Hodges Agreement

On August 5, 2019, Mr. Hodges and his wife loaned DragonWave $200,000 at an interest rate of 5.0% per annum with a maturity date of December 31, 2020. Interest is payable monthly while the full principal balance is due at maturity.

2020 Debt Securities and Warrants

In connection with our acquisition of VNC, on July 2, 2020, we sold an aggregate of 29 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 $1,900,000 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 3,334 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 $3.00 per share, subject to adjustment. The warrants are exercisable to purchase shares of our common stock at an exercise price of $3.00 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.

Between November 4, 2020 and November 24, 2020, we borrowed an aggregate of $550,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes are between $50,000 and $100,000. The loans bear interest at a rate of 15% and have maturity dates between January 31, 2021 and February 23, 2021. As additional consideration for such loans, Daniel L. Hodges, our Chairman and Chief Executive Officer, guaranteed the notes and transferred to such investors an aggregate of 38,334 shares of common stock.

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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 September 30, 2020, 47,939,205 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, at such date, 932,291 shares of common stock were reserved for issuance upon the exercise of outstanding common stock purchase warrants, 3,440,169 shares of common stock were reserved for issuance upon the exercise of outstanding common stock purchase options, and 974,833 shares of common stock were reserved for issuance upon the conversion of outstanding convertible debt. Subsequent to September 30, 2020, we issued an aggregate of 1,476,955 shares of common stock, 18,572 warrants were exercised in a cashless exchange to receive 16,667 shares of common stock, and 23,334 warrants expired.

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

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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.

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 $7.87 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 Nasdaq Capital Market 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 September 30, 2020, the following warrants were outstanding:

•        Warrants to purchase 23,334 shares of common stock at any time on or prior to November 20, 2020 at an initial exercise price of $15.00 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. These warrants have since expired.

•        Warrants to purchase 10,000 shares of common stock at any time on or prior to August 3, 2021 at an initial exercise price of $1.50 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.

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•        Warrants to purchase 6,667 shares of common stock at any time on or prior to November 9, 2021 at an initial exercise price of $1.50 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 33,334 shares of common stock at any time on or prior to September 26, 2022 at an initial exercise price of $3.00 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 33,334 shares of common stock at any time on or prior to April 12, 2025 at an initial exercise price of $3.60 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 62,170 shares of common stock at any time on or prior to April 29, 2025 at an initial exercise price of $2.97 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 96,667 shares of common stock and remain outstanding at any time on or prior to December 31, 2022 at an initial exercise price of $3.00 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 62,170 shares of common stock at any time on or prior to April 29, 2025 at an initial exercise price of $2.97 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 17,857 shares of common stock at any time on or prior to August 20, 2025 at an initial exercise price of $8.40 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 560,190 shares of common stock at any time on or prior to July 6, 2025 at an initial exercise price of $0.15 per share for 315,688 of the warrants and $0.72 per share for 244,502 of the warrants. 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 8,000 shares of common stock and remain outstanding at any time on or prior to June 7, 2023 at an initial exercise price of $3.00 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

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.

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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

Kingswood Capital Markets, division of Benchmark Investments, Inc. (the “Representative”) 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 per unit 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:

 

Number of
Units

Kingswood Capital Markets, division of Benchmark Investments, Inc.

 

 

     

Total

 

 

The underwriters are committed to purchase all of 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.

Over-Allotment Option

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 595,237 additional shares of common stock and/or warrants to purchase up to 595,237 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 $28,750,000 and the total net proceeds, before expenses, to us will be $26,162,500.

Discounts, Commissions and Reimbursement

The following table shows the per unit and total underwriting discounts and commissions to be paid to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

     

Total

   

Per Unit

 

Without
Option

 

With
Option

Public offering price

 

$

6.30

 

$

25,000,000

 

$

28,750,000

Underwriting discounts and commissions (8%)

 

$

0.50

 

$

2,000,000

 

$

2,300,000

Non-accountable expense allowance (1%)(1)

 

$

0.06

 

$

250,000

 

$

287,500

Proceeds, before expenses, to us

 

$

5.73

 

$

22,750,000

 

$

26,162,500

____________

(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 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 all expenses relating to the offering, including: (a) all filing fees and expenses relating to the registration of the securities with the Commission; (b) all fees and expenses relating to the listing of the Company’s securities on The Nasdaq Capital Market; (c) all fees associated with the review of the offering by FINRA; (d) all fees, expenses and disbursements relating to the registration, qualification or exemption of securities offered under “blue sky” securities laws or the securities laws of foreign jurisdictions designated by the Representative, including the reasonable fees and expenses of the Representative’s blue sky counsel; (e) all fees, expenses and disbursements relating to the registration, qualification or exemption of the securities under the securities laws of such foreign jurisdictions; (f) the costs of mailing and printing the offering materials; (g) transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Representative; and (h) the fees and expenses of our accountants; and (i) actual accountable expenses of the Representative not to exceed $200,000, which amount includes expenses for the representative’s legal counsel and road show expenses.

We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount, will be approximately $750,000.

Representative’s Warrants

We have agreed to issue to the Representative or its designees, as the closing of this offering, warrants to purchase up to a total of 198,412 shares of common stock (5% of the number of shares of common stock sold in this offering). The Representative’s Warrants will be exercisable at any time, and from time to time, in whole or in part, during the four and a half-year period commencing six months from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with FINRA Rule 5110(g)(8)(A). The Representative’s Warrants are exercisable at a per share price equal to 110% of the public offering price per share in the offering. The Representative’s Warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The Representative (or permitted assignees under Rule 5110(e)(1)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the date of this prospectus. The Representative’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 Representative’s Warrants shall be reduced, or the exercise price increased, if necessary, to comply with FINRA rules or regulations. Further, the Representative’s Warrants will provide for a one-time demand registration right and unlimited piggyback rights. The Representative’s Warrants and underlying shares are included in this prospectus.

The Representative will also be entitled to the cash fee set forth above with respect to any public or private sale of equity or debt securities (“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 12-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 certain “lock-up” agreements, we, our named executive officers and directors, and holders of greater than 5% of our outstanding shares of common stock on a fully diluted basis (including shares underlying options, warrants and convertible securities) have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of

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ownership of, directly or indirectly, engage in any short selling of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently acquired, without the prior written consent of the representative, for a period of 90 days from the date of this prospectus.

Right of First Refusal

We have granted the Representative a right of first refusal, for a period of six (6) months from the consummation of this offering, to act as sole investment bank, sole book-runner and/or sole placement agent, for each and every future public and private equity and debt offering during such six (6) month period, of our company, or any successor to or any subsidiary of our company, on terms customary to the Representative.

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 units to underwriters and selling group members for sale to their 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 is quoted on the OTCQB under the symbol “COMS”. We have applied to list our common stock and warrants included within the units on The Nasdaq Capital Market 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 securities 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 securities while the offering is in progress.

•        Over-allotment transactions involve sales by the underwriters of securities in excess of the number of securities 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 securities over-allotted by the underwriters is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than the number of securities in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing securities in the open market.

•        Syndicate covering transactions involve purchases of securities in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of securities to close out the short position, the underwriters will consider, among other things, the price of securities available for purchase in the open market as compared with the price at which they may purchase securities through exercise of the over-allotment option. If the underwriters sell more securities 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 securities 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 securities 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 securities originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.

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These stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our securities or preventing or retarding a decline in the market price of our securities. As a result, the price of our securities 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 securities. These transactions may be effected on The Nasdaq Capital Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

Passive Market Making

In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our securities on The Nasdaq Capital Market 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.

Certain Relationships

The underwriters and their affiliates have provided, or may in the future provide, various investment banking, commercial banking, financial advisory, brokerage or other services to us and our affiliates, for which services they have received, and may in the future receive, customary fees and expense reimbursement.

The underwriters and their affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of its business for which they may receive customary fees and reimbursements of expenses. In the ordinary course of their various business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own accounts and for the accounts of their customers and such investment and securities activities may involve securities and/or instruments of our Company. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

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.

Australia

This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.

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Canada

The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

China

The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (the “PRC”) (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”

European Economic Area — Belgium, Germany, Luxembourg and Netherlands

The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.

An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:

•        to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

•        to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);

•        to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of our Company or any underwriter for any such offer; or

•        in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by our Company of a prospectus pursuant to Article 3 of the Prospectus Directive.

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France

This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1, et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.

This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.

Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs non-qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.

Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.

Ireland

The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.

Israel

The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the “ISA”), nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.

Italy

The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Societá e la Borsa, “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:

•        to Italian qualified investors, as defined in Article 100 of Decree No. 58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 11971”) as amended (“Qualified Investors”); and

•        in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended.

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Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:

•        made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and

•        in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.

Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.

Japan

The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”), pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.

Portugal

This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

Sweden

This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

Switzerland

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing

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Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority.

This document is personal to the recipient only and not for general circulation in Switzerland.

United Arab Emirates

Neither this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor have we received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the securities within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by our Company.

No offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre.

United Kingdom

Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.

Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to our company.

In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

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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 Nelson Mullins Riley & Scarborough LLP, Washington, DC.

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 nine-month periods ended September 30, 2020, have not been audited.

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 5000 Quorum Drive, Suite 400, Dallas, Texas 75254, Attention: Chief Financial Officer or telephoning us at (469) 930-2661.

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

 

Page

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

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

   

Consolidated Balance Sheet

 

F-43

Consolidated Statement of Operations

 

F-44

Consolidated Statement of Comprehensive Loss

 

F-45

Consolidated Statement of Changes in Stockholders’ Equity

 

F-46

Consolidated Statement of Cash Flows

 

F-48

Notes to the Consolidated Financial Statements

 

F-50

F-1

Table of Contents

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

F-2

Table of Contents

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

COMSOVEREIGN HOLDING CORP.
CONSOLIDATED BALANCE SHEET

(Amounts in US$’s, except share data)

 

December 31, 2019

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash

 

$

812,452

 

Accounts receivable, net

 

 

2,168,659

 

Receivables – related party

 

 

1,595

 

Inventory, net

 

 

4,671,396

 

Prepaid expenses

 

 

916,729

 

Other current assets

 

 

94,538

 

Total Current Assets

 

 

8,665,369

 

Property and equipment, net

 

 

1,458,106

 

Operating lease right-of-use assets

 

 

2,199,682

 

Intangible assets, net

 

 

51,277,482

 

Goodwill

 

 

56,386,796

 

Total Assets

 

$

119,987,435

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable

 

$

2,245,704

 

Accrued interest

 

 

306,445

 

Accrued liabilities

 

 

1,383,008

 

Accrued liabilities – related party

 

 

461,254

 

Accrued payroll

 

 

1,050,703

 

Contract liabilities, current

 

 

149,923

 

Accrued warranty liability

 

 

195,138

 

Operating lease liabilities, current

 

 

467,979

 

Line of credit

 

 

2,000,000

 

Notes payable – related party

 

 

1,492,953

 

Current portion of long-term debt, net of unamortized discounts and debt issuance costs

 

 

5,389,492

 

Total Current Liabilities

 

 

15,142,599

 

Contract liabilities, net of current portion

 

 

152,892

 

Operating lease liabilities, net of current portion

 

 

1,744,569

 

Total Liabilities

 

 

17,040,060

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

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, $0.0001 par value, 300,000,000 shares authorized, 128,326,243 shares issued and outstanding as of December 31, 2019

 

 

12,833

 

Additional paid-in capital

 

 

130,553,180

 

Accumulated deficit

 

 

(27,545,255

)

Accumulated other comprehensive loss

 

 

(23,383

)

Treasury stock, at cost, 100,000 shares as of December 31, 2019

 

 

(50,000

)

Total Stockholders’ Equity

 

 

102,947,375

 

Total Liabilities and Stockholders’ Equity

 

$

119,987,435

 

See Notes to the Consolidated Financial Statements

F-3

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COMSOVEREIGN HOLDING CORP.
CONSOLIDATED STATEMENT OF OPERATIONS

(Amounts in US$’s, except share data)

 

January 10,
2019
(Inception) to
December 31,
2019

Revenue

 

$

4,712,212

 

Cost of Goods Sold(1)

 

 

2,990,716

 

Gross Profit

 

 

1,721,496

 

   

 

 

 

Operating Expenses

 

 

 

 

Research and development(1)

 

 

174,257

 

Sales and marketing(1)

 

 

6,222

 

General and administrative(1)

 

 

14,325,078

 

Depreciation and amortization

 

 

7,567,184

 

Gain on sale of fixed assets

 

 

(98,410

)

Total Operating Expenses

 

 

21,974,331

 

Net Operating Loss

 

 

(20,252,835

)

Other Income (Expense)

 

 

 

 

Loss on conversion of debt

 

 

(2,640,000

)

Net loss on extinguishment of debt

 

 

(434,774

)

Foreign currency transaction gain

 

 

191,547

 

Interest expense

 

 

(8,399,663

)

Other expense

 

 

(147,430

)

Total Other Expenses

 

 

(11,430,320

)

Net Loss Before Income Taxes

 

 

(31,683,155

)

Deferred Tax Benefit

 

 

4,137,900

 

Net Loss

 

$

(27,545,255

)

Loss per common share:

 

 

 

 

Basic

 

$

(0.57

)

Diluted

 

$

(0.57

)

Weighted-average shares outstanding:

 

 

 

 

Basic

 

 

48,714,099

 

Diluted

 

 

48,714,099

 

Unaudited Pro-Forma Earnings Per Share Information as Discussed in Note 21

 

 

 

 

Loss per common share:

 

 

 

 

Basic

 

$

(1.70

)

Diluted

 

$

(1.70

)

Weighted-average shares outstanding:

 

 

 

 

Basic

 

 

16,238,033

 

Diluted

 

 

16,238,033

 

____________

(1)      These are exclusive of depreciation and amortization

See Notes to the Consolidated Financial Statements

F-4

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Amounts in US$’s)

 

January 10,
2019
(Inception) to
December 31,
2019

Net Loss

 

$

(27,545,255

)

Other Comprehensive Loss:

 

 

 

 

Foreign currency translation adjustment

 

 

(23,383

)

Total Comprehensive Loss

 

$

(27,568,638

)

See Notes to the Consolidated Financial Statements

F-5

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in US$’s, except share data)

 



Preferred Stock

 



Common Stock

 

Additional
Paid-In
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Stock

 

Accumulated
Deficit

 

Total
Stockholders’
Equity

Shares

 

Amount

 

Shares

 

Amount

 

January 10, 2019 (Inception)

 

 

 

$

 

 

 

$

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Issuance of founder shares at inception

 

 

 

 

 

 

27,890,000

 

 

2,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,789

 

Issuance of preferred stock for VEO, Inc. acquisition

 

1,500,000

 

 

 

150

 

 

 

 

 

 

13,214,850

 

 

 

 

 

 

 

 

 

 

 

 

13,215,000

 

Issuance of preferred stock for InduraPower, Inc. acquisition

 

800,000

 

 

 

80

 

 

 

 

 

 

7,047,920

 

 

 

 

 

 

 

 

 

 

 

 

7,048,000

 

Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition

 

300,000

 

 

 

30

 

 

 

 

 

 

2,642,970

 

 

 

 

 

 

 

 

 

 

 

 

2,643,000

 

Issuance of common stock for DragonWave-X LLC and Lextrum, Inc. acquisitions

 

 

 

 

 

 

13,237,149

 

 

1,324

 

 

58,242,132

 

 

 

 

 

 

 

 

 

 

 

 

58,243,456

 

Common stock issued for cash

 

 

 

 

 

 

500,000

 

 

50

 

 

4,950

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

Common stock issued for cashless exercise of warrants

 

 

 

 

 

 

3,372,500

 

 

337

 

 

33,388

 

 

 

 

 

 

 

 

 

 

 

 

33,725

 

Common stock issued for conversion of senior convertible debentures

 

 

 

 

 

 

1,100,000

 

 

110

 

 

3,752,388

 

 

 

 

 

 

 

 

 

 

 

 

3,752,498

 

Common stock issued in debt conversion

 

 

 

 

 

 

160,000

 

 

16

 

 

703,984

 

 

 

 

 

 

 

 

 

 

 

 

704,000

 

Warrants issued for services

 

 

 

 

 

 

 

 

 

 

4,074,330

 

 

 

 

 

 

 

 

 

 

 

 

4,074,330

 

Warrants issued in conjunction with debt agreements

 

 

 

 

 

 

 

 

 

 

3,138,667

 

 

 

 

 

 

 

 

 

 

 

 

3,138,667

 

Common stock issued as debt issuance costs

 

 

 

 

 

 

1,235,140

 

 

123

 

 

7,805,489

 

 

 

 

 

 

 

 

 

 

 

 

7,805,612

 

Common stock issued for services

 

 

 

 

 

 

120,000

 

 

12

 

 

525,290

 

 

 

 

 

 

 

 

 

 

 

 

525,302

 

Share-based compensation

 

 

 

 

 

 

45,660

 

 

5

 

 

258,256

 

 

 

 

 

 

 

 

 

 

 

 

258,261

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

 

 

855,549

 

 

 

 

 

 

 

 

 

 

 

 

855,549

 

Conversion of preferred stock

 

(2,600,000

)

 

 

(260

)

 

2,600,000

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of ComSovereign Corp. stock at 0.8902 into Drone Aviation Holding Corp. stock

 

 

 

 

 

 

44,739,551

 

 

4,474

 

 

(4,474

)

 

 

 

 

 

 

 

 

 

 

 

 

Merger with Drone Aviation Holding Corp.

 

 

 

 

 

 

33,326,243

 

 

3,333

 

 

28,257,491

 

 

 

 

 

 

(50,000

)

 

 

 

 

 

28,210,824

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,545,255

)

 

 

(27,545,255

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,383

)

 

 

 

 

 

 

 

 

(23,383

)

December 31, 2019

 

 

 

$

 

 

128,326,243

 

$

12,833

 

$

130,553,180

 

 

$

(23,383

)

 

$

(50,000

)

 

$

(27,545,255

)

 

$

102,947,375

 

See Notes to the Consolidated Financial Statements

F-6

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in US$’s)

 

January 10,
2019
(Inception) to
December 31,
2019

Cash flows from operating activities:

 

 

 

 

Net loss

 

$

(27,545,255

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

Depreciation

 

 

623,884

 

Amortization

 

 

6,943,300

 

Share-based compensation

 

 

258,256

 

Deferred income taxes

 

 

(4,137,900

)

Amortization of debt discounts and debt issuance costs

 

 

8,458,341

 

Amortization of right-of-use asset

 

 

135,542

 

Gain on sale of fixed assets

 

 

(98,410

)

Loss on conversion of debt

 

 

2,640,000

 

Net loss on extinguishment of debt

 

 

434,774

 

Other, net

 

 

525,307

 

Changes in assets and liabilities:

 

 

 

 

Accounts receivable

 

 

(26,992

)

Receivables – related party

 

 

(4,876,258

)

Inventory

 

 

(1,136,012

)

Prepaids

 

 

(767,355

)

Other current assets

 

 

(93,289

)

Accounts payable

 

 

(1,141,823

)

Accrued liabilities

 

 

2,295,273

 

Accrued interest

 

 

1,109,252

 

Related party payable

 

 

9,826,112

 

Operating lease liabilities

 

 

(123,534

)

Other current liabilities

 

 

(156,460

)

Net cash used in operating activities

 

 

(6,853,247

)

Cash flows from investing activities:

 

 

 

 

Cash acquired from acquisitions

 

 

2,925,273

 

Additions to property and equipment

 

 

(87,038

)

Net cash provided by investing activities

 

 

2,838,235

 

Cash flows from financing activities:

 

 

 

 

Proceeds from issuance of common stock

 

 

5,000

 

Proceeds from issuance of related party debt

 

 

485,000

 

Proceeds from issuance of debt

 

 

6,249,170

 

Repayment of debt

 

 

(1,808,323

)

Debt issuance costs

 

 

(80,000

)

Net cash provided by financing activities

 

 

4,850,847

 

Effect of exchange rates on cash

 

 

(23,383

)

Net increase in cash and cash equivalents

 

 

812,452

 

Cash and cash equivalents, beginning of period

 

 

 

Cash and cash equivalents, end of year

 

$

812,452

 

Supplemental disclosures of cash flow information:

 

 

 

 

Cash paid during the period:

 

 

 

 

Taxes

 

$

 

Interest

 

 

 

Non-cash investing and financing activities:

 

 

 

 

Recognition of right-of-use operating lease asset and liability

 

 

2,335,224

 

Issuance of founder shares at inception

 

 

2,789

 

Common stock issued for cashless exercise of warrants

 

 

33,725

 

Common stock issued for conversion of senior convertible debentures

 

 

3,725,498

 

Common stock issued in debt conversion

 

 

704,000

 

Warrants issued for services

 

 

4,074,330

 

Warrants issued in conjunction with debt agreements

 

 

3,138,667

 

Common stock issued as debt issuance costs

 

 

7,805,612

 

Beneficial conversion feature

 

 

855,549

 

Issuance of preferred stock for VEO, Inc. acquisition

 

 

13,215,000

 

Issuance of preferred stock for InduraPower, Inc. acquisition

 

 

7,048,000

 

Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition

 

 

2,643,000

 

Issuance of common stock for DragonWave-X LLC and Lextrum, Inc. acquisitions

 

 

58,243,456

 

See Notes to the Consolidated Financial Statement

F-7

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

COMSovereign Holding Corp., formerly known as Drone Aviation Holding Corp. (“the “Company”), is a provider of technologically-advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. The Company has assembled a portfolio of communications, power and niche technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. The Company focuses on special capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the radio-frequency spectrum. The Company’s product solutions are complemented by a broad array of services including technical support, systems design and integration, and sophisticated research and development programs. The Company competes globally on the basis of its innovative technology, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of its global customer base and distribution. In addition, the Company believes it is in a unique position to rapidly increase its near-term domestic sales as it is among the few U.S.-based providers of telecommunications equipment and services.

Acquisition of ComSovereign Corp.

The Company was incorporated under the laws of the State of Nevada on April 17, 2014. On November 27, 2019, the Company entered into an Agreement and Plan of Merger dated as of November 27, 2019 (the “Merger Agreement”) with ComSovereign Corp., a Delaware corporation (“ComSovereign”), and DACS Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”). The Merger Agreement provided for the merger of Merger Sub with and into ComSovereign (hereafter referred to as the “ComSovereign Acquisition”). As a result of the ComSovereign Acquisition, Merger Sub ceased to exist, and ComSovereign became the surviving corporation and a direct wholly-owned subsidiary of the Company. Additionally, the former stockholders of ComSovereign (the “ComSovereign Stockholders”) received a direct equity ownership and controlling equity interest in the Company. For each share of ComSovereign common stock, the stockholder received 1.8902 shares of the Company’s common stock. The ComSovereign Acquisition was completed on November 27, 2019. On December 10, 2019, the Company changed its name from Drone Aviation Holding Corp. to COMSovereign Holding Corp.

The ComSovereign Acquisition was accounted for as a reverse merger with ComSovereign acquiring the assets of the Company, and the net assets, including other intangible assets, of the Company prior to the ComSovereign Acquisition being recorded at fair value with the excess purchase price allocated to goodwill. As a result of the completion of the ComSovereign Acquisition, these consolidated financial statements include (1) the assets and liabilities of the Company and its consolidated subsidiaries, including ComSovereign and its subsidiaries, as of December 31, 2019, (2) the historical operations of ComSovereign from inception (January 10, 2019) to the date of consummation of the ComSovereign Acquisition, and (3) and the operations of the Company and its subsidiaries from the date of completion of the ComSovereign Acquisition (November 27, 2019) to December 31, 2019.

Corporate History of ComSovereign

ComSovereign was incorporated in the state of Delaware on January 10, 2019. From the date of incorporation until the date of its first acquisition, as described below, ComSovereign had no business operations.

On January 12, 2019, two founding members of ComSovereign each acquired 6,000,000 shares of common stock at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

On January 20, 2019, the same two founding members of ComSovereign each acquired an additional 6,000,000 shares of common stock at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

F-8

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (cont.)

On January 22, 2019, an additional 11 founding members of ComSovereign acquired an aggregate of 3,290,000 shares of common stock at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

On January 23, 2019, one of the additional 11 founding members acquired an additional 500,000 shares of common stock at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

On January 29, 2019, an additional founding member of ComSovereign acquired 100,000 shares of common stock at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

On January 31, 2019, ComSovereign acquired the capital stock of VEO, Inc. (“VEO”). VEO is a research and development company innovating silicon photonic (“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. In connection with the purchase of VEO, ComSovereign issued 1,500,000 unregistered shares of Series A Redeemable Convertible Preferred stock (“Preferred Series A”) to Dr. Chen K. Sun, who is also a founding member of ComSovereign.

On January 31, 2019, ComSovereign acquired the capital stock of InduraPower Inc. (“InduraPower”). InduraPower is a manufacturer of intelligent batteries and back-up power supplies for network systems and telecom nodes. It also provides power designs and batteries for aerospace, marine and automotive industries. In connection with the purchase of InduraPower, ComSovereign issued an aggregate of 800,000 unregistered Preferred Series A shares. Of those 800,000 shares, 688,800 Preferred Series A shares were issued to Sergei Begliarov, who is a founding member of ComSovereign and who became the Chief Executive Officer of InduraPower, and the balance was distributed to four other shareholders.

On March 4, 2019, ComSovereign acquired the capital stock of Silver Bullet Technology, Inc. (“Silver Bullet”). Silver Bullet is an 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. In connection with the purchase of Silver Bullet, ComSovereign issued 300,000 unregistered Preferred Series A shares to Dr. Dustin McIntire, who is a founding member of ComSovereign and who became the Company’s Chief Technology Officer.

On April 1, 2019, ComSovereign acquired the capital stock of DragonWave-X LLC (“DragonWave”) and Lextrum, Inc. (“Lextrum”). DragonWave is a manufacturer of high-capacity microwave and millimeter point-to-point telecom backhaul radio units. Lextrum is a manufacturer of full-duplex wireless technologies and components, including multi-reconfigurable radio frequency 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. In connection with the purchase of DragonWave and Lextrum, ComSovereign issued an aggregate of 13,237,149 shares of common stock to the shareholders of the parent company of DragonWave and Lextrum. Included in those shareholders were Daniel L. Hodges, the Chairman of the parent company, and John E. Howell, the Director and Chief Executive Officer of the parent company. In accordance with the subsections of ASC 805-50, Business Combinations, Transactions Between Entities Under Common Control, the Company noted common control did not exist based on either voting interests or qualitative factors; therefore, the Company concluded that the transaction was considered at arms-length and accounted for the transaction based on ASC 805, Business Combinations.

On November 15, 2019, the 2,600,000 outstanding shares of Preferred Series A were exchanged for an aggregate of 2,600,000 shares of ComSovereign’s common stock.

F-9

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (cont.)

Basis of Presentation

The accompanying financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The historical information is not necessarily indicative of the Company’s future results of operations, financial position or cash flows.

Principle of Consolidation

The consolidated financial statements as of, and for the period from January 10, 2019 (inception) to December 31, 2019 (“fiscal 2019”) include the accounts of the Company and its subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO and InduraPower.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents are represented by operating accounts or money market accounts maintained with insured financial institutions, including all short-term, highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2019.

Accounts Receivable and Credit Policies

Trade accounts receivable consist of amounts due from the sale of the Company’s products and services. Such accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 to 45 days of receipt of the invoice. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. As of December 31, 2019, the Company characterized $690,830 as uncollectible.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and trade accounts receivables. The Company places its cash with high-credit-quality financial institutions. At times, such cash may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage limit of $250,000 per depositor. As a result, there could be a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company has not experienced any losses due to these excess deposits and believes the risk is not significant. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Related Parties

The Company accounts for related party transactions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 850, Related Party Disclosures. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries controls, is controlled by, or is under common control with the Company. Related parties also include principal owners

F-10

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Inventory

Inventory is valued at the lower of cost and net realizable value (“NRV”). The cost of inventory is calculated on a standard cost basis, which approximates weighted average actual cost. NRV is determined as the market value for finished goods, replacement cost for raw materials and finished goods market value less cost to complete for work in progress inventory. The Company regularly reviews inventory quantities on hand and records an impairment for excess and obsolete inventory based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question. Indirect manufacturing costs and direct labor expenses are allocated systematically to the total production inventory.

Investments

An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless (1) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of the fair value up to (or beyond) the cost of the investment; and (2) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other that temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and fair value.

Property and Equipment, net

Property and equipment are stated at cost when acquired. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows:

Asset Type

 

Useful Life

Test equipment, research and development equipment

 

4 – 5 years

Computer hardware

 

2 years

Production fixtures

 

3 years

Leasehold improvements

 

5 years

Other

 

3 – 5 years

Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.

Long-Lived Assets and Goodwill

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

F-11

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

The Company accounts 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. During fiscal 2019, the Company recorded no impairments.

Beneficial Conversion Features and Warrants

The Company evaluates the conversion feature of convertible debt instruments to determine whether the conversion feature was beneficial as described in ASC 470-30, Debt with Conversion and Other Options. The Company records 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 records 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. The Company calculates the fair value of warrants with the convertible instruments using the Black-Scholes valuation model.

Under these guidelines, the Company allocates 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.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with the requirements of ASC 820, Fair Value Measurement. As defined in ASC 820, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 — Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

F-12

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally-developed methodologies that result in management’s best estimate of fair value.

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of December 31, 2019 approximated their fair value due to their short-term nature.

Debt Discounts

The Company records debt discounts as a deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet with the respective debt discount amortized in interest expense on its Consolidated Statement of Operations. In connection with the issuance of certain notes payable and senior convertible debentures, the Company, or its subsidiaries, issued warrants to purchase shares of its common stock and has BCFs. See Note 10 — Debt Agreements and Note 15 — Warrants. The warrants are exercisable at various exercise prices per share. The Company evaluated the terms of these warrants at issuance and concluded that they should be treated as equity. The fair value of the warrants was determined by using the Black-Scholes model and was recorded as a debt discount offsetting the carrying value of the debt obligation in the Consolidated Balance Sheet.

As described above under Beneficial Conversion Features and Warrants, the Company allocates 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.

Debt Issuance Costs

The Company presents debt issuance costs as a direct deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet and amortizes these costs over the term of the related debt liability using the straight-line method, which approximates the effective interest method. Amortization is recorded in interest expense on the Consolidated Statement of Operations.

Foreign Currency Translation

The Company’s operations and balances denominated in foreign currencies, including those of its foreign Canadian subsidiary, DragonWave, that are primarily a direct and integral component or extension of the Company’s operations, are translated into U.S. dollars (“USD”) using the following: monetary assets and liabilities are translated at the period end exchange rate; non-monetary assets are translated at the historical exchange rate; and revenue and expense items are translated at the average exchange rate and records the translation adjustments in accumulated other comprehensive income (loss) on the Consolidated Balance Sheet. Foreign currency transaction gains and losses are included in foreign currency transaction gain (loss) in the Consolidated Statement of Operations.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance sets forth a five-step revenue recognition model which replaced the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance and to require more detailed disclosures. The five steps of the revenue recognition model are: (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.

F-13

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

To further assist with adoption and implementation of ASU 2014-09, the FASB issued the following ASUs:

•        ASU 2016-08 (Issued March 2016) — Principal versus Agent Consideration (Reporting Revenue Gross versus Net)

•        ASU 2016-10 (Issued April 2016) — Identifying Performance Obligations and Licensing

•        ASU 2016-12 (Issued May 2016) — Narrow-Scope Improvements and Practical Expedients

•        ASU 2016-20 (Issued December 2016) — Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

The Company adopted these standards as of January 10, 2019 (date of incorporation).

At contract inception, the Company assesses the goods and services promised in the contract with customers and identifies a performance obligation for each. To determine the performance obligation, the Company considers 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. The Company measures revenue as the amount of consideration expected to be received in exchange for transferring goods and services. Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities.

The Company has determined that it has the following performance obligations related to its products and services: equipment, software license, extended warranty, training, installation and consulting service. Revenue from equipment, software license, training and installation are all recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery dependent upon the terms of the underlying contract, or services is completed. Revenue from extended warranties is recognized over time using an input method that results in a straight-line basis recognition over the warranty period, as the contract usually provides the customer equal benefit throughout the warranty period. Revenue from consulting services is recognized over time using an input method of labor hours expensed, as it directly measures the efforts toward satisfying the performance obligation.

For contracts with customers that contain multiple performance obligations, the Company accounts for the promised performance obligations separately as individual performance obligations if they are distinct. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, including the degree of interrelation and interdependence between obligations and whether or not the good or service significantly modifies or transforms another good or service in the contract. After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company generally determines the standalone selling prices based on the prices charged to customers. Judgment may be used to determine the standalone selling prices for items that are not sold separately, including taking into consideration either historical pricing practices or an adjusted market assessment. Unsatisfied and partially unsatisfied performance obligations as of the end of the reporting period primarily consist of products and services for which customer purchase orders have been accepted and that are in the process of being delivered.

Transaction price is calculated as the selling price less any variable consideration, consisting of rebates and discounts. Discounts provided to customers are known at contract inception. Rebates are calculated on the “expected value” method where the Company (1) estimates the probability of each rebate amount which could be earned by the distributor, (2) multiplies each estimated amount by its assigned probability factor, and (3) calculates a final sum of each of the probability-weighted amounts calculated in step (2). The sum calculated in step (3) is the rebate amount, which along with discounts reduces the amount of revenue recognized.

F-14

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Costs incurred for shipping and handling are included in costs of goods sold on the Consolidated Statement of Operations. Amounts billed to a customer for shipping and handling are reported as revenue on the Consolidated Statement of Operations.

The Company provides limited warranties for products sold to customers, typically for 13 months, covering product defects. Such limited warranties are not sold separately and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of limited warranties are not considered to be separate performance obligations. In accordance with applicable guidance, the expected cost of the limited warranties is recorded as accrued warranty liability on the Consolidated Balance Sheet. Optional extended warranties are sold to customers and include additional support services.

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. The Company records contract liabilities when cash payments are received (or unconditional rights to receive cash) in advance of fulfilling its performance obligations. When the services have been performed or the goods delivered, revenue will be recognized, and contract liabilities will be reduced.

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The majority of the Company’s performance obligations in its contracts with customers relate to contracts with durations of less than one year. The transaction price allocated to unsatisfied performance obligations included in contracts with durations of more than 12 months is reflected in contract liabilities on the Consolidated Balance Sheet.

Applying a practical expedient, the Company recognizes the incremental costs of obtaining contracts, which primarily consist of sales commissions, as expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. If the service period, inclusive of any anticipated renewal, is longer than a year, the incremental direct costs are capitalized and amortized over the period of benefit. As of December 31, 2019, there were no such capitalized costs.

The Company also applies the practical expedient not to adjust the promised amount of consideration for the effects of a financing component if the Company expects, at contract inception, that the period between when the Company transfers a good or service to the customer and when the customer pays for the good or service will be one year or less. During fiscal 2019, there were no such financing components.

Research and Development

Research costs are expensed as incurred. Development costs are expensed as incurred unless they meet generally accepted accounting criteria for deferral and amortization. Development costs incurred prior to establishment of technological feasibility do not meet these criteria and are expensed as incurred.

Share-Based Compensation

Employees

The Company accounts 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. The Company has elected to adopt ASU 2016-09, Compensation — Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting (“Topic 718”) and has a policy to account for forfeitures as they occur.

F-15

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Non-Employees

Effective January 10, 2019, the Company adopted ASU No. 2018-07, Compensation — Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to non-employees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to non-employees under Subtopic 505-50, Equity, Equity — Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

Share-based compensation for employees and non-employees is recorded in the Consolidated Statement of Operations as a component of general and administrative expense with a corresponding increase to additional paid-in capital in shareholders’ equity.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires organizations to recognize right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The FASB retained the distinction between finance leases and operating leases, leaving the effect of leases in the statement of comprehensive income and the statement of cash flows largely unchanged from previous U.S. GAAP. To further assist with adoption and implementation of ASU 2016-02, the FASB issued the following ASUs:

•        ASU 2018-10 (Issued July 2018) — Codification Improvements to Topic 842, Leases

•        ASU 2018-11 (Issued July 2018) — Leases (Topic 842): Targeted Improvements (“ASU 2018-11”)

•        ASU 2018-20 (Issued December 2018) — Leases (Topic 842): Narrow-Scope Improvements for Lessors

•        ASU 2019-01 (Issued March 2019) — Leases (Topic 842): Codification Improvements

ASU 2018-11 provided entities with an additional transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if any. The new lease standard was effective for fiscal years beginning after December 15, 2018. The Company adopted these standards in the first quarter of 2019 utilizing the transition method allowed under ASU 2018-11. See Note 17 — Leases for more information related to the Company’s leases.

Income Taxes

The Company accounts for income taxes utilizing ASC 740, Income Taxes. ASC 740 requires the measurement of deferred tax assets for deductible temporary differences and operating loss carry forwards and of deferred tax liabilities for taxable temporary differences. Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law. The effects of future changes in tax laws or rates are not included in the measurement. The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s financial statements or tax returns. The Company has recorded a 100% valuation allowance against net deferred tax assets due to the uncertainty of their ultimate realization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

F-16

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

The Company also follows the guidance for accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of December 31, 2019. If the Company has to recognize any interest or penalties associated with its tax positions or returns, any interest or penalties will be recorded as income tax expense in the Consolidated Statement of Operations.

Earnings or Loss per Share

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

There were no adjustments to net loss, the numerator, for purposes of computing basic earnings per share. The following table sets out the computation of basic and diluted income (loss) per share:

(Amounts in US$’s, except share data)

 

January 10,
2019
(Inception) to
December 31,
2019

Numerator:

 

 

 

 

Net loss

 

$

(27,545,255

)

Numerator for basic earnings per share – loss available to common shareholders

 

$

(27,545,255

)

   

 

 

 

Denominator:

 

 

 

 

Denominator for basic earnings per share – weighted average common shares outstanding

 

 

48,714,099

 

Dilutive effect of warrants and options

 

 

 

Denominator for diluted earnings per share – weighted average common shares outstanding and assumed conversions

 

 

48,714,099

 

Basic loss per common share

 

$

(0.57

)

Diluted loss per common share

 

$

(0.57

)

Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are dilutive in periods of net loss available to common shareholders. Stock options are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period, regardless of whether the Company is in a period of net loss available to common shareholders. The following weighted-average potential common shares were excluded from the diluted loss per common share as their effect was anti-dilutive: stock options of 837,479, restricted stock units of 156,091 and warrants of 48,498.

F-17

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Reportable Segments

U.S. GAAP establishes standards for reporting financial and descriptive information about a company’s reportable 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.

Recent Accounting Pronouncements

Management believes 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.

3. BUSINESS ACQUISITIONS

The Company’s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill.

For fiscal 2019, the Company recorded the following acquisitions.

VEO, Inc.

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of VEO. At the effective date of the acquisition, all of the outstanding capital stock of VEO that was issued and outstanding at such time was exchanged for 1,500,000 unregistered Preferred Series A shares of ComSovereign.

Purchase consideration has been evaluated based on the business enterprise valuation of VEO. The shares of Preferred Series A issued to acquire VEO were valued at $8.81 per share (non-marketable basis).

VEO Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A paid

 

 

1,500,000

Per share value

 

$

8.81

Purchase price

 

$

13,215,000

F-18

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

3. BUSINESS ACQUISITIONS (cont.)

The allocation of the total preliminary estimated purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the estimated fair values as of January 31, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

55,261

 

Fixed and other long-term assets

 

 

4,000

 

Assumed liabilities

 

 

(40,531

)

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

6,410,000

 

Goodwill

 

 

6,786,270

 

Total intangible assets and goodwill

 

 

13,196,270

 

Total Consideration

 

$

13,215,000

 

InduraPower, Inc.

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholders of InduraPower. At the effective date of the acquisition, all of the outstanding capital stock of InduraPower that was issued and outstanding at such time was exchanged for 800,000 unregistered shares of Preferred Series A of ComSovereign.

Purchase consideration has been evaluated based on the business enterprise valuation of InduraPower. The shares of Preferred Series A issued to acquire InduraPower were valued at $8.81 per share (non-marketable basis).

InduraPower Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A paid

 

 

800,000

Per share value

 

$

8.81

Purchase price

 

$

7,048,000

The allocation of the total preliminary estimated purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the estimated fair values as of January 31, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

18,791

 

Debt-free net working capital (excluding cash)

 

 

263,459

 

Fixed and other long-term assets

 

 

97,384

 

Assumed liabilities

 

 

(1,240,097

)

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

1,000,000

 

Goodwill estimate

 

 

6,908,463

 

Total intangible assets and goodwill

 

 

7,908,463

 

Total Consideration

 

$

7,048,000

 

Silver Bullet Technology, Inc.

On March 4, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of Silver Bullet. At the effective date of the acquisition, all of the outstanding capital stock of Silver Bullet that was issued and outstanding at such time was exchanged for 300,000 unregistered shares of Preferred Series A of ComSovereign.

F-19

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

3. BUSINESS ACQUISITIONS (cont.)

Purchase consideration has been evaluated based on the business enterprise valuation of Silver Bullet. The shares of Preferred Series A issued to acquire Silver Bullet were valued at $8.81 per share (non-marketable basis).

Silver Bullet Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A paid

 

 

300,000

Per share value

 

$

8.81

Purchase price

 

$

2,643,000

The allocation of the total preliminary estimated purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the estimated fair values as of March 4, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

273,290

 

Debt-free net working capital (excluding cash)

 

 

103,537

 

Fixed and other long-term assets

 

 

21,000

 

Liabilities assumed

 

 

(84,382

)

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

210,000

 

Trade name

 

 

200,000

 

Customer relationships

 

 

400,000

 

Goodwill estimate

 

 

1,519,555

 

Total intangible assets and goodwill

 

 

2,329,555

 

Total Consideration

 

$

2,643,000

 

DragonWave-X LLC and Lextrum, Inc.

On April 1, 2019, ComSovereign entered into a stock-for-stock exchange with the owner of DragonWave and Lextrum. At the effective date of the acquisition, all of the equity interests of DragonWave and Lextrum were exchanged for an aggregate of 13,237,149 shares of ComSovereign’s restricted common stock.

Purchase consideration has been evaluated based on the business enterprise valuation of DragonWave and Lextrum. The shares of common stock issued to acquire DragonWave and Lextrum were valued at $4.40 per share (non-marketable basis).

DragonWave and Lextrum Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of common stock paid

 

 

13,237,149

Per share value

 

$

4.40

Purchase price

 

$

58,243,456

DragonWave

 

$

42,081,392

Lextrum

 

$

16,162,064

F-20

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

3. BUSINESS ACQUISITIONS (cont.)

DragonWave

The allocation of the total preliminary estimated purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the estimated fair values as of April 1, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

1,274,072

 

Debt-free net working capital (excluding cash)

 

 

(1,099,194

)

Note payable

 

 

(5,690,000

)

Fixed and other long-term assets

 

 

2,455,714

 

Intangible assets:

 

 

 

 

Technology

 

 

13,750,000

 

Trade name

 

 

4,210,000

 

Customer relationships

 

 

13,080,000

 

Goodwill estimate

 

 

14,100,800

 

Total intangible assets and goodwill

 

 

45,140,800

 

Total Consideration

 

$

42,081,392

 

Lextrum

The allocation of the total preliminary estimated purchase price to the acquired tangible and intangible assets and liabilities assumed by ComSovereign based on the estimated fair values as of April 1, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

8,105

 

Debt-free net working capital (excluding cash)

 

 

(103,611

)

Fixed and other long-term assets

 

 

 

Intangible assets:

 

 

 

 

Technology

 

 

11,430,000

 

Goodwill estimate

 

 

4,827,570

 

Total intangible assets

 

 

16,257,570

 

Total Consideration

 

$

16,162,064

 

Historical Drone Aviation Holding Corp

The allocation of the total preliminary estimated purchase price to Drone Aviation Holding Corp’s acquired tangible and intangible assets and assumed liabilities based on the estimated fair values as of November 27, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Working capital

 

$

2,399,800

Other assets

 

 

220,672

Intangible assets and goodwill:

 

 

 

Intellectual property

 

 

3,729,537

Trade name

 

 

1,233,204

Customer relationships

 

 

1,630,792

Noncompete

 

 

937,249

Goodwill estimate

 

 

18,106,237

Total intangible assets and goodwill

 

 

25,637,019

Total Consideration

 

$

28,257,491

F-21

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

4. GOING CONCERN

On August 27, 2014, the FASB issued ASU 2014-05, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.

The accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For fiscal 2019, the Company generated negative cash flows from operations of $6,853,247 and had an accumulated deficit of $27,545,255 and negative working capital of $6,477,230.

Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets and secure lines of credit. The Company is in discussion with its investment bankers regarding the sale of approximately $13,000,000 of equity in the third quarter of 2020.

The Company’s fiscal operating results, accumulated deficit and negative working capital, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. However, the Company believes the fundraising actions outlined above, and its future operating cash flows, will enable it to meet its liquidity requirements through June 2021. There can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.

5. INVENTORY

Inventory consisted of the following as of December 31, 2019:

(Amounts in US$’s)

 

December 31, 2019

Raw materials

 

$

1,041,256

 

Work in progress

 

 

1,566,147

 

Finished goods

 

 

3,060,518

 

Total production inventory

 

 

5,667,921

 

Inventory held for customer service/warranty

 

 

56,409

 

Total inventory

 

 

5,724,330

 

Reserve

 

 

(1,052,934

)

Total inventory, net

 

$

4,671,396

 

6. PREPAID EXPENSES

Prepaid expenses consisted of the following as of December 31, 2019:

(Amounts in US$’s)

 

December 31, 2019

Prepaid products and services

 

$

873,617

Prepaid rent and security deposit

 

 

43,112

   

$

916,729

F-22

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

7. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of December 31, 2019:

(Amounts in US$’s)

 

December 31, 2019

Shop machinery and equipment

 

$

8,100,667

 

Computers and electronics

 

 

558,561

 

Office furniture and fixtures

 

 

341,214

 

Leasehold improvements

 

 

222,332

 

   

 

9,222,774

 

Less – accumulated depreciation

 

 

(7,764,668

)

   

$

1,458,106

 

For fiscal 2019, the Company invested $87,038 in capital expenditures.

The Company recognized $623,884 of depreciation expense for fiscal 2019.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table sets forth the changes in the carrying amount of goodwill for fiscal 2019:

(Amounts in US$’s)

 

Total

Balance at January 10, 2019 (inception)

 

$

Acquisitions

 

 

56,386,796

Balance at December 31, 2019

 

$

56,386,796

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of December 31, 2019:

(Amounts in US$’s)

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

Definite-lived intangible assets:

 

 

   

 

 

 

 

 

 

Trade names

 

$

5,643,204

 

$

(489,222

)

 

$

5,153,982

Technology

 

 

32,800,000

 

 

(4,308,333

)

 

 

28,491,667

Customer relationships

 

 

15,110,792

 

 

(2,054,894

)

 

 

13,055,898

Intellectual property

 

 

3,729,537

 

 

(51,799

)

 

 

3,677,738

Noncompete

 

 

937,249

 

 

(39,052

)

 

 

898,197

Total definite-lived intangible assets

 

$

58,220,782

 

$

(6,943,300

)

 

$

51,277,482

The following table sets forth the amortization expense (actual and estimated) for intangible assets, assuming no additional amortizable intangible assets, for fiscal 2019 and each of the following five years:

(Amounts in US$’s)

 

Actual
2019

 

Estimated

2020

 

2021

 

2022

 

2023

 

2024

Amortization expense

 

$

6,943,300

 

$

10,385,211

 

$

10,346,159

 

$

9,916,587

 

$

9,916,587

 

$

7,861,692

F-23

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

9. REVOLVING LINE OF CREDIT AND NOTE PAYABLE

Revolving Line of Credit

In 2017, the Company issued a promissory note (the “CNB Note”) to City National Bank of Florida (“CNB”) in the principal amount of $2,000,000, with a maturity date of August 2, 2018. In 2018, the maturity date of the CNB Note was extended to August 2, 2019. On August 29, 2019, the maturity date of the CNB Note was extended to August 2, 2020. The August 2019 modification was evaluated and it was determined that it did not qualify as an extinguishment of debt. The CNB Note allows for a CNB line of credit with advances that may be requested by the Company until the maturity date of August 2, 2020 so long as no event of default exists under the CNB Note or certain other events.

The CNB Note bears an interest rate equal to the average of the interest rates per annum at which U.S. Dollars are offered in the London Interbank Borrowing Market (“LIBOR”) for a 30-day period (the “Index”) plus 2.9% over the Index. The Company will pay to CNB a late charge of 5.0% of any monthly payment not received by CNB within 10 calendar days after its due date. The Company may prepay the CNB Note at any time without penalty. In the event of a default, the interest rate will increase to the highest lawful rate. As of December 31, 2019, the interest rate on the CNB Note is 4.6% per annum.

Under the terms of the CNB Note, the Company is obligated to maintain its primary operating account with CNB with a minimum average annual balance of $1,600,000. In the event the Company does not maintain this account balance, CNB may charge the Company a fee equal to 2% of the deficiency as additional interest under the CNB Note. Management believes that it was in compliance at all times during the year with this covenant and was never charged the 2% deficiency fee. The CNB Note is personally guaranteed by the Company’s former Chief Executive Officer, Mr. Jay H. Nussbaum and his estate (“Guarantors”). The Company and the Guarantors are obligated to maintain aggregate unencumbered liquidity of no less than $6,000,000 in accounts with recognized financial institutions or licensed brokerage firms during the term of the CNB Note. Management believes that it was in compliance at all times during the year with this covenant. In addition, the CNB Note is secured by all of the Company’s accounts, inventory and equipment, along with an assignment of a $120,000 bank account the Company maintains at CNB. The Company maintained the $120,000 bank account as of December 31, 2019. As of December 31, 2019, $2,000,000 had been drawn against the CNB line of credit.

See Note 20 — Subsequent Events for details regarding the payoff of the CNB Note.

Indemnification Agreement

On August 3, 2017, the Company entered into an Indemnification Agreement with Mr. Nussbaum in order to indemnify and defend him to the fullest extent permitted by law for any claim, expense or obligation which might arise as a result of his guarantee of the CNB Note.

F-24

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

10. DEBT AGREEMENTS

Long-term debt consisted of the following as of December 31, 2019:

(Amounts in US$’s)

 

Maturity Date

 

December 31, 2019

Amount Outstanding

 

Interest
Rate

Secured Notes Payable

     

 

 

 

   

 

Secured note payable

 

February 28, 2020

 

$

788,709

 

 

8.5

%

Secured note payable

 

March 1, 2022

 

 

224,288

 

 

9.0

%

Secured note payable

 

September 1, 2021

 

 

21,571

 

 

7.9

%

Secured note payable

 

November 26, 2021

 

 

2,000,000

 

 

9.0

%

Total secured notes payable

     

 

3,034,568

 

   

 

Notes Payable

     

 

 

 

   

 

Equipment financing loan

 

September 15, 2020

 

 

3,828

 

 

8.8

%

Note payable

 

July 9, 2019

 

 

200,000

 

 

18.0

%

Note payable

 

September 1, 2019

 

 

200,000

 

 

18.0

%

Note payable

 

September 30, 2020

 

 

500,000

 

 

10.0

%

Note payable

 

September 30, 2020

 

 

175,000

 

 

10.0

%

Note payable

 

March 30, 2020

 

 

5,000,000

 

 

10.0

%

Note payable

 

July 9, 2019

 

 

200,000

 

 

18.0

%

Notes payable

 

December 6, 2019

 

 

450,100

 

 

18.0

%

Total notes payable

     

 

6,728,928

 

   

 

Senior Convertible Debentures

     

 

 

 

   

 

Senior convertible debenture

 

December 31, 2019

 

 

100,000

 

 

15.0

%

Senior convertible debenture

 

December 31, 2019

 

 

25,000

 

 

15.0

%

Senior convertible debenture

 

December 31, 2021

 

 

250,000

 

 

10.0

%

Total senior convertible debentures

     

 

375,000

 

   

 

Total long-term debt

     

 

10,138,496

 

   

 

Less unamortized discounts and debt issuance costs

     

 

(4,749,004

)

   

 

Total long-term debt, less discounts and debt issuance costs

     

 

5,389,492

 

   

 

Less current portion of long-term debt

     

 

(5,389,492

)

   

 

Debt classified as long-term debt

     

$

 

   

 

Secured Notes Payable

In August 2016, InduraPower entered into 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 with both parties agreeing that the outstanding balance of $813,709 would be due on February 28, 2020. As of December 31, 2019, 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 entered into 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. As of December 31, 2019, an aggregate principal amount of $224,288 was outstanding under this note. This promissory note is secured by all assets, certain real estate and cash

F-25

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

10. DEBT AGREEMENTS (cont.)

accounts of InduraPower and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The outstanding balance is presented as a current liability as of December 31, 2019. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 with an interest rate 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. As of December 31, 2019, an aggregate principal amount of $21,571 was outstanding under this note. This promissory note is secured by business equipment, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The outstanding balance is presented as a current liability as of December 31, 2019. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

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 December 31, 2019, an aggregate principal amount of $2,000,000 was outstanding under this note. In connection with this loan, DragonWave incurred $20,000 of debt discounts and $4,700,000 of debt issuance costs. The debt issuance costs were the result of the issuance of 1,050,000 shares of common stock of the Company and a cash payment of $80,000. During fiscal 2019, $196,667 of these costs were amortized and recognized in interest expense in the Consolidated Statement of Operations. As of December 31, 2019, there were $19,167 of debt discounts and $4,504,167 of debt issuance costs remaining.

Notes Payable

InduraPower has a financing loan for certain of its equipment that bears interest at 8.775% per annum and is due on September 15, 2020. Principal and interest payments of $1,872 are due quarterly. As of December 31, 2019, the loan had an outstanding balance of $3,828.

In September 2017, InduraPower entered into 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 entered into 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. Since this note was not repaid and is currently past due, interest is being accrued at a rate of 18% per annum. Additionally, on August 14, 2019, InduraPower borrowed from the same lender an additional $200,000 promissory note that matured on September 1, 2019. As this note is currently past due, interest is being accrued at a rate of 18% per annum. As of December 31, 2019, 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 on a promissory note in the principal amount of $500,000 bearing interest at 12.0%

F-26

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

10. DEBT AGREEMENTS (cont.)

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. As of December 31, 2019, an aggregate principal amount of $500,000 was outstanding under this note. On April 30, 2020, the Company 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.

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, valued at $44,000. Accrued interest and principal are due and payable at maturity. As of December 31, 2019, an aggregate principal amount of $175,000 was outstanding under this note.

In October 2017, DragonWave entered into a 90-day promissory note in the principal amount of $4,400,000 and received proceeds of $4,000,000. In January 2018, the promissory note was amended to accrue interest at the rate of 8% per annum and to extend the maturity date another 90 days. In August 2018, the maturity date was extended to December 31, 2018 with new payment terms. In September 2018, the maturity date was extended to February 28, 2019 with new payment terms. In October 2018, DragonWave amended the promissory note to clarify the payment of interest. 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, and the interest rate was increased to 12% per annum.

On June 10, 2019, ComSovereign entered into 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 December 31, 2019, an aggregate principal amount of $200,000 was outstanding under this note.

In September 2019, DragonWave entered into a $5,250,000 promissory note that was not fully funded and was guaranteed by ComSovereign. DragonWave received $3,485,000 in proceeds. As incentive to enter into the promissory note, the noteholder was issued 500,000 shares of ComSovereign’s common stock for the total purchase price of $4.40 per share, or $2,200,000, of which only $5,000 was paid in cash. The noteholder was later granted detachable warrants to purchase an aggregate of 2,442,500 shares of ComSovereign’s common stock at a price of $0.01 per share. As of December 31, 2019, DragonWave had repaid the principal amount in full along with all accrued interest, and the warrants had been converted into 2,442,500 shares of ComSovereign’s common stock at an exercise price of $0.01 per share or noncash proceeds $24,425.

On November 7, 2019, ComSovereign entered into several promissory notes in the aggregate principal amount of $450,100 that bore an effective interest rate at 133% per annum due to a single payment incentive, 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 the Company is using an interest rate of 18% per annum to accrue interest on these notes. As of December 31, 2019, an aggregate principal amount of $450,100 was outstanding under these notes.

F-27

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

10. DEBT AGREEMENTS (cont.)

Senior Convertible 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 only have settlement through cash.

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 only have settlement through cash.

In July and August 2019, ComSovereign sold $1,000,000 principal amount of 9% Senior Convertible Debentures that bore interest at the rate of 9% per annum and matured on December 31, 2021. ComSovereign received $850,000 in cash. Interest was payable 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) $8.00 or (2) 80% of the common stock price offered under the next equity offering. The noteholders were also granted detachable warrants to purchase an aggregate of 100,000 shares of ComSovereign’s common stock at a price of $5.00 per share. ComSovereign allocated the note proceeds based on relative fair value and recorded the warrants as a discount to the debt in the amount of $63,880. ComSovereign also recorded a $150,000 debt discount and $786,549 for the BCF associated with the debentures. Prior to conversion, the warrants were cancelled and 132,500 warrants were issued for $1.50 per share. On November 15, 2019, ComSovereign converted the outstanding warrants into 132,500 shares of ComSovereign’s common stock and the full principal amount of such debentures and accrued interest into 1,100,000 shares of ComSovereign’s common stock.

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 by ComSovereign. 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. In connection with these debentures, ComSovereign recognized a BCF of $69,000 and a debt discount of $181,000 associated with the issuance of warrants, both of which are recorded as debt discounts. During fiscal 2019, $25,000 of these costs were amortized and recognized in interest expense in the Consolidated Statement of Operations. As of December 31, 2019, there were $225,000 of debt discounts remaining. On April 30, 2020, these debentures were amended to provide for the conversion of the debentures into shares of the Company’s 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 a result, all the outstanding warrants were exercised at $0.01 per share into 283,530 shares of the Company’s common stock. The Company also issued 6,700 shares of common stock on April 30, 2020 in lieu of an aggregate cash interest payment payable by ComSovereign through December 31, 2019 on these outstanding convertible debentures.

F-28

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

10. DEBT AGREEMENTS (cont.)

The agreements governing the secured notes payable, notes payable and senior convertible debentures contain customary covenants, such as debt service coverage ratios, limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness. As of December 31, 2019, the various subsidiaries were in compliance with all debt covenants under the applicable agreements except as noted above.

All debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and is continuing, the lenders may accelerate the applicable amounts due.

Future maturities contractually required by the Company under long-term debt obligations are as follows for the years ending December 31:

(Amounts in US$’s)

 

Total

2020

 

$

7,888,496

2021

 

 

2,250,000

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

Total

 

$

10,138,496

See Note 20 — Subsequent Events for details regarding additional debt incurred after December 31, 2019.

11. RELATED PARTY TRANSACTIONS

Receivable — Related Party

As of December 31, 2019, the receivables - related party balance was $1,595, which represented amounts owed by Dr. Dustin McIntire, the Company’s Chief Technology Officer, for personal charges he incurred using his company credit card.

Accrued Liabilities — Related Party

As of December 31, 2019, the accrued liabilities – related party balance was $461,254, which represented amounts owed to various contractors, officers and employees of the Company as described below.

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 that bears interest at 7.785% per annum and matures on September 1, 2021. At the same time, InduraPower also entered into a promissory note in the principal amount of $450,000 with the same lender that bears interest at 9.0% per annum and matures on March 1, 2022. A requirement of the promissory notes is to maintain a balance of at least $155,159 at J.P. Morgan while the promissory notes are outstanding. Sergei Begliarov, Chief Executive Officer of InduraPower, provided cash of $153,761 to comply with the requirements of the promissory notes. The $153,761 was recorded in accrued liabilities — related party as of December 31, 2019.

During 2019, Sergei Begliarov paid $71,199 worth of expense of behalf of InduraPower, and Daniel L. Hodges, Chairman and Chief Executive Officer of ComSovereign at the time, paid $6,588 of rent on behalf of InduraPower. Additionally, during 2019, TM Technologies, Inc. (“TM”), described below, paid $29,300 worth of expense of behalf of InduraPower. These amounts were recorded in accrued liabilities — related party as of December 31, 2019.

During 2018 and 2019, Daniel L. Hodges paid $29,120 of rent on behalf of Lextrum. This amount was recorded in accrued liabilities — related party as of December 31, 2019.

F-29

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

11. RELATED PARTY TRANSACTIONS (cont.)

On November 10, 2017, the Company and Global Security Innovative Strategies, LLC (“GSIS”), a company in which David Aguilar, a member of the Company’s Board of Directors, is a principal, entered in an agreement (the “GSIS Agreement”) pursuant to which GSIS agreed to provide business development support and general consulting services for sales opportunities with U.S. government agencies and other identified prospects and consulting support services for the Company. The GSIS Agreement had an initial term of six months beginning on November 1, 2017. On September 26, 2018, the parties amended the GSIS Agreement to extend the period of service through September 2019 with monthly automatic renewals thereafter. The Company also agreed to issue an option to purchase 100,000 shares of the Company’s common stock at a strike price of $1.00, or $100,000. This option immediately vested and terminates on September 26, 2022. Pursuant to the GSIS Agreement, GSIS is paid a fee of $10,000 per month. In addition, GSIS is paid for the expenses incurred in connection with the performance of its duties under the GSIS Agreement. Either party may terminate or renew the GSIS Agreement at any time, for any reason or no reason, upon at least 30 days’ notice to the other party. GSIS was owed $23,036 for normal monthly retainers and expenses incurred as of December 31, 2019. This amount was recorded in accrued liabilities — related party as of December 31, 2019.

On March 21, 2019, concurrent with the resignation of Kevin Hess, the Company’s former Chief Technology Officer, the Company and Cognitive Carbon Corporation (“CCC”), entered into an agreement pursuant to which CCC agreed to provide Chief Technology Officer services, sales and marketing services and outsourced software and platform development services which are to be provided personally by Kevin Hess or third-party development firms of his choosing for outsourced development. CCC will receive $19,750 per month for one year for the Chief Technology Officer services and potential bonuses and an amount up to $120,000 for outsourced software and platform development. Felicia Hess, the Company’s Chief Quality Officer, who is married to Kevin Hess, is the President and a director of CCC. CCC was owed $148,250 for normal monthly fees and the 2019 bonus as of December 31, 2019. This amount was recorded in accrued liabilities — related party as of December 31, 2019.

Notes Payable — Related Party

On August 5, 2019, Mr. Hodges and his wife, loaned DragonWave $200,000 at an interest rate of 5.0% per annum and a maturity date of December 31, 2019. Interest was payable monthly while the full principal balance was due at maturity. As of December 31, 2019, $200,000 plus accrued interest was outstanding under the loan, and the loan was past due.

Mr. Hodges is also the founder, Chairman and Chief Executive Officer of TM Technologies, Inc. (“TM”). Mr. Hodges also controls TM by virtue of his ownership and control of a majority of the outstanding equity securities of TM. In October 2017, TM loaned $250,000 to DragonWave. On October 31, 2019, this loan was increased to $1,292,953 at an interest rate of 5% per annum with a maturity date of August 31, 2020. This loan was partially used to simulate and test emplacement of the modulation technology within one of DragonWave’s Harmony line radios. Interest and principal are due at maturity. As of December 31, 2019, $1,292,953 plus accrued interest was outstanding under this loan.

Stock Awards

In January 2019, Daniel L. Hodges, Chairman and Chief Executive Officer of ComSovereign at such time, and John E. Howell, President of ComSovereign at such time, each acquired 12,000,000 shares of common stock of ComSovereign at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

On January 22, 2019, three members of the Board of Directors of ComSovereign and an executive officer of ComSovereign acquired an aggregate of 2,150,000 shares of common stock of ComSovereign at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required. Additionally, four executive officers of InduraPower, Lextrum and VEO acquired an aggregate of 500,000 shares of common stock of ComSovereign at a value of $0.0001 per share of common stock with no cash paid to ComSovereign and no services required.

F-30

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

11. RELATED PARTY TRANSACTIONS (cont.)

On November 19, 2019, ComSovereign’s Board of Directors granted an aggregate of 24,000 restricted stock awards (“RSAs”) to three executives of DragonWave and Silver Bullet at a grant date fair value of $4.40 per share of common stock for a total value of $105,600. The total value was recognized during fiscal 2019 in share-based compensation expense.

On December 2, 2019, the Company’s Board of Directors granted an aggregate of 1,900,000 RSAs to eight officers and directors at a grant date fair value of $0.82 per share of common stock for a total value of $1,558,000. The vesting period for these RSAs is as follows: 850,000 vest on the one-year anniversary of the grant date; 850,000 vest on the two-year anniversary of the original grant date; and 200,000 vest on the three-year anniversary of the original grant date. During fiscal 2019, $54,667 was recognized in share-based compensation expense after the ComSovereign Acquisition. See Note 14 — Share-Based Compensation for additional information.

See Note 20 — Subsequent Events for information regarding a new note payable with the Nussbaum estate.

12. SHAREHOLDERS’ EQUITY

ComSovereign had 5,000,000 Preferred Series A shares authorized for issuance and as of March 4, 2019 had 2,600,000 Preferred Series A shares issued and outstanding. All the Preferred Series A shares issued were for the acquisitions of VEO, InduraPower and Silver Bullet during fiscal 2019. On November 15, 2019, each Preferred Series A share was converted into one common share of ComSovereign. After the conversion, the Preferred Series A shares ceased to exist and were no longer authorized for issuance.

As of December 31, 2019, the Company had 100,000,000 shares of preferred stock authorized for issuance, none of which were issued and outstanding.

As of December 31, 2019, the Company had 300,000,000 shares of common stock authorized for issuance and 128,326,243 shares of common stock issued and outstanding.

As of December 31, 2019, the Company had outstanding warrants to purchase an aggregate of 503,523 shares of common stock. Of those 503,523 warrants, 283,523 had an exercise price of $0.01 per share; 70,000 had an exercise price of $5.00 per share; 100,000 had an exercise price of $1.00 per share; and the remaining 50,000 had an exercise price of $0.50 per share.

On September 4, 2019, the Company entered into a Redemption Agreement with Robert Guerra, a former director of the Company, pursuant to which 100,000 shares of common stock were redeemed for $0.50 per share, or an aggregate of $50,000. These redeemed shares were recorded as treasury stock on the Consolidated Balance Sheet as of December 31, 2019.

Dividends

The Company did not pay dividends to holders of its common stock during fiscal 2019. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on applicable laws and the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. In addition, current or future loan agreements may restrict the Company’s ability to pay dividends. The Company does not anticipate declaring or paying any cash dividends on common stock in the foreseeable future.

F-31

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

13. REVENUE

The following table is a summary of the Company’s timing of revenue recognition for fiscal 2019:

(Amounts in US$’s)

 

January 10,
2019
(Inception) to
December 31,
2019

Timing of revenue recognition:

 

 

 

Services and products transferred at a point in time

 

$

2,803,026

Services and products transferred over time

 

 

1,909,186

Total revenue

 

$

4,712,212

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

Revenue by source consisted of the following for fiscal 2019:

(Amounts in US$’s)

 

January 10, 2019
(Inception) to
December 31,
2019

Revenue by products and services:

 

 

 

Products

 

$

2,702,410

Services

 

 

2,009,802

Total revenue

 

$

4,712,212

Revenue by geographic destination consisted of the following for fiscal 2019:

(Amounts in US$’s)

 

January 10, 2019
(Inception) to
December 31,
2019

Revenue by geography:

 

 

 

North America

 

$

3,476,977

International

 

 

1,235,235

Total revenue

 

$

4,712,212

See Note 2 — Summary of Significant Accounting Policies for the Company’s policies on revenue recognition.

14. SHARE-BASED COMPENSATION

Stock Options

The following information relates to the stock option activity of the Company prior to the ComSovereign Acquisition.

During 2017, the Company granted the following options outside of any equity plan with the attributes described below to purchase the Company’s common stock (amounts in US$’s, except share data):

Grant Date

 

Underlying Shares

 

Option Price

 

Full Vesting Date

 

Expiration Date

January 9, 2017

 

100,000

 

$

2.90

 

January 9, 2019

 

January 7, 2021

August 3, 2017

 

5,130,000

 

$

0.50

 

August 3, 2017

 

August 3, 2021

November 9, 2017

 

2,000,000

 

$

0.50

 

November 9, 2017

 

November 9, 2021

December 13, 2017

 

200,000

 

$

1.00

 

November 13, 2019

 

December 13, 2021

F-32

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

14. SHARE-BASED COMPENSATION (cont.)

During 2018, the Company granted the following options outside of any equity plan with the attributes described below to purchase the Company’s common stock (amounts in US$’s, except share data):

Grant Date

 

Underlying Shares

 

Vesting

 

Option Price

 

Full Vesting Date

 

Expiration Date

March 28, 2018

 

100,000

 

 

50% in one year; 50% in two years from grant date

 

$

1.00

 

March 28, 2020

 

March 28, 2022

May 16, 2018

 

330,000

 

 

Immediate vesting

 

$

1.00

 

May 16, 2018

 

May 16, 2022

May 16, 2018

 

130,000

 

 

50% in one year; 50% in two years from grant date

 

$

1.00

 

May 16, 2020

 

May 16, 2022

September 26, 2018

 

6,000,000

 

$

  4,000,000 new government orders

 

$

0.65

 

December 21, 2018

 

September 26, 2022

All of the above options were outstanding as of January 10, 2019.

On March 20, 2019, the Company granted options outside of any equity plan to two employees and one non-employee for the purchase of an aggregate of 180,000 shares of the Company’s common stock. All the options have an exercise price of $1.06 per share and expire on March 20, 2023. Under the Black-Scholes option pricing model, the fair value of the 180,000 options on the date of grant was estimated at $123,130.

The following table summarizes the assumptions used to estimate the fair value of stock options granted during fiscal 2019:

 

2019

Expected dividend yield

 

0

%

Expected volatility

 

90

%

Risk-free interest rate

 

2.40 – 2.47

%

Expected life of options

 

4.0 years

 

Total recognized compensation expense related to the Company’s stock options was $157,441 for fiscal 2019. All options granted by the Company vested upon the change of control resulting from the completion of the ComSovereign Acquisition on November 27, 2019.

The following table represents stock option activity of ComSovereign and the Company as of and for fiscal 2019:

 

Number of
Options

 

Weighted- Average
Exercise
Price per
Share

 

Weighted-
Average
Contractual
Life in
Years

 

Aggregate
Intrinsic
Value

Outstanding – January 10, 2019

 

13,990,000

 

 

$

0.61

 

3.15

 

$

Granted

 

180,000

 

 

 

1.06

     

 

 

Exercised

 

(5,250,000

)

 

 

0.57

     

 

 

Cancelled or Expired

 

(225,000

)

 

 

0.72

 

 

 

 

 

Outstanding – December 31, 2019

 

8,695,000

 

 

$

0.63

 

1.34

 

$

2,264,760

Exercisable – December 31, 2019

 

8,695,000

 

 

$

0.63

 

1.34

 

$

2,264,760

As of December 31, 2019, there were no unvested stock options.

The Company did not record any compensation expense for the period from November 27, 2019, the date of the ComSovereign Acquisition, to December 31, 2019. Compensation expense related to stock options would be recorded in general and administrative expense in the Consolidated Statement of Operations. As of December 31, 2019, there was no unrecognized compensation expense related to stock options.

F-33

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

14. SHARE-BASED COMPENSATION (cont.)

Restricted Stock Awards

On March 25, 2019, ComSovereign’s Board of Directors granted an aggregate of 80,000 RSAs to a non-employee for consulting services, of which 60,000 RSAs immediately vested and 20,000 RSAs vested upon the change in control of ComSovereign in connection with the ComSovereign Acquisition. The grant date fair value of these RSAs was $4.40 per share of common stock for a total value of $352,000.

On November 12, 2019, the Company’s Board of Directors granted an aggregate of 2,300,000 RSAs to eight employees. The RSAs vested upon the change of control upon the completion of the ComSovereign Acquisition on November 27, 2019. The Company recorded $1,495,000 in share-based compensation expense related to these RSAs during fiscal 2019, prior to the ComSovereign Acquisition. No compensation expense was recognized for the period November 27, 2019, the date of the ComSovereign Acquisition, through December 31, 2019.

On November 14, 2019, ComSovereign’s Board of Directors granted an aggregate of 40,000 RSAs to a non-employee for consulting services that vested immediately. The grant date fair value of these RSAs was $4.40 per share of common stock for a total value of $176,000.

On November 19, 2019, ComSovereign’s Board of Directors granted an aggregate of 270,800 RSAs to noteholders, employees, non-employees and an officer with a grant date fair value of $4.40 per share of common stock that vested immediately for a total value of $1,191,520.

On November 27, 2019, ComSovereign’s Board of Directors granted an aggregate of 50,000 RSAs that immediately vested to a non-employee for assistance in negotiating a secured loan agreement on ComSovereign’s behalf. The grant date fair value of these RSAs was $4.40 per share of common stock for a total value of $220,000.

On December 2, 2019, the Company’s Board of Directors granted an aggregate of 1,900,000 RSAs to nine officers and directors. The vesting period for these RSAs is as follows: 850,000 vest on the one-year anniversary of the grant date; 850,000 vest on the two-year anniversary of the original grant date; and 200,000 vest on the three-year anniversary of the original grant date. The Company recognized $54,667 in share-based compensation expense for these RSAs during fiscal 2019 which was recognized after the ComSovereign Acquisition.

Total recognized compensation expense related to the RSAs was $258,256 which was recorded in general and administration expense in the Consolidated Statement of Operations. See Note 1 — Description of Business and Basis of Presentation for information about the shares issued in connection with the formation of ComSovereign.

See Note 20 — Subsequent Events for information related to the adoption of the 2020 Long-Term Incentive Plan.

15. WARRANTS

The following warrants were issued by the Company prior to the ComSovereign Acquisition with the attributes described below to purchase the Company’s common stock (amounts in US$’s, except share data):

Issuance Date

 

Warrants Issued

 

Exercise Price

 

Full Vesting Date

 

Expiration Date

November 20, 2015

 

70,000

 

$

5.00

 

November 20, 2015

 

November 20, 2020

April 27, 2016

 

60,000

 

$

2.91

 

April 27, 2016

 

April 27, 2019

August 3, 2017

 

30,000

 

$

0.50

 

August 3, 2017

 

August 3, 2021

August 3, 2017

 

2,000,000

 

$

0.50

 

August 3, 2017

 

August 3, 2022

November 9, 2017

 

20,000

 

$

0.50

 

November 9, 2017

 

November 9, 2021

September 26, 2018

 

100,000

 

$

1.00

 

September 26, 2018

 

September 26, 2022

F-34

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

15. WARRANTS (cont.)

During the third quarter of 2019, ComSovereign issued eight warrants to purchase an aggregate of 100,000 shares of ComSovereign’s common stock. The warrants were issued in conjunction with the sale of the ComSovereign’s 9% Senior Convertible Debentures. The warrants had an exercise price of $5.00 per share and an expiration date of December 31, 2021. Prior to conversion of the related debentures, ComSovereign cancelled warrants to purchase 80,000 shares of common stock at $5.00 per share, and reissued warrants to purchase 112,500 shares of common stock at $1.50 per share. ComSovereign valued the new warrants at $250,835 using the Black-Scholes pricing model, which is included in interest expense on the Consolidated Statement of Operations. Warrants to purchase all 132,500 shares of common stock were exercised in November 2019 prior to the ComSovereign Acquisition.

On September 24, 2019, ComSovereign issued a warrant to purchase 150,000 shares of the ComSovereign’s common stock, which was converted into the ability to purchase 283,530 shares of the Company’s common stock as a result of the ComSovereign Merger. The warrant was issued in conjunction with the sale of ComSovereign’s 10% Senior Convertible Debentures. The warrant has an exercise price of $0.01 per share and an expiration date of December 31, 2021. No warrants were exercised during fiscal 2019. On April 21, 2020, these warrants were exercised and exchanged for 283,530 shares of the Company’s common stock.

During September 2019, ComSovereign issued two warrants to purchase 2,000,000 shares of ComSovereign’s common stock. The warrants were issued in conjunction with the sale by ComSovereign of a promissory note. The warrants had an exercise price of $0.01 per share and an expiration date of December 31, 2021. Warrants to purchase the full 2,000,000 shares of ComSovereign’s common stock were exercised in November 2019 prior to the ComSovereign Acquisition.

On October 15, 2019, ComSovereign issued a warrant to purchase 442,500 shares of ComSovereign’s common stock. The warrant was issued in conjunction with the sale by ComSovereign of a promissory note. The warrant had an exercise price of $0.01 per share and an expiration date of December 31, 2021. Warrants to purchase the full 442,500 shares of ComSovereign’s common stock were exercised in November 2019 prior to the ComSovereign Acquisition.

On November 26, 2019, ComSovereign issued warrants to purchase 930,000 shares of ComSovereign’s common stock to non-employees for consulting services in connection with the ComSovereign Acquisition. The warrants had an exercise price of $0.01 per share and an expiration date of November 26, 2024. Warrants to purchase the full 930,000 shares of ComSovereign’s common stock were exercised on November 27, 2019.

The following table summarizes the assumptions used to estimate the fair value of the warrants granted during fiscal 2019:

Expected dividend yield

 

0

%

Expected volatility

 

32 – 33

%

Risk-free interest rate

 

1.38 – 1.82

%

Expected life of warrants

 

2.27 – 3.0 years

 

Under the Black-Scholes option pricing model, the fair value of the warrants issued was estimated at $3,138,667 on the date of grant, which was recognized as interest expense in the Consolidated Statement of Operations. As of December 31, 2019, there was no unrecognized expense related to the warrants as all of the warrants were fully vested.

F-35

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

15. WARRANTS (cont.)

The following table represents warrant activity of ComSovereign and the Company as of and for fiscal 2019:

 

Number of Warrants

 

Weighted-Average Exercise
Price

 

Weighted-Average Remaining Contractual Life in
Years

 

Aggregate Intrinsic
Value

Outstanding – January 10, 2019

 

2,280,000

 

 

$

0.72

 

3.44

 

$

Exercisable – January 10, 2019

 

2,280,000

 

 

$

0.72

 

3.44

 

$

Granted

 

3,868,523

 

 

 

0.18

     

 

 

Exercised

 

(5,472,500

)

 

 

0.23

     

 

 

Forfeited or Expired

 

(172,500

)

 

 

3.61

     

 

 

Outstanding – December 31, 2019

 

503,523

 

 

$

0.95

 

1.96

 

$

258,328

Exercisable – December 31, 2019

 

503,523

 

 

$

0.95

 

1.96

 

$

258,328

16. INCOME TAXES

Deferred taxes are provided on the liability method whereby deferred tax assets and liabilities are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and rates on the date of enactment. The Tax Cut and Jobs Act was enacted on December 22, 2017, which reduced the U.S. corporate statutory income tax rate from 35% to 21% beginning January 1, 2018.

Net deferred tax liabilities consisted of the following as of December 31, 2019:

(Amounts in US$’s)

 

December 31, 2019

Deferred tax assets:

 

 

 

 

Share-based compensation

 

$

13,700

 

Inventory reserve

 

 

137,000

 

Allowance for bad debt

 

 

172,700

 

Net operating loss carryover

 

 

11,867,800

 

Foreign losses

 

 

4,130,000

 

General business credits

 

 

256,400

 

Valuation allowance

 

 

(3,762,800

)

Total deferred tax assets

 

 

12,814,800

 

Deferred tax liabilities:

 

 

 

 

Depreciation

 

 

(43,000

)

Amortization

 

 

(12,771,800

)

Total deferred tax liabilities

 

 

(12,814,800

)

Net deferred tax assets (liabilities)

 

$

 

F-36

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

16. INCOME TAXES (cont.)

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to income (loss) from continuing operations before tax for fiscal 2019 due to the following:

 

December 31, 2019

   

US$’s

 

Rates

Income tax benefit at statutory federal income tax rate

 

$

(6,653,400

)

 

21.00

%

State tax expense, net of federal benefit

 

 

(1,267,300

)

 

4.00

%

Permanent items

 

 

20,000

 

 

(0.06

)%

Valuation allowance

 

 

3,762,800

 

 

(11.88

)%

Income tax benefit

 

$

(4,137,900

)

 

13.06

%

As of December 31, 2019, the Company had domestic net operating loss carryforwards of approximately $47,472,000, of which approximately $13,615,000 was generated pre-2018 that may be carried forward 20 years to offset against future taxable income from the year 2019 through 2039, and approximately $33,857,000 that may offset future taxable income with no definite expiration date.

Due to the change in the ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon the ultimate settlement with the related tax authority. The Company did not record any liabilities related to uncertain tax positions as of December 31, 2019.

The Company records valuation allowances to reduce its deferred tax assets to an amount the its believes is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers all positive and negative evidence to determine whether future taxable income will be generated during the periods in which those temporary differences become deductible. As a result, the Company recorded a valuation allowance on the portion of the deferred tax assets, including current year losses, deemed not to have enough sources of income to utilize the future benefits.

17. LEASES

As of December 31, 2019, the Company had six operating leases for office and manufacturing space and no financial leases. The impact of ASU 2016-02 on the Company’s Consolidated Balance Sheet beginning January 10, 2019 was from the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized as of January 10, 2019 and December 31, 2019 for operating leases were as follows:

(Amounts in US$’s)

 

January 10,
2019

ROU assets

 

$

116,876

Lease liability

 

$

116,876

(Amounts in US$’s)

 

December 31, 2019

ROU assets

 

$

2,199,682

Lease liability

 

$

2,212,548

F-37

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

17. LEASES (cont.)

The Company elected the practical expedient under ASU 2018-11, which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date. Therefore, the Company recognized and measured leases existing at January 10, 2019 (inception date). In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact was recorded to the Consolidated Statement of Operations or beginning retained earnings resulting from the adoption of Topic 842.

Beginning January 10, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to January 10, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 10, 2019. As none of the Company’s leases included an implicit rate of return, the Company used its incremental secured borrowing rate based on lease term information available as of the adoption date or lease commencement date in determining the present value of lease payments.

On January 10, 2019, the Company had one operating lease for office space. The Company is leasing 5,533 square feet of office space with monthly payments of $6,316 and an incremental borrowing rate of 5.90%. As of December 31, 2019, the Company had seven months remaining on the lease with a lease liability of $44,588.

During fiscal 2019, the Company entered into the following leases which the Company identified as operating leases:

On March 1, 2019, the Company entered into a 37-month lease for 2,390 square feet of office space. On December 31, 2019, the remaining liability under this agreement was $54,852, payable in amounts ranging from $2,091 to $2,188 per month through March 2022. The lease did not include an implicit rate of return, so the Company used an incremental borrowing rate of 5.5%.

On June 1, 2018, InduraPower entered into a one-year lease on its executive office located at 1668 S. Research Loop in Tucson, Arizona. InduraPower leases 7,432 square feet of a business park. On February 1, 2019, the date InduraPower was acquired, there were five months remaining on the original lease. On June 7, 2019, InduraPower entered into a two-year lease renewal. On December 31, 2019, the remaining liability under this lease was $89,482 payable in amounts ranging from $5,351 to $5,717 per month until June 2021. The lease did not include an implicit rate of return; therefore, the Company used the average interest rate of InduraPower’s debt financings, which is 8.46%. The lease does not have a renewal option.

On June 1, 2019, VEO entered into a five-year lease on its executive office located at 10509 Vista Sorrento Parkway in San Diego, California. VEO leases 3,031 square feet of a business park. On December 31, 2019, the remaining liability under this agreement was $341,200 payable in amounts from $6,800 to $7,654 per month until May 2024. The lease did not include an implicit rate of return and VEO did not have any outstanding debt financing. Therefore, the Company used the average rate of the first two outstanding leases mentioned above, which is 5.70%. The lease has a renewal option of two additional periods of five years each.

On June 12, 2019, DragonWave entered into a two-year lease on office space located at 362 Terry Fox Drive, Ottawa Canada. DragonWave leases 13,541 square feet of a business park with monthly payments of $10,708, in Canadian dollars. On December 31, 2019, the remaining liability under this lease was $173,792. The lease is effective as of July 1, 2019 through June 2021. DragonWave used a 15% interest rate and there is no renewal option.

On December 13, 2019, the Company entered into a 63-month lease on its executive office located at 5000 Quorum Drive, Dallas, TX 75254. The Company is leasing 15,289 square feet of a business park. The lease began on April 1, 2020 and will expire on July 31, 2025. A right-of-use asset and lease liability for $1,540,142 was recorded as of December 13, 2019. Monthly payments will range from $27,074 to $29,622 during the life of the lease. The lease did not include an implicit rate of return; therefore, the Company used the average rate of the first two outstanding leases mentioned above, which is 5.70%. The lease has a renewal option of two additional periods of five years each.

F-38

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

17. LEASES (cont.)

The renewal periods were not included in the analysis of the right-to-use asset and lease liability as the Company does not consider them to be reasonably certain of being exercised, as comparable locations could generally be identified for comparable lease rates, without the Company incurring significant costs.

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

(Amounts in US$’s)

 

December 31,
2019

ROU Asset – January 10, 2019

 

$

116,876

 

Increase

 

 

2,300,580

 

Amortization

 

 

(217,774

)

ROU Asset – December 31, 2019

 

$

2,199,682

 

   

 

 

 

Lease liability – January 10, 2019

 

$

116,876

 

Increase

 

 

2,300,580

 

Amortization

 

 

(204,908

)

Lease liability – December 31, 2019

 

$

2,212,548

 

   

 

 

 

Lease liability – short term

 

$

467,979

 

Lease liability – long term

 

 

1,744,569

 

Lease liability – total

 

$

2,212,548

 

As of December 31, 2019, the Company’s operating leases had a weighted-average remaining lease term of 4.56 years and a weighted average discount rate of 6.50%.

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of December 31, 2019:

(Amounts in US$’s)

 

Operating
Leases

Amounts due within twelve months of December 31,

 

 

 

 

2020

 

$

557,200

 

2021

 

 

521,067

 

2022

 

 

431,146

 

2023

 

 

434,736

 

2024

 

 

389,917

 

Thereafter

 

 

177,735

 

Total minimum lease payments

 

 

2,511,801

 

Less: effect of discounting

 

 

(299,253

)

Present value of future minimum lease payments

 

 

2,212,548

 

Less: current obligations under leases

 

 

(467,979

)

Long-term lease obligations

 

$

1,744,569

 

F-39

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

18. COMMITMENTS AND CONTINGENCIES

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

On May 22, 2020, Michael Powell filed suit against DragonWave-X, LLC, DragonWave-X, Inc., Transform-X, Inc., ComSovereign Corp, and the 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. The Company disputes Mr. Powell’s allegations and intends to vigorously defend the lawsuit.

On February 7, 2020, DragonWave agreed to repurchase inventory held by Tessco Technologies Incorporated (“Tessco”), one of DragonWave’s customers and note holders. Upon receipt of the inventory, which is valued at $121,482, DragonWave agreed to reimburse Tessco $56,766, representing the balance due after making the initial payment of $60,000. The return of inventory and payment to Tessco of $56,776 was required by February 28, 2020, but has not yet been made. On June 5, 2020, Tessco filed a complaint for confessed judgment against DragonWave in the Circuit Court for Baltimore, Maryland, Case No. 5539212, for approximately $60,000, which it claims is the reimbursement amount. The Company does not intend to oppose the entry of this judgment.

19. CONCENTRATIONS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable. At December 31, 2019, accounts receivable from one customer comprised 84% of the Company’s total trade accounts receivable, and none of this balance has been characterized as uncollectible as of December 31, 2019.

20. SUBSEQUENT EVENTS

Management evaluated for subsequent events requiring disclosure within the financial statements through the date of the filing of this report and noted the following items.

Pending Corporate Transaction

Agreement and Plan of Merger and Reorganization

On May 21, 2020, the Company signed an Agreement and Plan of Merger and Reorganization to acquire Virtual Network Communications, Inc. (“VNC”), a developer of fixed and mobile broadband communications solutions for wireless networks operated by commercial, enterprise, government and defense customers. The acquisition is expected to be completed on or before July 6, 2020, subject to satisfactory completion of closing conditions.

Acquisitions

On March 6, 2020, the Company’s subsidiary, Sovereign Plastics, LLC (“Sovereign Plastics”), entered into a Stock Purchase Agreement to acquire 100% of the shares of common stock of Spring Creek Manufacturing, Inc. for a purchase price of $500,000. The acquisition closed on March 6, 2020 with Sovereign Plastics paying the purchase price through the assumption of the obligations of the sellers under an outstanding promissory note in the principal amount of $90,000 and the delivery of short-term promissory notes in the aggregate principal amount of $410,000. Additionally, Sovereign Plastics agreed to pay certain sales commissions on all sales to two specific customers.

F-40

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

20. SUBSEQUENT EVENTS (cont.)

On March 6, 2020, in a related transaction, Sovereign Plastics also entered into an Asset Purchase Agreement with Fast Plastics Parts, LLC (“Fast Plastics”) to acquire certain assets, consisting primarily of machinery, equipment and furniture of Fast Plastics. The acquisition also closed on March 6, 2020 with Sovereign Plastics providing the purchase price of approximately $1,464,000 by the payment of approximately $66,000 in cash, the repayment of outstanding indebtedness of Fast Plastics in the aggregate amount of $250,000 and the assumption of an outstanding term loan of Fast Plastics in the amount of approximately $979,000. Sovereign Plastics also assumed equipment leases.

The cash portions of the purchase prices were funded by the sale to unaffiliated lenders of promissory notes in the principal amount of $500,000 that mature on September 4, 2020 and 50,000 shares of common stock for an aggregate purchase price of $450,000.

2020 Long-Term Incentive Plan

On April 22, 2020, the Company’s Board of Directors adopted the 2020 Long-Term Incentive Plan (the “2020 Plan”) which was approved by the stockholders on or about May 6, 2020. Employees, officers, directors and consultants that provide services to the Company or one of its subsidiaries may be selected to receive awards under the 2020 Plan. Awards under the 2020 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards and performance-based awards.

A total of 10,000,000 shares of the Company’s common stock are authorized for issuance with respect to awards granted under the 2020 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 Plan. No stock grants have been issued under the 2020 Plan, and 10,000,000 shares authorized under the 2020 Plan remained available for award purposes.

The 2020 Plan will terminate on May 1, 2030. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2020 Plan is ten years after the initial date of the award.

Debt Agreements

On February 26, 2020, the Company entered into a $600,000 secured business loan bearing interest at 81.74% per annum that matures on December 26, 2020. Principal and interest payments of $19,429 are due weekly. The loan is secured by the assets of the Company.

On March 19, 2020, the Company entered into a note payable with the Nussbaum estate 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. The proceeds of the note payable were used to repay the balance of the CNB Note.

On April 29, 2020, the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 and warrants to purchase 158,730 shares of the Company’s common stock for proceeds of $250,000. The note bears interest at a rate of 12.5% per annum and matures on January 29, 2021. Within three business days of filing the Annual Report for fiscal 2019, the investor is required to issue, and the Company is required accept, an additional convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 along with warrants to purchase an additional 158,730 shares of the Company’s common stock for proceeds of $250,000. This note will bear interest at 12.5% per annum and mature on January 29, 2021. The investor will not be required to purchase the additional securities if the Company is in default under the outstanding notes or if certain other conditions are not met.

F-41

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
For the Period from January 10, 2019 (Inception) to December 31, 2019

20. SUBSEQUENT EVENTS (cont.)

On May 29, 2020, DragonWave issued a promissory note in the principal amount of $290,000 with an original issue discount of $40,000 for proceeds of $250,000. The note matures on September 30, 2020 and will bear interest at the rate of 12% per annum on any principal balance not paid from the maturity date until paid in full. The promissory note is guaranteed by the Company and Mr. Hodges.

Payroll Protection Program of the CARES Act

During April and May 2020, the Company and its subsidiaries received an aggregate of $455,185 under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) of 2020. These loans are to cover 24 weeks of payroll expenses and may be used for a variety of other needs such as: payroll costs, salaries or commissions, rent, utilities and interest on other outstanding debt. Management believes it is complying with the rules for forgiveness of these funds received under the PPP of the CARES Act.

Consulting Agreement

On January 31, 2020, the Company entered into an agreement with a consultant to its subsidiary, Lextrum, to amend a consulting agreement between the consultant and Lextrum to allow the consultant to elect to take from 50% to 100% of his compensation in the form of common stock of the Company. Common stock to be issued to the consultant will be paid on a quarterly basis. On March 12, 2020, the Company issued 165,095 shares of its common stock in satisfaction of $106,238 that was owed by Lextrum to the consultant for services previously rendered and the additional $106,238 that was owed by Lextrum was partially paid in cash of $55,000 on March 6, 2020. The remaining $51,238 is still outstanding. To date, no additional shares of common stock have been issued pursuant to this agreement.

21. UNAUDITED PRO FORMA INFORMATION

The Company has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission in connection with a proposed offering of its securities. On May 26, 2020, the board of directors of the Company and stockholders holding a majority of the outstanding shares of the Company’s common stock approved resolutions authorizing the board of directors to effect a reverse split (the “split”) of the Company’s common stock at an exchange ratio of up to 1-for-3, with the board of directors retaining the discretion as to whether to implement the reverse stock split. On December 16, 2020, the Company’s board of directors approved a ratio for the split of 1-for-3 subject to such registration statement being declared effective by the Commission. Following the effectiveness of such registration statement, and prior to the closing of the public offering contemplated thereby, the Company will effect the stock split at a ratio of 1 share for each 3 shares.

Pro forma basic earnings (loss) per share presented as unaudited on the statement of operations is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period after the effect of the split. Diluted earnings (loss) per share presented as unaudited on the statement of operations is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period after the effect of the split.

F-42

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEET

(Amounts in US$’s, except share data)

 

September 30,
2020

 

December 31,
2019

   

(Unaudited)

   

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash

 

$

505,053

 

 

$

812,452

 

Accounts receivable, net

 

 

893,407

 

 

 

2,168,659

 

Receivables – related party

 

 

 

 

 

1,595

 

Inventory, net

 

 

5,319,590

 

 

 

4,671,396

 

Prepaid expenses

 

 

589,387

 

 

 

916,729

 

Other current assets

 

 

96,168

 

 

 

94,538

 

Total Current Assets

 

 

7,403,605

 

 

 

8,665,369

 

Property and equipment, net

 

 

2,233,089

 

 

 

1,458,106

 

Operating lease right-of-use assets

 

 

2,891,113

 

 

 

2,199,682

 

Finance lease right-of-use-assets

 

 

73,576

 

 

 

 

Intangible assets, net

 

 

44,364,266

 

 

 

51,277,482

 

Goodwill

 

 

75,538,127

 

 

 

56,386,796

 

Other assets – long term

 

 

57,487

 

 

 

 

Total Assets

 

$

132,561,263

 

 

$

119,987,435

 

   

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,776,805

 

 

$

2,245,704

 

Accrued interest

 

 

1,129,692

 

 

 

306,445

 

Accrued liabilities

 

 

1,803,640

 

 

 

1,383,008

 

Accrued liabilities – related party

 

 

366,601

 

 

 

461,254

 

Accrued payroll

 

 

2,543,006

 

 

 

1,050,703

 

Contract liabilities, current

 

 

199,488

 

 

 

149,923

 

Accrued warranty liability

 

 

181,797

 

 

 

195,138

 

Operating lease liabilities, current

 

 

659,789

 

 

 

467,979

 

Finance lease liabilities, current

 

 

55,046

 

 

 

 

Line of credit

 

 

 

 

 

2,000,000

 

Notes payable – related party

 

 

1,542,953

 

 

 

1,492,953

 

Current portion of long-term debt, net of unamortized discounts and debt issuance
costs

 

 

13,123,317

 

 

 

5,389,492

 

Total Current Liabilities

 

 

26,382,134

 

 

 

15,142,599

 

Contract liabilities – long term

 

 

110,970

 

 

 

152,892

 

Operating lease liabilities – long term

 

 

2,360,575

 

 

 

1,744,569

 

Finance lease liabilities – long term

 

 

14,296

 

 

 

 

Total Liabilities

 

 

28,867,975

 

 

 

17,040,060

 

COMMITMENTS AND CONTINGENCIES (Note 21)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized, 143,817,614 and 128,326,243 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

 

 

14,382

 

 

 

12,833

 

Additional paid-in capital

 

 

156,196,213

 

 

 

130,553,180

 

Accumulated deficit

 

 

(52,467,307

)

 

 

(27,545,255

)

Accumulated other comprehensive loss

 

 

 

 

 

(23,383

)

Treasury stock, at cost, 100,000 shares as of September 30, 2020 and December 31, 2019, respectively

 

 

(50,000

)

 

 

(50,000

)

Total Stockholders’ Equity

 

 

103,693,288

 

 

 

102,947,375

 

Total Liabilities and Stockholders’ Equity

 

$

132,561,263

 

 

$

119,987,435

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

F-43

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

(Amounts in US$’s, except share data)

 



Three Months Ended
September 30,

 


Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

2020

 

2019

 

Revenue

 

$

2,018,363

 

 

$

2,573,431

 

 

$

7,513,660

 

 

$

3,576,342

 

Cost of Goods Sold

 

 

859,661

 

 

 

1,130,750

 

 

 

3,473,293

 

 

 

2,019,020

 

Gross Profit

 

 

1,158,702

 

 

 

1,442,681

 

 

 

4,040,367

 

 

 

1,557,322

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(١)

 

 

561,942

 

 

 

118,635

 

 

 

1,263,427

 

 

 

179,599

 

Sales and marketing(١)

 

 

898

 

 

 

387

 

 

 

30,523

 

 

 

4,202

 

General and administrative(١)

 

 

4,471,121

 

 

 

4,634,711

 

 

 

13,151,442

 

 

 

9,027,646

 

Depreciation and amortization

 

 

2,908,572

 

 

 

2,440,581

 

 

 

8,653,635

 

 

 

4,918,800

 

Gain on the sale of assets

 

 

 

 

 

(128,749

)

 

 

(663

)

 

 

(325,838

)

Total Operating Expenses

 

 

7,942,533

 

 

 

7,065,565

 

 

 

23,098,364

 

 

 

13,804,409

 

Net Operating Loss

 

 

(6,783,831

)

 

 

(5,622,884

)

 

 

(19,057,997

)

 

 

(12,247,087

)

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,349,964

)

 

 

(1,598,732

)

 

 

(5,707,840

)

 

 

(1,961,334

)

Other income (expense)

 

 

(128,754

)

 

 

95,266

 

 

 

(128,778

)

 

 

95,266

 

Loss on extinguishment of debt

 

 

(21,882

)

 

 

 

 

 

(21,882

)

 

 

 

Foreign currency transaction gain (loss)

 

 

(46,587

)

 

 

(133,893

)

 

 

(6,799

)

 

 

108,333

 

Loss on investment

 

 

(24

)

 

 

 

 

 

(24

)

 

 

 

Interest income

 

 

213

 

 

 

7

 

 

 

1,268

 

 

 

7

 

Total Other Expenses

 

 

(3,546,998

)

 

 

(1,637,352

)

 

 

(5,864,055

)

 

 

(1,757,728

)

Net Loss Before Income Taxes

 

 

(10,330,829

)

 

 

(7,260,236

)

 

 

(24,922,052

)

 

 

(14,004,815

)

Deferred Tax Benefit

 

 

 

 

 

1,815,059

 

 

 

 

 

 

3,501,204

 

Net Loss

 

$

(10,330,829

)

 

$

(5,445,177

)

 

$

(24,922,052

)

 

$

(10,503,611

)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(0.12

)

 

$

(0.19

)

 

$

(0.27

)

Diluted

 

$

(0.08

)

 

$

(0.12

)

 

$

(0.19

)

 

$

(0.27

)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

132,649,621

 

 

 

43,953,888

 

 

 

132,466,532

 

 

 

39,103,721

 

Diluted

 

 

132,649,621

 

 

 

43,953,888

 

 

 

132,466,532

 

 

 

39,103,721

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited Pro-Forma Earnings Per Share Information as Discussed in Note 24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.23

)

 

$

(0.37

)

 

$

(0.56

)

 

$

(0.81

)

Diluted

 

$

(0.23

)

 

$

(0.37

)

 

$

(0.56

)

 

$

(0.81

)

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,216,541

 

 

 

14,651,296

 

 

 

44,155,511

 

 

 

13,034,574

 

Diluted

 

 

44,216,541

 

 

 

14,651,296

 

 

 

44,155,511

 

 

 

13,034,574

 

____________

(1)      These are exclusive of depreciation and amortization

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

F-44

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Unaudited)

(Amounts in US$’s)

 



Three Months Ended
September 30,

 

Nine Months
Ended
September 30,
2020

 

January 10, 2019 (Inception) to September 30,
2019

2020

 

2019

 

Net Loss

 

$

(10,330,829

)

 

$

(5,445,177

)

 

$

(24,922,052

)

 

$

(10,503,611

)

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

21,699

 

 

 

 

 

 

23,383

 

 

 

(21,699

)

Total Comprehensive Loss

 

$

(10,309,130

)

 

$

(5,445,177

)

 

$

(24,898,699

)

 

$

(10,525,310

)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

F-45

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

For the Three and Nine Months Ended September 30, 2020 and For the Three Months Ended September 30, 2019 and for the period January 10, 2019 (Inception) to September 30, 2019

(Amounts in US$’s, except share data)

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Shares

 

Accumulated
Deficit

 

Total Stockholders’
Equity

Shares

 

Amount

 

Shares

 

Amount

 

December 31, 2019

 

 

$

 

128,326,243

 

$

12,833

 

$

130,553,180

 

$

(23,383

)

 

$

(50,000

)

 

$

(27,545,255

)

 

$

102,947,375

 

Issuance of common stock for settlement of accounts payable

 

 

 

 

165,095

 

 

17

 

 

193,143

 

 

 

 

 

 

 

 

 

 

 

193,160

 

Issuance of common stock for debt issue costs

 

 

 

 

50,000

 

 

5

 

 

56,995

 

 

 

 

 

 

 

 

 

 

 

57,000

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

   

 

1,684

 

 

 

 

 

 

 

 

 

1,684

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,025,538

)

 

 

(7,025,538

)

March 31, 2020

 

 

 

 

128,541,338

 

 

12,855

 

 

130,803,318

 

 

(21,699

)

 

 

(50,000

)

 

 

(34,570,793

)

 

 

96,173,681

 

Issuance of common stock for exercise of warrants

 

 

 

 

283,530

 

 

28

 

 

2,807

 

 

 

 

 

 

 

 

 

 

 

2,835

 

Issuance of common stock
for payment of accrued
interest

 

 

 

 

21,196

 

 

2

 

 

38,362

 

 

 

 

 

 

 

 

 

 

 

38,364

 

Warrants issued in conjunction with debt agreements

 

 

 

 

 

 

 

 

44,323

 

 

 

 

 

 

 

 

 

 

 

44,323

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

68,654

 

 

 

 

 

 

 

 

 

 

 

68,654

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,565,685

)

 

 

(7,565,685

)

June 30, 2020

 

 

 

 

128,846,064

 

 

12,885

 

 

130,957,464

 

 

(21,699

)

 

 

(50,000

)

 

 

(42,136,478

)

 

 

88,762,172

 

Issuance of common stock for Virtual Network Communications Inc. acquisition

 

 

 

 

11,738,210

 

 

1,174

 

 

12,676,093

 

 

 

 

 

 

 

 

 

 

 

12,677,267

 

Issuance of options for Virtual Network Communications Inc. acquisition

 

 

 

 

 

 

 

 

2,261,275

 

 

 

 

 

 

 

 

 

 

 

2,261,275

 

Issuance of warrants for Virtual Network Communications Inc. acquisition

 

 

 

 

 

 

 

 

1,646,471

 

 

 

 

 

 

 

 

 

 

 

1,646,471

 

Issuance of common stock for debt issue costs

 

 

 

 

400,000

 

 

40

 

 

1,339,960

 

 

 

 

 

 

 

 

 

 

 

1,340,000

 

Issuance of warrants for
debt issue costs

 

 

 

 

 

 

 

 

103,955

 

 

 

 

 

 

 

 

 

 

 

103,955

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

567,345

 

 

 

 

 

 

 

 

 

 

 

567,345

 

Issuance of warrants in conjunction with debt agreements

 

 

 

 

 

 

 

 

149,448

 

 

 

 

 

 

 

 

 

 

 

149,448

 

Issuance of common stock for extinguishment of debt and interest

 

 

 

 

612,406

 

 

61

 

 

2,539,672

 

 

 

 

 

 

 

 

 

 

 

2,539,733

 

Issuance of common stock for conversion of debt

 

 

 

 

1,921,082

 

 

192

 

 

2,320,013

 

 

 

 

 

 

 

 

 

 

 

2,320,205

 

Share-based compensation

 

 

 

 

 

 

 

 

531,157

 

 

 

 

 

 

 

 

 

 

 

531,157

 

Issuance of common
stock as vendor
compensation

 

 

 

 

208,011

 

 

21

 

 

268,019

 

 

 

 

 

 

 

 

 

 

 

268,040

 

Issuance of warrants as vendor compensation

 

 

 

 

 

 

 

 

24,782

 

 

 

 

 

 

 

 

 

 

 

24,782

 

Common stock issued for
cash

 

 

 

 

91,841

 

 

9

 

 

331,833

 

 

 

 

 

 

 

 

 

 

 

331,842

 

Non-cash contribution
from Chief Executive
Officer

 

 

 

 

 

 

 

 

478,726

 

 

 

 

 

 

 

 

 

 

 

478,726

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

   

 

21,699

 

 

 

 

 

 

 

 

 

21,699

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,330,829

)

 

 

(10,330,829

)

September 30, 2020

 

 

$

 

143,817,614

 

 

14,382

 

$

156,196,213

 

$

 

 

$

(50,000

)

 

$

(52,467,307

)

 

$

103,693,288

 

F-46

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — Continued
(Unaudited)

For the Three and Nine Months Ended September 30, 2020 and For the Three Months Ended September 30, 2019 and for the period January 10, 2019 (Inception) to September 30, 2019

(Amounts in US$’s, except share data)

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Shares

 

Accumulated
Deficit

 

Total Stockholders’
Equity

Shares

 

Amount

 

Shares

 

Amount

 

January 10, 2019 (Inception)

 

 

$

 

 

$

 

$

 

$

 

 

$

 

$

 

 

$

 

Issuance of founder shares at inception

 

 

 

 

27,890,000

 

 

2,789

 

 

   

 

 

 

 

 

 

 

 

 

2,789

 

Issuance of preferred stock for VEO, Inc. acquisition

 

1,500,000

 

 

150

 

 

 

 

 

13,214,850

 

 

 

 

 

 

 

 

 

 

13,215,000

 

Issuance of preferred stock for InduraPower, Inc. acquisition

 

800,000

 

 

80

 

 

 

 

 

7,047,920

 

 

 

 

 

 

 

 

 

 

7,048,000

 

Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition

 

300,000

 

 

30

 

 

 

 

 

2,642,970

 

 

 

 

 

 

 

 

 

 

2,643,000

 

Share-based compensation

 

 

 

 

80,000

 

 

8

 

 

351,992

 

 

 

 

 

 

 

 

 

 

352,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(770,677

)

 

 

(770,677

)

March 31, 2019

 

2,600,000

 

 

260

 

27,970,000

 

 

2,797

 

 

23,257,732

 

 

 

 

 

 

 

(770,677

)

 

 

22,490,112

 

Issuance of common stock for DragonWave-X LLC and Lextrum, Inc. acquisition

 

 

 

 

13,237,149

 

 

1,324

 

 

58,242,131

 

 

 

 

 

 

 

 

 

 

58,243,455

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

(21,699

)

 

 

 

 

 

 

 

(21,699

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,287,757

)

 

 

(4,287,757

)

June 30, 2019

 

2,600,000

 

 

260

 

41,207,149

 

 

4,121

 

 

81,499,863

 

 

(21,699

)

 

 

 

 

(5,058,434

)

 

 

76,424,111

 

Issuance of common stock for cash

 

 

 

 

500,000

 

 

50

 

 

4,950

 

 

 

 

 

 

 

 

 

 

5,000

 

Issuance of warrants in conjunction with debt agreements

 

 

 

 

 

 

 

 

2,927,232

 

 

 

 

 

 

 

 

 

 

2,927,232

 

Issuance of common stock for debt issue costs

 

 

 

 

 

 

 

 

2,195,000

 

 

 

 

 

 

 

 

 

 

2,195,000

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

855,550

 

 

 

 

 

 

 

 

 

 

855,550

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,260,236

)

 

 

(7,260,236

)

September 30, 2019

 

2,600,000

 

 

260

 

41,707,149

 

 

4,171

 

 

87,482,595

 

 

(21,699

)

 

 

 

 

(12,318,670

)

 

 

75,146,657

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

F-47

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(Amounts in US$’s)

 

For the
Nine Months 
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,922,052

)

 

$

(10,503,611

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

797,801

 

 

 

304,669

 

Amortization

 

 

7,847,434

 

 

 

4,614,131

 

Amortization of financing lease right-of-use asset

 

 

8,400

 

 

 

 

Operating lease expense

 

 

444,436

 

 

 

76,557

 

Bad debt expense

 

 

647,643

 

 

 

 

Gain on the sale of assets

 

 

(663

)

 

 

(325,838

)

Stock based compensation

 

 

531,157

 

 

 

 

Amortization of debt discounts and debt issuance costs

 

 

4,287,794

 

 

 

 

Other, net

 

 

292,823

 

 

 

686,093

 

Loss on extinguishment of debt

 

 

21,882

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

627,609

 

 

 

(654,169

)

Inventory

 

 

(322,361

)

 

 

(460,852

)

Prepaids

 

 

354,768

 

 

 

(1,708,911

)

Other current assets

 

 

(248,447

)

 

 

(3,983,220

)

Accounts payable

 

 

2,719,261

 

 

 

(2,545,190

)

Accrued liabilities

 

 

420,632

 

 

 

1,415,744

 

Accrued interest

 

 

1,079,067

 

 

 

413,097

 

Deferred revenue

 

 

7,643

 

 

 

(109,044

)

Operating lease liabilities

 

 

(273,903

)

 

 

(77,565

)

(Repayments)/advances from related party

 

 

(94,653

)

 

 

1,086,316

 

Other current liabilities

 

 

1,478,963

 

 

 

114,730

 

Other non-current assets

 

 

(168,100

)

 

 

 

Net cash (used in) operating activities

 

 

(4,462,866

)

 

 

(11,657,063

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of net assets

 

 

(3,146,500

)

 

 

1,629,519

 

Purchases of property and equipment

 

 

(96,852

)

 

 

 

Proceeds from disposal of property and equipment

 

 

663

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(3,242,689

)

 

 

1,629,519

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payment on finance lease

 

 

(12,634

)

 

 

 

Proceeds from issuance of related party note

 

 

1,950,000

 

 

 

200,000

 

Payment on line of credit

 

 

(2,000,000

)

 

 

 

Proceeds from sale of common stock

 

 

331,842

 

 

 

5,000

 

Proceeds from issuance of debt

 

 

8,008,026

 

 

 

11,152,733

 

Proceeds from issuance of warrant

 

 

200

 

 

 

 

Repayment of debt

 

 

(902,661

)

 

 

(646,580

)

Net cash provided by financing activities

 

 

7,374,773

 

 

 

10,711,153

 

Effect of exchange rates on cash

 

 

23,383

 

 

 

(21,699

)

Net (decrease)/increase in cash and cash equivalents

 

 

(307,399

)

 

 

661,910

 

Cash and cash equivalents, beginning of period

 

 

812,452

 

 

 

 

Cash and cash equivalents, end of period

 

$

505,053

 

 

$

661,910

 

F-48

Table of Contents

COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS — Continued
(Unaudited)

(Amounts in US$’s)

 

For the
Nine Months 
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

Supplemental disclosures of cash flow information:

 

 

   

 

 

Cash paid during the period:

 

 

   

 

 

Taxes

 

$

 

$

Interest

 

 

367,321

 

 

13,787

Non-cash operating activities:

 

 

   

 

 

Issuance of common stock as vendor compensation

 

 

268,040

 

 

352,000

Issuance of common stock for interest paid-in-kind

 

 

261,866

 

 

Issuance of common stock as settlement on accounts payable

 

 

193,160

 

 

Issuance of warrants as vendor compensation

 

 

24,782

 

 

Settlement of VNC notes receivable and related interest receivable
pre-existing relationship

 

 

251,247

 

 

Non-cash investing and financing activities:

 

 

   

 

 

Issuance of common stock for Virtual Network Communications, Inc. acquisition

 

 

12,677,267

 

 

Issuance of warrants for Virtual Network Communications Inc.
acquisition

 

 

2,261,275

 

 

Issuance of options for Virtual Network Communications Inc.
acquisition

 

 

1,646,471

 

 

Issuance of common stock for extinguishment of debt

 

 

2,343,400

 

 

Issuance of preferred stock for VEO, Inc. acquisition

 

 

 

 

13,215,000

Issuance of preferred stock for InduraPower, Inc. acquisition

 

 

 

 

7,048,000

Issuance of preferred stock for Silver Bullet Technology, Inc. acquisition

 

 

 

 

2,643,000

Issuance of common stock for Lextrum, Inc. acquisition

 

 

 

 

16,162,064

Issuance of common stock for DragonWave-X LLC acquisition

 

 

 

 

42,081,392

Issuance of common stock for conversion of debt

 

 

285,714

 

 

Issuance of common stock for conversion of related party note

 

 

1,900,000

 

 

Issuance of common stock as payment-in-kind of default penalty

 

 

97,322

 

 

Issuance of founder shares at inception

 

 

 

 

2,789

Issuance of common stock as debt issuance costs

 

 

1,397,000

 

 

2,195,000

Issuance of warrants as debt issuance costs

 

 

103,755

 

 

Issuance of warrants in exchange for note receivable

 

 

2,835

 

 

Issuance of warrants in conjunction with debt agreements

 

 

193,771

 

 

2,927,232

Beneficial conversion feature

 

 

635,999

 

 

855,550

Recognition of operating right-of-use asset and liability

 

 

 

 

517,208

Recognition of operating right-of-use asset and liability rent abatement

 

 

151,565

 

 

Debt incurred to sellers for Fast Plastics Parts LLC and Spring Creek Manufacturing, Inc. acquisition

 

 

575,574

 

 

Contribution from Chief Executive Officer of common stock as debt issuance costs

 

 

478,726

 

 

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

F-49

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

COMSovereign Holding Corp., formerly known as Drone Aviation Holding Corp. (the Company), provides technologically advanced telecom solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. The Company has assembled a portfolio of communications, power, and niche technologies, capabilities, and products that enable upgrading latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. The Company focuses on special capabilities, including signal modulations, antennae, software, hardware, and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. The Company’s product solutions are complemented by a broad array of services including technical support, systems design and integration, and sophisticated research and development programs. Since the Company’s business operations are in the early stages and the Company has a limited operating history as a consolidated company, the Company may be susceptible to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises as outlined in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. While the Company competes globally on the basis of its innovative technology, broad product offerings, high-quality and cost-effective customer solutions, as well as the scale of its global customer base and distribution, the Company’s primary focus is on the North American telecom infrastructure and service market. The Company believes it is in a unique position to rapidly increase its near-term domestic sales as it is among the few U.S.-based providers of telecommunications equipment and services.

Corporate History

The Company was incorporated in Nevada on April 17, 2014. On June 3, 2014, the Company acquired Drone Aviation Corp. through a share exchange transaction, and on March 26, 2015, Drone Aviation Corp. merged with and into the Company. As a result of the share exchange and merger with Drone Aviation Corp., the Company acquired Drone Aviation Corp.’s subsidiary, Lighter Than Air Systems Corp. (“LTAS”), which does business under the name Drone Aviation.

On November 27, 2019, the Company completed the acquisition (the “ComSovereign Acquisition”) of ComSovereign Corp., a Delaware corporation (“ComSovereign”) 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 the Company as the accounting acquiree. As a result, our Condensed Consolidated Financial Statements included in this Quarterly Report are those of ComSovereign for the three months ended September 30, 2019 and the period January 10, 2019 (Inception) to September 30, 2019 and those of the Company for the three-and nine-month periods ended September 30, 2020. The operations of our pre-acquisition business, which consisted primarily of the operations of Drone Aviation, are included in our consolidated operating results only for the three-and nine-month periods ended September 30, 2020.

ComSovereign 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 Silicon Photonics (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 Inc. (“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.

F-50

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (cont.)

On March 4, 2019, ComSovereign acquired the capital stock of Silver Bullet Technology, Inc. (“Silver Bullet”), a California-based engineering firm that designs and develops next generation network systems and components, including self-organizing network protocol development, software-defined radio systems, and wireless communications systems.

On April 1, 2019, ComSovereign acquired the equity securities of 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 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 Inc. (“Lextrum”), a Tucson, Arizona-based developer of in band full-duplex wireless technologies and components, including multi-reconfigurable RF antennae and software programs. Lextrum’s duplexing technology enables capacity doubling in a given spectrum band by allowing simultaneous transmission and receipt of radio signals on the same frequencies.

On March 6, 2020, the Company’s newly-formed subsidiary, Sovereign Plastics LLC (“Sovereign Plastics”), acquired substantially all of the assets of a Colorado Springs, Colorado-based manufacturer of plastics and metal components to third-party manufacturers. The Company acquired its Sovereign Plastics business to increase its operating margins by reducing the manufacturing and production costs of its telecom products. Sovereign Plastics will also primarily operate as the material, component manufacturing and supply chain source for all of the Company’s subsidiaries. The Company does not expect the revenues of Sovereign Plastics from sales to third parties to be material in the future.

On July 6, 2020, the Company completed its acquisition (the “VNC Acquisition”) of Virtual Network Communications Inc., a Virginia corporation (“VNC”), pursuant to an Agreement and Plan of Merger and Reorganization dated as of May 21, 2020 (the “Merger Agreement”), by and among the Company and its wholly-owned subsidiaries, CHC Merger Sub 7, Inc. and VNC Acquisition LLC, VNC and Mohan Tammisetti, solely in his capacity as the representative of the security holders of VNC. VNC is an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC is reinventing how wireless networks service mission-critical communications for Public Safety, Homeland Security, Department of Defense and commercial Private Network users. We envision the future of virtualized micro networks blanketing the globe without expensive terrestrial based radio towers and building installation. VNC’s patented technology virtualizes entire LTE Advanced and 5G core and radio solutions. Our products eliminate much of the costly backbone equipment of telecom networks. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones, including from COMSovereign’s Drone Aviation subsidiary, enabling operating in nearly any location in the world.

Each of the Company’s subsidiaries was acquired to address a different opportunity or segment within the North American telecom infrastructure and service market.

F-51

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (cont.)

Basis of Presentation and Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and with the rules and regulations of the Security and Exchange Commission (SEC) for interim financial information. As a result, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial positions, results of operations and cash flows for such periods. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the Company’s results of operations, financial position or cash flows that may be expected for the full fiscal year or future operating periods. The unaudited Condensed Consolidated Financial Statements included herein should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The unaudited consolidated financial statements as of, and for the three- and nine-month periods ended, September 30, 2020 include the accounts of the Company and its wholly-owned subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics, and VNC. All intercompany transactions and accounts have been eliminated.

Reclassifications

Certain immaterial December 31, 2019 amounts have been reclassified to be consistent with the current period presentation.

Use of Estimates

The preparation of unaudited financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical factors, current circumstances and the experience and judgment of management. The Company evaluates its estimates, assumptions and judgments on an ongoing basis and may employ outside experts to assist in making these evaluations. Hence, changes in such estimates, based on more accurate information or different assumptions or conditions may cause actual results to differ from those estimates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes in the Company’s significant accounting policies as of and for the three months ended September 30, 2020, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Accounting Standards Not Yet Adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance simplifies the accounting for certain convertible instruments and contracts in an entity’s own equity. As a smaller reporting entity, this standard will become effective for fiscal years beginning after December 15, 2023, including interim periods within those years. The Company is currently evaluating the potential impact ASU 2020-06 will have on our Condensed Consolidated Financial Statements.

F-52

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This guidance provides optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments that use LIBOR as a reference rate and is effective upon issuance through December 31, 2022. The Company is currently evaluating the potential impact of this ASU will have on our Condensed Consolidated Financial Statements throughout the effective period.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. ASU 2019-12 will be effective for the Company in the fiscal years beginning after December 15, 2020 and for interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the potential impact that adopting this ASU will have on our Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will become effective for annual periods beginning after December 15, 2022 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact the adoption of this ASU will have on our Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This standard will become effective for interim and annual periods beginning after December 15, 2022 and earlier adoption is permitted. The Company is currently evaluating the potential impact the adoption of this ASU will have on our Condensed Consolidated Financial Statements.

3. GOING CONCERN

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

The accompanying unaudited consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For the nine months ended September 30, 2020, the Company generated negative cash flows from operations of $4,462,867 and had an accumulated deficit of $52,467,306 and negative working capital of $18,978,529.

Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets and secure lines of credit. The Company anticipates an approximate $20,000,000 offering of equity securities in the fourth quarter of 2020. The Company’s fiscal operating results, accumulated deficit, and negative working capital, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. Nevertheless, the Company believes the fundraising actions outlined above, and its future operating cash flows, will enable it to meet its liquidity requirements through September 2021. There can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.

F-53

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

4. REVENUE

The following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2020 and for the three months ended September 30, 2019 and the period January 10, 2019 (Inception) to September 30, 2019:

 



Three Months Ended
September 30,

 

Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

(Amounts in US$’s)

 

2020

 

2019

 

Timing of revenue recognition:

 

 

   

 

   

 

   

 

 

Services and products transferred at a point in time

 

$

1,941,239

 

$

1,824,924

 

$

7,056,659

 

$

2,289,249

Services and products transferred over time

 

 

77,124

 

 

748,507

 

 

457,001

 

 

1,287,093

Total revenue

 

$

2,018,363

 

$

2,573,431

 

$

7,513,660

 

$

3,576,342

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

Revenue by source consisted of the following for the three and nine months ended September 30, 2020 and for the three months ended September 30, 2019 and the period January 10, 2019 (Inception) to September 30, 2019:

 



Three Months Ended
September 30,

 

Nine Months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

(Amounts in US$’s)

 

2020

 

2019

 

Revenue by products and services:

 

 

   

 

   

 

   

 

 

Products

 

$

1,726,425

 

$

1,824,924

 

$

6,298,041

 

$

2,289,249

Services

 

 

291,938

 

 

748,507

 

 

1,215,619

 

 

1,287,093

Total revenue

 

$

2,018,363

 

$

2,573,431

 

$

7,513,660

 

$

3,576,342

Revenue by geographic destination consisted of the following for the three and nine months ended September 30, 2020 and for the three months ended September 30, 2019 and the period January 10, 2019 (Inception) to September 30, 2019:

 



Three Months Ended
September 30,

 

Nine months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

(Amounts in US$’s)

 

2020

 

2019

 

Revenue by geography:

 

 

   

 

   

 

   

 

 

North America

 

$

1,830,967

 

$

2,466,473

 

$

6,755,717

 

$

2,669,728

International

 

 

187,396

 

 

106,958

 

 

757,943

 

 

906,614

Total revenue

 

$

2,018,363

 

$

2,573,431

 

$

7,513,660

 

$

3,576,342

Contract Balances

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of September 30, 2020, the Company did not have a contract assets balance.

F-54

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

4. REVENUE (cont.)

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

(Amounts in US$’s)

 

Total

Balance at December 31, 2019

 

$

302,815

Increase

 

 

7,643

Balance at September 30, 2020

 

$

310,458

The increase in contract liabilities during the nine months ended September 30, 2020 was primarily due to invoiced amounts that did not yet meet the revenue recognition criteria, partially offset by the revenue recognition criteria being met for previously deferred revenue. The amount of revenue recognized in the nine months ended September 30, 2020 that was included in the prior period contract liability balance was $156,937. This revenue consisted of services provided to customers who had been invoiced prior to the current year.

5. EARNINGS (LOSS) PER SHARE

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

There were no adjustments to net loss, the numerator, for purposes of computing basic earnings per share. The following table sets out the computation of basic and diluted income (loss) per share:

 



Three Months Ended
September 30,

 

Nine months
Ended
September 30,
2020

 

January 10,
2019
(Inception) to
September 30,
2019

(Amounts in US$’s, except share data)

 

2020

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(10,330,829

)

 

$

(7,260,236

)

 

$

(24,922,052

)

 

$

(12,318,670

)

Numerator for basic earnings per share – loss available to common shareholders

 

$

(10,330,829

)

 

$

(7,260,236

)

 

$

(24,922,052

)

 

$

(12,318,670

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share – weighted average common shares outstanding

 

 

132,649,621

 

 

 

43,953,888

 

 

 

132,466,532

 

 

 

39,103,271

 

Dilutive effect of warrants and options

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share – weighted average common shares outstanding and assumed conversions

 

 

132,649,621

 

 

 

43,953,888

 

 

 

132,466,532

 

 

 

39,103,271

 

Basic loss per common share

 

$

(0.08

)

 

$

(0.17

)

 

$

(0.19

)

 

$

(0.32

)

Diluted loss per common share

 

$

(0.08

)

 

$

(0.17

)

 

$

(0.19

)

 

$

(0.32

)

F-55

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

5. EARNINGS (LOSS) PER SHARE (cont.)

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

6. CASH AND CASH EQUIVALENTS

Cash and cash equivalents are represented by operating accounts or money market accounts maintained with insured financial institutions, including all short-term, highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of September 30, 2020 and December 31, 2019.

Cash and cash equivalents consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Cash and cash equivalents

 

$

505,053

 

$

812,452

Total cash and cash equivalents in the Statement of Cash Flows

 

$

505,053

 

$

812,452

7. ACCOUNTS RECEIVABLE, NET

Trade accounts receivable consist of amounts due from the sale of the Company’s 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. The Company provides 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.

Accounts receivable consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Account receivables

 

$

2,547,763

 

 

$

2,859,489

 

Less: Allowance for doubtful accounts

 

 

(1,654,356

)

 

 

(690,830

)

Total account receivables, net

 

$

893,407

 

 

$

2,168,659

 

Bad debt expense totaled $647,643 for the three- and nine-months ended September 20, 2020. There was no bad debt expense for the period from inception through September 30, 2019.

During 2020, LTAS entered into an accounts receivable purchase and security agreement. The Company utilizes this agreement to factor, with full recourse, certain accounts receivable of one specific customer of LTAS on an invoice-by-invoice basis at the LTAS’s discretion. This agreement allows LTAS to obtain 85% of the value of each invoice factored in the form of cash in advance of payment to help finance operations. Payment on factored invoices are made directly to the counterparty, who in turn remits any funds remaining after it recovers the amount advanced to the LTAS and fees for the transaction. The transfers of financial assets do not qualify under ASC 860 as sale transactions and are accounted for as if they were secured borrowings. LTAS continues to report the transferred financial asset in its statement of financial position while recognizing any cash received as an obligation to return the cash to the transferee. LTAS’s continuing involvement with all transferred financial assets relative to this agreement consists of (1) the full recourse provisions of the contract, (2) participation in additional future cashflows from the full payment of the invoice, and (3) the unconditional guarantee of ComSovereign. At September 30, 2020, the amount of accounts receivable that has been pledged as security interest under the factoring arrangement totaled $68,347 and the corresponding liability totaled $58,095.

F-56

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

8. INVENTORY

Inventory is valued at the lower of cost and net realizable value (“NRV”). The cost of inventory is calculated on a standard cost basis, which approximates weighted average actual cost. NRV is determined as the market value for finished goods, replacement cost for raw materials and finished goods market value less cost to complete for work in progress inventory. The Company regularly reviews inventory quantities on hand and records an impairment for excess and obsolete inventory based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question. Indirect manufacturing costs and direct labor expenses are allocated systematically to the total production inventory.

Inventory consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Raw materials

 

$

1,775,498

 

 

$

1,041,256

 

Work in progress

 

 

873,050

 

 

 

1,566,147

 

Finished goods

 

 

3,796,555

 

 

 

3,060,518

 

Total inventory

 

 

6,445,103

 

 

 

5,667,921

 

Reserve

 

 

(1,125,513

)

 

 

(996,525

)

Total inventory, net

 

$

5,319,590

 

 

$

4,671,396

 

9. PREPAID EXPENSES

Prepaid expenses consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Prepaid products and services

 

$

420,077

 

$

873,617

Prepaid rent and security deposit

 

 

169,310

 

 

43,112

   

$

589,387

 

$

916,729

10. PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at cost when acquired. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows:

 

Asset Type

 

Useful Life

   

Test equipment, research and development equipment

 

4 – 5 years

 

Computer hardware

 

2 years

 

Production fixtures

 

3 years

 

Leasehold improvements

 

Shorter of remaining lease term or 5 years

 

Other

 

3 – 5 years

 

Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.

F-57

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

10. PROPERTY AND EQUIPMENT, NET (cont.)

Property and equipment, net consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Shop machinery and equipment

 

$

9,481,183

 

 

$

8,100,667

 

Computers and electronics

 

 

579,875

 

 

 

558,561

 

Office furniture and fixtures

 

 

348,911

 

 

 

341,214

 

Leasehold improvements

 

 

274,313

 

 

 

222,332

 

   

 

10,684,282

 

 

 

9,222,774

 

Less – accumulated depreciation

 

 

(8,451,193

)

 

 

(7,764,668

)

   

$

2,233,089

 

 

$

1,458,106

 

For the nine months ended September 30, 2020, the Company invested $96,852 in capital expenditures.

The Company recognized $278,857 and $197,446 of depreciation expense for the three months ended September 30, 2020 and 2019, respectively, and $797,801 and $304,669 for the nine months ended September 30, 2020 and the period January 10, 2019 (Inception) to September 30, 2019, respectively.

11. LEASES

Operating Leases

The Company determines, at contract inception, whether or not an arrangement contains a lease.

The Company has operating leases for office, manufacturing and warehouse space, along with office equipment. Amounts recognized as of September 30, 2020 and December 31, 2019 for operating leases were as follows:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Operating lease ROU assets

 

$

2,891,113

 

$

2,199,682

Operating lease liability

 

$

3,020,364

 

$

2,212,548

During the nine months ended September 30, 2020, the Company recognized three months of rent abatement and also applied a portion of a security deposit balance towards two months of future rent for its executive office located at 5000 Quorum Drive, Dallas, TX 75254, resulting in a reduction of the right-of-use asset and lease liability by $151,565. Recognition of the security deposit balance towards two months of future rent also resulted in an increase of the right-of-use asset by $54,148.

As part of the acquisition of the business of Sovereign Plastics transaction on March 6, 2020, the Company assumed a lease for 23,300 square feet of flexible office space with a remaining term of approximately 62 months that will expire on May 30, 2025. A right-of-use asset and lease liability for $1,048,058 was recorded on March 6, 2020. Monthly payments range from $17,600 to $20,903 during the life of the lease. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate based on other leases with similar terms. The lease agreement has no renewal option.

F-58

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

11. LEASES (cont.)

On August 14, 2020, the Company amended its lease for 5,533 square feet of office space in Jacksonville, Florida, that originally expired on July 31, 2020, to extend the term for an additional 36-months through July 31, 2023. A right-of-use asset and lease liability for $161,328 was recorded on the commencement date of August 1, 2020. Monthly payments range from $4,786 to $5,078 over the extended lease term. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate. The lease agreement has no renewal option.

On September 17, 2020, the Company entered into a 63-month lease of office equipment. The lease commenced on September 29, 2020 and will expire on December 29, 2025. A right-of-use asset and lease liability for $23,898 was recorded on the commencement date of September 29, 2020. Monthly payments are $529 during the life of the lease, excluding a lease incentive of $1,750 payable at lease commencement. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate. The renewal periods were not included in the analysis of the right-to-use asset and lease liability as the Company does not consider them to be reasonably certain of being exercised, as comparable equipment could generally be identified for comparable lease rates, without the Company incurring significant costs.

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

(Amounts in US$’s)

 

For the
nine months
ended
September 30,
2020

Operating lease ROU Asset – December 31, 2019

 

$

2,199,682

 

Increase

 

 

1,287,432

 

Decrease

 

 

(151,565

)

Amortization

 

 

(444,436

)

Operating lease ROU Asset – September 30, 2020

 

$

2,891,113

 

   

 

 

 

Operating lease liability – December 31, 2019

 

$

2,212,548

 

Increase

 

 

1,233,284

 

Decrease

 

 

(151,565

)

Amortization

 

 

(273,903

)

Operating lease liability – September 30, 2020

 

$

3,020,364

 

   

 

 

 

Operating lease liability – short term

 

$

659,789

 

Operating lease liability – long term

 

 

2,360,575

 

Operating lease liability – total

 

$

3,020,364

 

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of September 30, 2020 and December 31, 2019, respectively:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Weighted average remaining lease term

 

4.44 years

 

 

4.56 years

 

Weighted average discount rate

 

5.99

%

 

6.50

%

F-59

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

11. LEASES (cont.)

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Condensed Consolidated Balance Sheet as of September 30, 2020:

(Amounts in US$’s)

 

Operating
Leases

Remainder of 2020

 

$

188,633

 

2021

 

 

805,765

 

2022

 

 

699,255

 

2023

 

 

713,647

 

2024

 

 

641,648

 

Thereafter

 

 

377,459

 

Total minimum lease payments

 

 

3,426,407

 

Less: effect of discounting

 

 

(406,043

)

Present value of future minimum lease payments

 

 

3,020,364

 

Less: current obligations under leases

 

 

(659,789

)

Long-term lease obligations

 

$

2,360,575

 

Finance Leases

As part of the acquisition of the business of Sovereign Plastics transaction on March 6, 2020, the Company assumed a finance lease for certain equipment with a remaining term of approximately 20 months. The finance lease includes a bargain purchase option of $1 for the equipment at the end of the term on October 1, 2021. A right-of-use asset and lease liability for $18,009 was recorded on March 6, 2020. Monthly payments are $964.76 during the life of the lease, excluding the bargain purchase option. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate.

On June 11, 2020, the Company entered into a 24-month finance lease for certain equipment. The finance lease includes a bargain purchase option of $1 for the equipment at the end of the term on June 11, 2022. A right-of-use asset and lease liability for $35,562 was recorded on June 11, 2020. Monthly payments are $1,481.69 during the life of the lease, excluding the bargain purchase option. The lease included an implicit rate of return.

On July 19, 2020, the Company entered into a 12-month finance lease for certain equipment, with a commencement date of August 6, 2020. The finance lease transfers ownership of the equipment to the Company at the end of the term on August 6, 2021. A right-of-use asset and lease liability for $28,405 was recorded on August 6, 2020. Monthly payments range from $2,473 to $2,498.66 during the life of the lease. The lease did not include an implicit rate of return; therefore, the Company used an incremental borrowing rate.

F-60

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

11. LEASES (cont.)

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

(Amounts in US$’s)

 

For the
nine months ended
September 30,
2020

Finance lease ROU Asset – December 31, 2019

 

$

 

Increase

 

 

81,976

 

Amortization

 

 

(8,400

)

Finance lease ROU Asset – September 30, 2020

 

$

73,576

 

   

 

 

 

Finance lease liability – December 31, 2019

 

$

 

Increase

 

 

81,976

 

Interest accretion

 

 

1,063

 

Payment

 

 

(13,697

)

Finance lease liability – September 30, 2020

 

$

69,342

 

   

 

 

 

Finance lease liability – short term

 

$

55,046

 

Finance lease liability – long term

 

 

14,296

 

Finance lease liability – total

 

$

69,342

 

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of September 30, 2020 and December 31, 2019, respectively:

(Amounts in US$’s)

 

September 30,
2020

 

December 31,
2019

Weighted average remaining lease term

 

1.32 years

 

 

 

Weighted average discount rate

 

4.18

%

 

%

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value and has established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

•        Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities.

•        Level 2 — Observable market-based inputs or observable inputs that are corroborated by market data; and

•        Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of September 30, 2020 approximated their fair value due to their short-term nature.

F-61

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS

VEO, Inc.

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of VEO. At the effective date of the acquisition, all of the outstanding capital stock of VEO that was issued and outstanding at such time was exchanged for 1,500,000 unregistered Preferred Series A shares of ComSovereign.

Purchase consideration has been evaluated based on the business enterprise valuation of VEO. The shares of Preferred Series A issued to acquire VEO were valued at $8.81 per share (non-marketable basis).

VEO Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A shares paid

 

 

1,500,000

Per share value

 

$

8.81

Purchase price

 

$

13,215,000

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of January 31, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

55,261

 

Fixed and other long-term assets

 

 

4,000

 

Assumed liabilities

 

 

(40,531

)

   

 

 

 

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

6,410,000

 

Goodwill

 

 

6,786,270

 

Total intangible assets and goodwill

 

 

13,196,270

 

Total Consideration

 

$

13,215,000

 

InduraPower, Inc.

On January 31, 2019, ComSovereign entered a stock-for-stock exchange with the stockholders of InduraPower. At the effective date of the acquisition, all of the outstanding capital stock of InduraPower that was issued and outstanding at such time was exchanged for 800,000 unregistered shares of Preferred Series A of ComSovereign.

Purchase consideration has been evaluated based on the business enterprise valuation of InduraPower. The shares of Preferred Series A issued to acquire InduraPower were valued at $8.81 per share (non-marketable basis).

InduraPower Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A shares paid

 

 

800,000

Per share value

 

$

8.81

Purchase price

 

$

7,048,000

F-62

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS (cont.)

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of January 31, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

18,791

 

Debt-free net working capital (excluding cash)

 

 

263,459

 

Fixed and other long-term assets

 

 

97,384

 

Assumed liabilities

 

 

(1,240,097

)

   

 

 

 

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

1,000,000

 

Goodwill

 

 

6,908,463

 

Total intangible assets and goodwill

 

 

7,908,463

 

Total Consideration

 

$

7,048,000

 

Silver Bullet Technology, Inc.

On March 4, 2019, ComSovereign entered a stock-for-stock exchange with the stockholder of Silver Bullet. At the effective date of the acquisition, all of the outstanding capital stock of Silver Bullet that was issued and outstanding at such time was exchanged for 300,000 unregistered shares of Preferred Series A of ComSovereign.

Purchase consideration has been evaluated based on the business enterprise valuation of Silver Bullet. The shares of Preferred Series A issued to acquire Silver Bullet were valued at $8.81 per share (non-marketable basis).

Silver Bullet Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of Preferred Series A shares paid

 

 

300,000

Per share value

 

$

8.81

Purchase price

 

$

2,643,000

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of March 4, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

273,290

 

Debt-free net working capital (excluding cash)

 

 

103,537

 

Fixed and other long-term assets

 

 

21,000

 

Liabilities assumed

 

 

(84,382

)

   

 

 

 

Intangible assets and goodwill:

 

 

 

 

Technology

 

 

210,000

 

Trade name

 

 

200,000

 

Customer relationships

 

 

400,000

 

Goodwill

 

 

1,519,555

 

Total intangible assets and goodwill

 

 

2,329,555

 

Total Consideration

 

$

2,643,000

 

F-63

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS (cont.)

DragonWave-X LLC and Lextrum, Inc.

On April 1, 2019, ComSovereign entered into a stock-for-stock exchange with the owner of DragonWave and Lextrum. At the effective date of the acquisition, all of the equity interests of DragonWave and Lextrum were exchanged for an aggregate of 13,237,149 shares of ComSovereign’s restricted common stock.

Purchase consideration has been evaluated based on the business enterprise valuation of DragonWave and Lextrum. The shares of common stock issued to acquire DragonWave and Lextrum were valued at $4.40 per share (non-marketable basis).

DragonWave and Lextrum Purchase Price

(Amounts in US$’s, except share data)

 

Consideration

Number of common stock shares paid

 

 

13,237,149

Per share value

 

$

4.40

Purchase price

 

$

58,243,456

DragonWave

 

$

42,081,392

Lextrum

 

$

16,162,064

DragonWave

The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by ComSovereign based on the fair values as of April 1, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

1,274,072

 

Debt-free net working capital (excluding cash)

 

 

(1,099,194

)

Note payable

 

 

(5,690,000

)

Fixed and other long-term assets

 

 

2,455,714

 

   

 

 

 

Intangible assets:

 

 

 

 

Technology

 

 

13,750,000

 

Trade name

 

 

4,210,000

 

Customer relationships

 

 

13,080,000

 

Goodwill

 

 

14,100,800

 

Total intangible assets and goodwill

 

 

45,140,800

 

Total Consideration

 

$

42,081,392

 

F-64

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS (cont.)

Lextrum

The allocation of the total purchase price to the acquired tangible and intangible assets and liabilities assumed by ComSovereign based on the fair values as of April 1, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Cash

 

$

8,105

 

Debt-free net working capital (excluding cash)

 

 

(103,611

)

Fixed and other long-term assets

 

 

 

   

 

 

 

Intangible assets:

 

 

 

 

Technology

 

 

11,430,000

 

Goodwill

 

 

4,827,570

 

Total intangible assets

 

 

16,257,570

 

Total Consideration

 

$

16,162,064

 

Historical Drone Aviation Holding Corp

On November 27, 2019, the Company completed the ComSovereign Acquisition in a stock for stock transaction that was treated as a reverse merger for accounting purposes under U.S. GAAP with ComSovereign as the accounting acquiror and the Company as the accounting acquiree.

The allocation of the total purchase price to the Company’s acquired tangible and intangible assets and assumed liabilities based on the fair values as of November 27, 2019 was as follows:

(Amounts in US$’s)

 

Fair Value

Working capital

 

$

2,399,800

Other assets

 

 

220,672

   

 

 

Intangible assets and goodwill:

 

 

 

Intellectual property

 

 

3,729,537

Trade name

 

 

1,233,204

Customer relationships

 

 

1,630,792

Noncompete

 

 

937,249

Goodwill

 

 

18,106,237

Total intangible assets and goodwill

 

 

25,637,019

Total Consideration

 

$

28,257,491

Fast Plastic Parts, LLC and Spring Creek Manufacturing, Inc. Acquisition

On March 6, 2020, Sovereign Plastics completed the acquisition of the net assets of Fast Plastic Parts, LLC and 100% of the shares of common stock of Spring Creek Manufacturing, Inc. The consideration paid was the 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. Based in Colorado Springs, Colorado, the acquired business occupies a 23,300-square-foot manufacturing facility that houses a full-production machine shop, a comprehensive line of state-of-the-art plastic injection molding machinery, as well as light-assembly fulfilment and packaging lines serving customers 24x7. To finance the cash paid on the closing date and a portion of the short-term debt incurred, the Company entered into a new promissory note with an unaffiliated lender in the principal amount of $500,000 for proceeds of $446,000 that matures on December 5, 2020 and issued 50,000 shares of common stock. See Note 15 for further discussion of the promissory note. The Company expensed acquisition-related costs of $25,714 in the nine months ended September 30, 2020, which is included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.

F-65

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS (cont.)

The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2020:

(Amounts in US$’s)

 

Fair Value

Inventory

 

$

168,106

Prepaid expenses

 

 

66,575

Property & equipment

 

 

1,365,319

Operating lease right-of-use-assets

 

 

1,048,058

Finance lease right-of-use assets

 

 

18,009

   

 

 

Intangible assets:

 

 

 

Customer relationships

 

 

500,226

Total assets

 

 

3,166,293

Current portion of long-term debt

 

 

1,270,879

Operating lease liabilities, current

 

 

166,919

Finance lease liabilities, current

 

 

6,578

Operating lease liabilities, net of current portion

 

 

881,139

Finance lease liabilities, net of current portion

 

 

11,431

Total purchase consideration

 

$

829,347

This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.

Virtual Network Communications, Inc.

On July 6, 2020, the Company completed its acquisition (the “VNC Acquisition”) of Virtual Network Communications Inc., a Virginia corporation (“VNC”), pursuant to an Agreement and Plan of Merger and Reorganization dated as of May 21, 2020 (the “Merger Agreement”), by and among the Company and its wholly-owned subsidiaries, CHC Merger Sub 7, Inc. and VNC Acquisition LLC, VNC and Mohan Tammisetti, solely in his capacity as the representative of the security holders of VNC. VNC is an edge centric wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. VNC is reinventing how wireless networks service mission-critical communications for Public Safety, Homeland Security, Department of Defense and commercial Private Network users. We envision the future of virtualized micro networks blanketing the globe without expensive terrestrial based radio towers and building installation. VNC’s patented technology virtualizes entire LTE Advanced and 5G core and radio solutions. Our products eliminate much of the costly backbone equipment of telecom networks. VNC also has developed rapidly deployable, tactical systems that can be combined with the tethered aerostats and drones, including from COMSovereign’s Drone Aviation subsidiary, enabling operating in nearly any location in the world.

In connection with the VNC acquisition, the total preliminary purchase price consideration amounted to $19,728,987, representing (i) cash paid on the closing date of $2,892,727, (ii) 11,738,210 shares of the Company’s common stock with a fair value of $12,677,267 or $1.08 per share, of which an aggregate of 4,000,000 shares is being held in an escrow fund for purposes of satisfying any post-closing indemnification claims of the former

F-66

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

13. BUSINESS ACQUISITIONS (cont.)

VNC security holders under the Merger Agreement, (iii) options to purchase an aggregate 2,525,506 shares of the Company’s common stock with a fair value of $2,261,275, (iv) warrants to purchase an aggregate 1,736,284 shares of the Company’s common stock with a fair value of $1,646,471, and (v) settlement of a note receivable and related interest receivable pre-existing relationship in the amount of $251,247.

The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the Condensed Consolidated Balance Sheet at September 30, 2020:

(Amounts in US$’s)

 

Fair Value

Inventory

 

$

157,727

Prepaid expenses

 

 

15,000

Intangible assets:

 

 

 

Goodwill

 

 

19,151,331

Technology

 

 

23,992

Licenses

 

 

410,000

Total assets

 

 

19,758,050

Accounts payable and other accrued liabilities

 

 

5,000

Interest payable

 

 

35

Note payable

 

 

24,028

Total purchase consideration

 

$

19,728,987

This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis and working capital, as the Company has not yet completed the detailed valuation analyses as of the filing date of this Form 10-Q.

14. LONG-LIVED ASSETS AND GOODWILL

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

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles — Goodwill and Other. 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. For the nine months ended September 30, 2020, the Company recorded no impairments.

F-67

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

14. LONG-LIVED ASSETS AND GOODWILL (cont.)

The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2020:

(Amounts in US$’s)

 

Total

Balance at December 31, 2019

 

$

56,386,796

Balance at September 30, 2020

 

$

75,538,127

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

Definite-lived intangible assets:

 

 

   

 

 

 

 

 

 

Trade names

 

$

5,643,204

 

$

(489,222

)

 

$

5,153,982

Licenses

 

 

 

 

 

 

 

Technology

 

 

32,800,000

 

 

(4,308,333

)

 

 

28,491,667

Customer relationships

 

 

15,110,792

 

 

(2,054,894

)

 

 

13,055,898

Intellectual property

 

 

3,729,537

 

 

(51,799

)

 

 

3,677,738

Noncompete

 

 

937,249

 

 

(39,052

)

 

 

898,197

Total definite-lived intangible assets at December 31, 2019

 

$

58,220,782

 

$

(6,943,300

)

 

$

51,277,482

Trade names

 

$

5,643,204

 

$

(1,093,884

)

 

$

4,549,320

Licenses

 

 

410,000

 

 

 

 

 

410,000

Technology

 

 

32,823,992

 

 

(8,408,374

)

 

 

24,415,618

Customer relationships

 

 

15,611,018

 

 

(4,379,965

)

 

 

11,231,053

Intellectual property

 

 

3,729,537

 

 

(517,991

)

 

 

3,211,546

Noncompete

 

 

937,249

 

 

(390,520

)

 

 

546,729

Total definite-lived intangible assets at September 30, 2020

 

$

59,155,000

 

$

(14,790,734

)

 

$

44,364,266

Amortization expense of intangible assets was $2,621,315 and $2,243,135 for the three months ended September 30, 2020 and 2019, respectively, and $7,847,434 and $4,614,131 for the nine months ended September 30, 2020 and the period January 10, 2019 (Inception) to September 30, 2019, respectively.

As of September 30, 2020, assuming no additional amortizable intangible assets, the expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter was as follows:

(Amounts in US$’s)

 

Estimated

Remainder of 2020

 

$

2,637,033

2021

 

 

10,508,774

2022

 

 

10,079,202

2023

 

 

10,079,202

2024

 

 

8,024,308

2025

 

 

2,621,877

2026

 

 

378,187

2027

 

 

35,683

F-68

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS

Beneficial Conversion Features and Warrants

The Company evaluates the conversion feature of convertible debt instruments to determine whether the conversion feature was beneficial as described in ASC 470-30, Debt with Conversion and Other Options. The Company records 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 records 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. The Company calculates the fair value of warrants with the convertible instruments using the Black-Scholes valuation model.

Under these guidelines, the Company allocates 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.

Debt Discounts

The Company records debt discounts as a deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet with the respective debt discount amortized in interest expense on its Consolidated Statement of Operations. In connection with the issuance of certain notes payable and senior convertible debentures, the Company, or its subsidiaries, issued warrants to purchase shares of its common stock and has BCFs. The warrants are exercisable at various exercise prices per share. The Company evaluated the terms of these warrants at issuance and concluded that they should be treated as equity. The fair value of the warrants was determined by using the Black-Scholes model and was recorded as a debt discount offsetting the carrying value of the debt obligation in the Consolidated Balance Sheet.

Debt Issuance Costs

The Company presents debt issuance costs as a direct deduction from the carrying amount of the related indebtedness on its Consolidated Balance Sheet and amortizes these costs over the term of the related debt liability using the straight-line method, which approximates the effective interest method. Amortization is recorded in interest expense on the Consolidated Statement of Operations.

Long-term debt consisted of the following as of September 30, 2020 and December 31, 2019:

(Amounts in US$’s)

 

Maturity Date

 

September 30, 2020

 

December 31, 2019

Amount
Outstanding

 

Interest
Rate

 

Amount
Outstanding

 

Interest
Rate

Secured Notes Payable

     

 

     

 

 

 

     

 

Secured note payable*

 

February 28, 2020

 

$

788,709

 

12.5

%

 

$

788,709

 

8.5

%

Secured note payable*

 

March 1, 2022

 

 

186,709

 

9.0

%

 

 

224,288

 

9.0

%

Secured note payable*

 

September 1, 2021

 

 

18,980

 

7.9

%

 

 

21,571

 

7.9

%

Secured note payable

 

November 26, 2021

 

 

2,000,000

 

9.0

%

 

 

2,000,000

 

9.0

%

Secured note payable

 

December 26, 2020

 

 

211,667

 

78.99

%

 

 

 

 

Secured note payable*

 

September 15, 2020

 

 

855,120

 

36.0

%

 

 

 

 

Secured note payable*

 

October 15, 2020

 

 

2,007,971

 

5.0

%

 

 

 

 

Total secured notes payable

     

 

6,069,156

   

 

 

 

3,034,568

   

 

F-69

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

(Amounts in US$’s)

 

Maturity Date

 

September 30, 2020

 

December 31, 2019

Amount
Outstanding

 

Interest
Rate

 

Amount
Outstanding

 

Interest
Rate

Notes Payable

     

 

 

 

   

 

 

 

 

 

   

 

Equipment financing loan

 

September 15, 2020

 

 

 

 

 

 

 

3,828

 

 

8.8

%

Note payable

 

July 9, 2019

 

 

 

 

 

 

 

200,000

 

 

18.0

%

Note payable

 

September 1, 2019

 

 

 

 

 

 

 

200,000

 

 

18.0

%

Note payable*

 

September 30, 2020

 

 

500,000

 

 

10.0

%

 

 

500,000

 

 

10.0

%

Note payable*

 

September 30, 2020

 

 

175,000

 

 

10.0

%

 

 

175,000

 

 

10.0

%

Note payable*

 

August 31, 2020

 

 

3,500,000

 

 

12.0

%

 

 

5,000,000

 

 

10.0

%

Note payable

 

July 9, 2019

 

 

 

 

 

 

 

200,000

 

 

18.0

%

Notes payable*

 

December 6, 2019

 

 

66,700

 

 

18.0

%

 

 

450,100

 

 

18.0

%

Note payable

 

November 30, 2020

 

 

500,000

 

 

0.0

%

 

 

 

 

 

Notes payable*

 

June 30, 2020

 

 

379,588

 

 

0.0

%

 

 

 

 

 

Notes payable*

 

June 30, 2020

 

 

165,986

 

 

0.0

%

 

 

 

 

 

Note payable*

 

February 16, 2023

 

 

83,309

 

 

3.0

%

 

 

 

 

 

Equipment financing loan*

 

November 9, 2023

 

 

61,287

 

 

8.5

%

 

 

 

 

 

Equipment financing loan*

 

December 19, 2023

 

 

89,912

 

 

6.7

%

 

 

 

 

 

Equipment financing loan*

 

January 17, 2024

 

 

41,390

 

 

6.7

%

 

 

 

 

 

Note payable*

 

September 30, 2020

 

 

290,000

 

 

0.0

%

 

 

 

 

 

Note Payable*

 

October 13, 2020 through November 30, 2020

 

 

1,200,000

 

 

15.0 – 18.0

%

 

 

 

 

 

PPP loans

 

April 30, 2022 through May 26, 2022

 

 

455,184

 

 

1.0

%

 

 

 

 

 

PPP loan

 

May 14, 2022

 

 

24,028

 

 

1.0

%

 

 

 

 

 

PPP loan

 

August 11, 2025

 

 

103,659

 

 

1.0

%

 

 

 

 

 

Total notes payable

     

 

7,636,043

 

   

 

 

 

6,728,928

 

   

 

       

 

 

 

   

 

 

 

 

 

   

 

Senior Debentures

     

 

 

 

   

 

 

 

 

 

   

 

Senior debenture*

 

December 31, 2019

 

 

84,000

 

 

15.0

%

 

 

100,000

 

 

15.0

%

Total senior debentures

     

 

84,000

 

   

 

 

 

100,000

 

   

 

       

 

 

 

   

 

 

 

 

 

   

 

Convertible Notes Payable

     

 

 

 

   

 

 

 

 

 

   

 

Convertible note payable*

 

January 29, 2021

 

 

374,137

 

 

24.0

%

 

 

 

 

 

Convertible note payable

 

November 20, 2020

 

 

1,700,000

 

 

5.0

%

 

 

 

 

 

Total convertible notes payable

     

 

2,074,137

 

   

 

 

 

 

 

 

       

 

 

 

   

 

 

 

 

 

   

 

Senior Convertible Debentures

     

 

 

 

   

 

 

 

 

 

   

 

Senior convertible debenture

 

December 31, 2019

 

 

 

 

 

 

 

25,000

 

 

15.0

%

Senior convertible debenture

 

December 31, 2021

 

 

250,000

 

 

10.0

%

 

 

250,000

 

 

10.0

%

Senior convertible debenture

 

November 30, 2020

 

 

1,000,000

 

 

9.0

%

 

 

 

 

 

Total senior convertible debentures

     

 

1,250,000

 

   

 

 

 

275,000

 

   

 

Total long-term debt

     

 

17,113,336

 

   

 

 

 

10,138,496

 

   

 

Less unamortized discounts and debt issuance costs

     

 

(3,990,019

)

   

 

 

 

(4,749,004

)

   

 

Total long-term debt, less discounts and debt issuance costs

     

 

13,123,317

 

   

 

 

 

5,389,492

 

   

 

Less current portion of
long-term debt

     

 

(13,123,317

)

   

 

 

 

(5,389,492

)

   

 

Debt classified as long-term debt

     

$

 

   

 

 

$

 

   

 

____________

*        Note is in default. Refer to further discussion below.

F-70

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

Secured Notes Payable

In August 2016, InduraPower entered into 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 with both parties agreeing that the outstanding balance of $813,709 would be due on February 28, 2020. As of September 30, 2020, an aggregate principal amount of $788,709 was outstanding under this note. This promissory note is currently past due and accruing interest at an increased default rate of 12.5% per annum. This promissory note is secured by substantially all of the assets of InduraPower.

In August 2016, InduraPower entered into a promissory note in the principal amount of $450,000 that bears interest at 9.0% per annum and matures on March 1, 2022. Interest-only payments were due monthly beginning October 1, 2016 through March 1, 2017. Monthly payments of $9,341 for interest and principal were due on this note for the following 60 consecutive months. This promissory note is currently past due. As of September 30, 2020, an aggregate principal amount of $186,709 was outstanding under this note. This promissory note is secured by all assets, certain real estate and cash accounts of InduraPower, and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses for those covenants, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The outstanding balance is presented as a current liability as of September 30, 2020. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 with an interest rate of 7.9% 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 currently past due. As of September 30, 2020, an aggregate principal amount of $18,980 was outstanding under this note. This promissory note is secured by business equipment, certain real estate and cash accounts of InduraPower and is guaranteed by certain officers of InduraPower. This promissory note is subjected to clauses, whereby InduraPower is required to meet certain financial and non-financial terms. InduraPower did not fulfil the requirements to maintain a balance of at least $155,159 at J.P. Morgan while the promissory note is outstanding and maintain a debt service coverage ratio of at least 1.25. Due to this breach of clauses for those covenants, the promissory note holder is contractually entitled to request immediate repayment of the outstanding promissory note, and/or increase the interest rate up to an additional 18% per annum. The promissory note holder had not requested early repayment of the loan as of the date when these financial statements were approved by the Board of Directors.

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 9.0% 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 September 30, 2020, an aggregate principal amount of $2,000,000 was outstanding under this note. In connection with this loan, DragonWave incurred $20,000 of debt discounts and $4,700,000 of debt issuance costs. The debt issuance costs were the result of the issuance of 1,050,000 shares of common stock of the Company and a cash payment of $80,000. For the three and nine months ended September 30, 2020, $587,500 and $1,762,500 of these costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of September 30, 2020, there were $9,167 of debt discounts and $2,741,667 of debt issuance costs remaining.

F-71

Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

On February 26, 2020, the Company entered into a $600,000 secured business loan bearing interest at 78.99% per annum which matures on December 26, 2020. Principal and interest payments of $19,429 are due weekly. The loan is secured by the assets of the Company. As of September 30, 2020, an aggregate principal amount of $211,667 was outstanding under this note.

In connection with the acquisition of the business by Sovereign Plastics on March 6, 2020, the Company 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. 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. 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. As of September 30, 2020, an aggregate principal amount of $855,120 was outstanding and past due under this loan.

On March 19, 2020, the Company 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. On August 5, 2020, the maturity date of this loan was extended to October 15, 2020. 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 a late charge of 5% may be charged for any balance overdue by more than 10 days. 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 the 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. This loan is currently past due. As of September 30, 2020, an aggregate principal amount of $2,007,971 was outstanding under this loan.

Notes Payable

InduraPower has a financing loan for certain of its equipment that bears interest at 8.775% per annum and was due on September 15, 2020. Principal and interest payments of $1,872 are due quarterly. The aggregate principal amount of this loan was fully repaid during the third quarter of the current fiscal year.

In September 2017, ComSovereign entered into 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, ComSovereign entered into 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. Since this note was not repaid upon maturity, subsequent interest was accrued at an increased rate of 18% per annum. Additionally, on August 14, 2019, ComSovereign borrowed from the same lender an additional $200,000 promissory note that matured on September 1, 2019. As this note was not repaid upon maturity, subsequent interest was accrued at an increased rate of 18% per annum. On August 5, 2020, the aggregate principal amount of these notes and accrued interest in the amount of $488,520 was fully extinguished in exchange for 325,680 shares of issued common stock of the Company with a fair value of $1.51 per share.

In connection with its acquisition of DragonWave and Lextrum in April 2019, ComSovereign assumed the obligations of the seller on a promissory note in the principal amount of $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. On April 21, 2020, all unpaid accrued interest from October 1, 2019 through December 31, 2019 was converted into 14,496 shares of issued common stock of the Company. Accrued interest and the full principal balance are due at maturity. Upon maturity, the interest rate shall increase to 15% per annum for any balance overdue by more than 5 days. This note is currently past due. As of September 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

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, valued at $44,000. Accrued interest and principal are due and payable at maturity. Upon maturity, the interest rate shall increase to 15% per annum for any balance overdue by more than 5 days. This note is currently past due. As of September 30, 2020, the aggregate principal amount of $175,000 was outstanding under this note.

In October 2017, DragonWave entered into a 90-day promissory note in the principal amount of $4,400,000 and received proceeds of $4,000,000. In January 2018, the promissory note was amended to accrue interest at the rate of 8% per annum and to extend the maturity date another 90 days. In August 2018, the maturity date was extended to December 31, 2018 with new payment terms. In September 2018, the maturity date was extended to February 28, 2019 with new payment terms. In October 2018, DragonWave amended the promissory note to clarify the payment of interest. 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, interest payments are due and payable monthly. 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 the Company provided to the lender 100,000 fully paid and non-assessable shares of its common stock that have been treated as debt issuance costs. On August 5, 2020, $1,500,000 principal amount of this note was extinguished in exchange for 1,000,000 shares of common stock of the Company with a fair value of $1.51 per share. This loan is currently past due. However, there are no penalties associated with this default. As of September 30, 2020, an aggregate principal amount of $3,500,000 was outstanding under this note.

On June 10, 2019, ComSovereign entered into 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 was past due, interest was being accrued at an increased rate of 18% per annum. On August 5, 2020, the aggregate principal amount of this note and accrued interest in the amount of $245,172 was fully extinguished in exchange for 163,448 shares of issued common stock of the Company with a fair value of $1.51 per share.

On November 7, 2019, ComSovereign entered into several promissory notes in the aggregate principal amount of $450,100 that bore an effective interest rate at 133% per annum due to a single payment incentive, 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 the Company is using an interest rate of 18% per annum to accrue interest on these notes. The Company repaid $250,000 of the aggregate principal amount of this promissory note during the first quarter of the current fiscal year. An additional $133,400 of the aggregate principal amount of this promissory note, along with accrued interest and associated late fee penalties of $51,516, was fully extinguished on August 5, 2020 in exchange for 123,278 shares of issued common stock of the Company with a fair value of $1.51 per share. As of September 30, 2020, the remaining aggregate principal amount of $66,700 is currently past due and outstanding.

On March 5, 2020, the Company sold a promissory note in the principal amount of $500,000 that matures on November 30, 2020 for a purchase price of $446,000. Additionally, in lieu of interest, the Company issued to the lender 50,000 shares of its common stock. As of September 30, 2020, an aggregate principal amount of $500,000 was outstanding under this note.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

In connection with the acquisition of the business by Sovereign Plastics on March 6, 2020, the Company:

•        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 September 30, 2020, the aggregate amount of $379,588 was outstanding under these notes.

•        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 September 30, 2020, an aggregate amount of $165,986 was outstanding.

•        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 September 30, 2020, an aggregate principal amount of $83,309 was outstanding under this note.

•        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 September 30, 2020, an aggregate amount of principal of $61,287 was outstanding under this loan.

•        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 September 30, 2020, an aggregate amount of principal of $89,912 was outstanding under this loan.

•        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 September 30, 2020, an aggregate amount of principal of $41,390 was outstanding under this loan.

Between April 30 and May 26, 2020, six of the Company’s subsidiaries received loan proceeds in the aggregate amount of $455,184 under the Paycheck Protection Program (“PPP”). The PPP loan has a maturity of 2 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 of 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 September 30, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans.

On May 29, 2020, the Company entered into 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 was due at maturity, with interest accruing at a rate of 12% per annum for any principal balance remaining unpaid past the maturity date. This note is currently past due. As of September 30, 2020, the principal amount of $290,000 was outstanding under this note.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

Between July 2, 2020 and August 21, 2020, the Company 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 notes have maturity dates between October 13, 2020 and November 30, 2020 and bear interest at a rate of 15% per annum, with interest accruing at an annually compounded rate of 18% per annum for any principal balance remaining unpaid past the maturity date. Daniel L. Hodges, the Company’s Chief Executive Officer, transferred a total of 289,900 shares of his personally owned, issued and outstanding common stock of the Company to the accredited investors and brokers, as part of this transaction. The shares had a total fair value of $478,726. The Company accounted for this as a contribution from Mr. Hodges, with $398,540 assigned as debt discounts for additional consideration to the accredited investors, and $80,186 assigned as debt issuance costs to the brokers. The Company incurred additional debt issuance costs to the brokers of this transaction in the amount of $21,000. During the three and nine months ended September 30, 2020, $320,514 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of September 30, 2020, there were $179,212 of debt discounts remaining, and an aggregate principal amount of $1,200,000 was outstanding under these notes, with $1,000,000 of this principal amount past due as of the filing date of this Form 10-Q.

In connection with the VNC acquisition on July 6, 2020, the Company assumed a PPP loan in the principal amount of $24,028 bearing interest at 1% per annum and with a maturity date of May 14, 2022. Terms are consistent with the Company’s other PPP loans. As of September 30, 2020, an aggregate amount of principal of $24,028 was outstanding under this loan.

On August 11, 2020, one of the Company’s subsidiaries received loan proceeds in the aggregate amount of $103,659 under the PPP. The PPP loan has a maturity of 5 years and an interest rate of 1% per annum. Terms are consistent with the Company’s other PPP loans. As of September 30, 2020, an aggregate amount of principal of $103,659 was outstanding under this loan.

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. On April 30, 2020, these debentures were modified to remove the conversion feature and only have settlement through cash. As of September 30, 2020, an aggregate principal amount of $84,000 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, the Company sold a convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 that bore 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 would have automatically increased to 18% per annum or the maximum amount permitted by applicable law on any unpaid principal and accrued interest. The Company 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. 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, were also issued to an unrelated third party as a placement fee for the transaction. In connection with this note, the Company recognized a BCF of $114,904, a debt discount of $44,944 associated with the issuance of warrants to the note holder, and debt issuance costs of $39,333, which were all recorded as debt discounts. On July 28, 2020, the Company defaulted on this note under the

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

related Registration Rights Agreement by not filing a registration statement within 90 days of the note origination date. As a result, the aggregate principal balance increased by $97,322, which was composed of an $88,393 penalty payment-in-kind and an $8,929 interest payment-in-kind, representing 130% of the outstanding principal and accrued interest balance on the default date. In addition, the interest rate was increased to 24% per annum, and the note and accrued interest was due on-demand. On September 29, 2020, the note holder converted the full principal of $383,306 and all accrued interest of $16,087 into 443,470 shares of common stock of the Company. During the three and nine months ended September 30, 2020, $195,188 and $234,895, respectively, of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations.

On July 7, 2020, the Company sold to the same investor as the April 29, 2020 note an additional convertible promissory note in the principal amount of $285,714 with an original issue discount of $35,714 that bears interest at a rate of 12.5% per annum, and warrants to purchase an additional 158,730 shares of common stock. Warrants to purchase up to 27,778 shares of common stock, were also issued to an unrelated third party as a placement fee for the transaction. Terms and maturities are similar to the April 29, 2020 note and warrants. In connection with this note, the Company recognized a BCF of $139,810, a debt discount of $50,128 associated with the issuance of warrants to the note holder, and debt issuance costs of $35,539, which were all recorded as debt discounts. On July 28, 2020, the Company defaulted on this note under the related Registration Rights Agreement by not filing a registration statement within 90 days of the initial April 29, 2020 note origination date. As a result, the aggregate principal balance increased by $88,423, which was composed of an $86,339 penalty payment-in-kind and a $2,084 interest payment-in-kind, representing 130% of the outstanding principal and accrued interest balance on the default date. In addition, the interest rate was increased to 24% per annum, and the note and accrued interest is due on-demand. During the three and nine months ended September 30, 2020, $261,191 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of September 30, 2020, there were $0 of debt discounts remaining as a result of the note now due on-demand from the default not being cured as of the filing of this Form 10-Q, and an aggregate principal amount of $374,137 was outstanding under this note.

On August 21, 2020, the Company sold a convertible promissory note in the principal amount of $1,700,000 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. Upon maturity, the interest rate shall automatically increase to the lesser of 18% per annum or the maximum amount permitted by applicable law on any unpaid principal and accrued interest. Following the maturity date, the note is convertible into shares of common stock at a conversion price equal to 65% of the lowest volume weighted average price of the common stock during the 20 consecutive trading days immediately preceding the conversion date, and as such a BCF has not yet been measured. As additional consideration for the loan, the Company issued to the lender 400,000 shares of common stock at a fair value of $3.35 per share. Warrants to purchase up to 53,571 shares of common stock that are exercisable for a purchase price of $2.80 per share at any time on or prior to August 20, 2025, were also issued to an unrelated third party as a placement fee for the transaction. In connection with this note, the Company recognized a debt discount of $1,340,000 associated with the issuance of shares to the note holder, and debt issuance costs of $223,649, which were all recorded as debt discounts. During the three and nine months ended September 30, 2020, $775,231 of the amounts recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of September 30, 2020, there were $988,418 of debt discounts remaining, and an aggregate principal amount of $1,700,000 was outstanding under this note.

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

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

was equal to the lesser of (1) $8.00 or (2) 80% of the common stock price offered under the next equity offering. These debentures were past due and interest accrued at a rate of 15% per annum. 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 is equal to the lesser of (1) $2.50 or (2) a future effective price per share of any common stock sold by ComSovereign. Upon an event of default, the interest rate shall automatically increase to 15% per annum. In connection with these debentures, ComSovereign recognized a BCF of $69,000 and a debt discount of $181,000 associated with the issuance of warrants, both of which were recorded as debt discounts. On April 21, 2020, all unpaid accrued interest through December 31, 2019 was converted into 6,700 shares of issued common stock of the Company. Also on April 21, 2020, all the outstanding warrants were exercised at $0.01 per share into 283,530 issued shares of the Company’s common stock, resulting in full recognition in interest expense of the remaining debt discount of approximately $139,000 associated with the issuance of warrants. On April 30, 2020, these debentures were amended to provide for the conversion of the debentures into shares of the Company’s common stock instead of ComSovereign’s common stock. Additionally, the conversion price was changed from $2.50 per share to $0.756 per share. During the three and nine months ended September 30, 2020, $6,900 and $183,600 of the costs recorded as debt discounts were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations, respectively. As of September 30, 2020 and December 31, 2019, there were $41,400 and $225,000 of debt discounts remaining, respectively. As of September 30, 2020, an aggregate principal amount of $250,000 was outstanding under these debentures.

On July 2, 2020, the Company sold $1,000,000 aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor that bears interest at a rate of 9% per annum and a maturity date of September 30, 2020. On September 30, 2020, the maturity date of these debentures was extended to November 30, 2020. Accrued interest and principal are due on the maturity date, with interest paid in cash or, at the Company’s option, in shares of common stock at the conversion price of $1.00 per share. Upon an event of default, the interest rate shall automatically increase to 15% per annum. The debentures are convertible into shares of the Company’s common stock at a conversion price of $1.00 per share. The Company also issued warrants to purchase 100,000 shares of common stock that are exercisable for a purchase price of $1.00 per share, at any time on or prior to the earlier of December 31, 2022 or the second anniversary of the Company’s consummation of a public offering of its common stock in connection with an up-listing of the common stock to a national securities exchange. In connection with these debentures, the Company recognized a BCF of $131,477 and a debt discount of $31,477 associated with the issuance of warrants, both of which were recorded as debt discounts. During the three and nine months ended September 30, 2020, the entire $162,954 of the costs recorded as debt discounts were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of September 30, 2020, an aggregate principal amount of $1,000,000 was outstanding under these debentures.

Certain agreements governing the secured notes payable, notes payable and senior convertible debentures contain customary covenants, such as debt service coverage ratios, limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness.

All debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and is continuing, the lenders may accelerate the applicable amounts due. The Company is in default on several debt agreements, and has accrued the proper penalties or disclosed any additional contingencies that resulted from the default.

Other than for reasons of noncompliance with debt covenants as noted above, all long-term debt obligations are classified as current on the Condensed Consolidated Balance Sheet due to the significant debt issuance costs discounting these obligations and causing classification as noncurrent to be negative.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

15. DEBT AGREEMENTS (cont.)

Future maturities contractually required by the Company under long-term debt obligations are as follows for the years ending December 31:

(Amounts in US$’s)

   

Remainder of 2020

 

$

14,065,711

2021

 

 

2,344,018

2022

 

 

543,028

2023

 

 

55,944

2024

 

 

1,035

Thereafter

 

 

103,600

Total

 

$

17,113,336

See Note 23 — Subsequent Events for details regarding additional debt incurred after September 30, 2020.

16. RELATED PARTY TRANSACTIONS

The Company accounts for related party transactions in accordance with ASC 850, Related Party Disclosures. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party that can significantly influence the management or operating policies of the transacting parties or has an ownership interest in one of the other transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Accrued Liabilities — Related Party

As of September 30, 2020 and December 31, 2019, the accrued liabilities — related party balance was $366,601 and $461,254, respectively, which represented amounts owed to various contractors, officers and employees of the Company as described below.

In August 2016, InduraPower entered into a promissory note in the principal amount of $50,000 that bears interest at 7.785% per annum and matures on September 1, 2021. At the same time, InduraPower also entered into a promissory note in the principal amount of $450,000 with the same lender that bears interest at 9.0% per annum and matures on March 1, 2022. A requirement of the promissory notes is to maintain a balance of at least $155,159 at J.P. Morgan while the promissory notes are outstanding. Sergei Begliarov, Chief Executive Officer of InduraPower, provided cash of $153,761 to comply with the requirements of the promissory notes. The amount was recorded in accrued liabilities — related party and $153,761 was outstanding as of September 30, 2020 and December 31, 2019.

During 2019 and the nine months ended September 30, 2020, Sergei Begliarov paid $71,199 and $9,401, respectively, of expenses on behalf of InduraPower. Daniel L. Hodges, Chairman and Chief Executive Officer of ComSovereign at the time, paid $6,588 of rent and on behalf of InduraPower during 2019 and an additional $6,065 of expense during the nine months ended September 30, 2020. Additionally, during 2019, TM Technologies, Inc. (“TM”), described below, paid $29,300 of expense on behalf of InduraPower and an additional $9,150 of expense for InduraPower and ComSovereign. These amounts were recorded in accrued liabilities — related party and had balances outstanding aggregating to $130,554 and $107,087 as of September 30, 2020 and December 31, 2019, respectively.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

16. RELATED PARTY TRANSACTIONS (cont.)

Chen-Kuo Sun, Chief Executive Officer of VEO paid $4,566 of expenses on behalf of VEO. This amount was recorded in accrued liabilities — related party and was outstanding as of September 30, 2020.

On November 10, 2017, the Company and Global Security Innovative Strategies, LLC (“GSIS”), a company in which David Aguilar, a member of the Company’s Board of Directors, is a principal, entered in an agreement (the “GSIS Agreement”) pursuant to which GSIS agreed to provide business development support and general consulting services for sales opportunities with U.S. government agencies and other identified prospects and consulting support services for the Company. The GSIS Agreement had an initial term of nine months beginning on November 1, 2017. On September 26, 2018, the parties amended the GSIS Agreement to extend the period of service through September 2019 with monthly automatic renewals thereafter. The Company also agreed to issue an option to purchase 100,000 shares of the Company’s common stock at a strike price of $1.00, or $100,000. This option immediately vested and terminates on September 26, 2022. Pursuant to the GSIS Agreement, GSIS is paid a fee of $10,000 per month. In addition, GSIS is paid for the expenses incurred in connection with the performance of its duties under the GSIS Agreement. Either party may terminate or renew the GSIS Agreement at any time, for any reason or no reason, upon at least 30 days’ notice to the other party. GSIS was owed $23,036 and this amount was outstanding in accrued liabilities — related party as of December 31, 2019.

During 2018 and 2019, Daniel L. Hodges paid $29,120 of rent on behalf of Lextrum. This amount was recorded in accrued liabilities — related party and was outstanding as of September 30, 2020 and December 31, 2019.

During 2020, Daniel L. Hodges paid $2,100 of expenses on behalf of ComSovereign. This amount was recorded in accrued liabilities — related party and was outstanding as of September 30, 2020.

On March 21, 2019, concurrent with the resignation of Kevin Hess, the Company’s former Chief Technology Officer, the Company and Cognitive Carbon Corporation (“CCC”), entered into an agreement pursuant to which CCC agreed to provide Chief Technology Officer services, sales and marketing services and outsourced software and platform development services which are to be provided personally by Kevin Hess or third-party development firms of his choosing for outsourced development. CCC will receive $19,750 per month for one year for the Chief Technology Officer services and potential bonuses and an amount up to $120,000 for outsourced software and platform development. Felicia Hess, the Company’s Chief Quality Officer, who is married to Kevin Hess, is the President and a director of CCC. Amounts outstanding and payable to CCC in accrued liabilities — related party totaled $46,500 and $148,250 as of September 30, 2020 and December 31, 2019, respectively.

Notes Payable — Related Party

Mr. Hodges is also the founder, Chairman and Chief Executive Officer of TM Technologies, Inc. (“TM”). Mr. Hodges also controls TM by virtue of his ownership and control of a majority of the outstanding equity securities of TM. In addition, Mr. Kevin Sherlock, the Company’s General Counsel, is also a director of TM. During 2019, TM also performed engineering services on behalf of DragonWave.

As of and from inception through October 2019, TM advanced amounts to the Company totaling $1,292,953 for general expenses and to simulate and test emplacement of the modulation technology within one of DragonWave’s Harmony line radios. As of October 31, 2019, this amount was formalized into a note with a stated interest payment of $54,000. Interest and principal was due at initial maturity, August 31, 2020. No payment was made as of maturity and a default penalty was accrued in other liabilities totaling $67,348 in accordance with the agreement. Effective September 30, 2020, this note was amended to extend the maturity date to December 31, 2020. As of September 30, 2020 and December 31, 2019, $1,292,953 plus accrued interest and penalty was outstanding under this loan. Subsequent to September 30, 2020, the Company and TM entered into a debt exchange agreement that exchanged all outstanding amounts owed for common shares. See Note 23 — Subsequent Events for details regarding the debt exchange agreement with TM.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

16. RELATED PARTY TRANSACTIONS (cont.)

On August 5, 2019, Mr. Hodges and his wife loaned DragonWave $200,000 at an interest rate of 5.0% per annum with an original maturity date of December 31, 2019. This note was amended to extend the maturity date to December 31, 2020. Interest was payable monthly while the full principal balance was due at maturity. As of September 30, 2020 and December 31, 2019, $200,000 plus accrued interest was outstanding under the loan.

On July 1, 2020, Mr. Brent Davies, who is on the Company’s Board of Directors and Audit Committee, loaned the Company $50,000 at an interest rate of 4.80% per annum with an original maturity date of August 31, 2020. This note was amended to extend the maturity date to November 30, 2020. Interest and the full principal balance are due at maturity. As of September 30, 2020, $50,000 plus accrued interest was outstanding under the loan.

On July 2, 2020, the Company sold $1,900,000 aggregate principal amount of 9% Convertible Debentures to Mr. Dustin McIntire, the Company’s Chief Technology Officer, that bore interest at a rate of 9% per annum and matured on September 30, 2020. Mr. McIntire was also granted warrants to purchase an aggregate of 190,000 shares of the Company’s common stock at a price of $1.00 per share. The Company recorded the warrants as a discount to the debt in the amount of $59,806. The Company also recorded $249,806 for the BCF associated with the debentures. On August 19, 2020, Mr. McIntire converted the full principal amount of such debentures and accrued interest into 1,921,082 shares of the Company’s common stock.

17. SHAREHOLDERS’ EQUITY

For the nine months ended September 30, 2020

As of September 30, 2020, the Company had 100,000,000 shares of preferred stock authorized for issuance, none of which were issued and outstanding and 300,000,000 shares of common stock authorized for issuance and 143,817,614 shares of common stock issued and outstanding.

Consulting Agreements and Settlements with Vendors

On January 31, 2020, the Company entered into an agreement with a consultant to amend an existing consulting agreement between the consultant and the Company to allow the consultant to elect to take from 50% to 100% of its compensation in the form of common stock of the Company. Common stock to be issued to the consultant will be paid on a quarterly basis. On March 12, 2020, the Company issued 165,095 shares of its common stock in satisfaction of $106,238 that was owed by Lextrum to the consultant for services previously rendered. The fair value on the issue date of the 165,095 shares was $193,160. The Company booked the difference between the fair value of the shares issued and the amount owed by Lextrum to the consultant as general and administrative expense in the Company’s Condensed Consolidated Financial Statements. On August 8, 2020, 35,536 shares with a fair value of $81,935 were issued in conjunction with services performed in the first and second quarters of 2020. An additional 5,908 shares with a fair value of $15,222 are recorded at September 30, 2020 as unissued shares, as discussed below, for services rendered for the third quarter of 2020.

On June 12, 2020, the Company entered into an agreement with a consultant that requires payment of $5,000 to be paid in stock as well as 4,000 warrants per month. Six months of warrants were issued at the inception of the contract with no performance conditions. 15,765 shares are recorded at September 30, 2020 as unissued shares, as discussed below, for services rendered for the third quarter of 2020. This consulting agreement was terminated in October of 2020.

On May 15, 2020, the Company entered into an agreement with a consultant that requires the payment of 55,000 shares of the Company’s common stock at the inception of the contract with no performance condition. These shares were issued on August 26, 2020 and had a fair value of $49,500.

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

17. SHAREHOLDERS’ EQUITY (cont.)

On August 8, 2002, the Company settled outstanding accounts payable to a vendor by issuing 81,839 shares of common stock with a fair value of $102,424.

Subscription Agreement

On September 28, 2020, the Company entered into a stock subscription agreement to sell 100,000 shares of common stock for a total of $240,000. These shares were issued on October 9, 2020 and are recorded as shares payable as of September 30, 2020.

Unissued Shares

As of September 30, 2020, the Company had agreements in place for which shares of common stock were subscribed or shares were called for to settle debt or compensate vendors, although shares had not been administratively issued. These agreements have met the equity classification requirements and a corresponding increase to additional paid in capital has been recorded. Upon their issuance, the par value of these shares will be reclassified into common stock and the shares entered as outstanding. If these shares had been issued on of September 30, 2020, no change in EPS would have been noted. Unissued shares as of September 30, 2020 totaled approximately 1,665,000 shares and were issued subsequent to that date.

For the period January 10, 2019 (Inception) through September 30, 2019

As of September 30, 2019, ComSovereign had 5,000,000 Preferred Series A shares authorized for issuance, 2,600,000 of which were issued and outstanding and 300,000,000 shares of common stock authorized for issuance, 41,207,149 of which were outstanding. All the Preferred Series A shares issued were for the acquisitions of VEO, InduraPower and Silver Bullet during fiscal 2019. On November 15, 2019, each Preferred Series A share was converted into one common share of ComSovereign.

Dividends

The Company did not pay dividends to holders of its common stock during the nine months ended September 30, 2020. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on applicable laws and the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. In addition, current or future loan agreements may restrict the Company’s ability to pay dividends. The Company does not anticipate declaring or paying any cash dividends on common stock in the foreseeable future.

18. SHARE-BASED COMPENSATION

The Company accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation. ASC 718 requires companies to measure the cost of employee and non-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 and non-employee is required to provide service in exchange for the award, usually the vesting period.

Share-based compensation for employees and non-employees is recorded in the Consolidated Statement of Operations as a component of general and administrative expense with a corresponding increase to additional paid-in capital in shareholders’ equity. For employee awards, the Company elected to utilize the simplified method of estimating the expected life of options as allowed by SAB 107. The Company believes this to be a better estimate of the expected life given the lack of historical information. For nonemployee awards, the Company will utilize the stated term of the award. Forfeitures will be accounted for as they occur for both employee and nonemployee awards. Upon exercise or conversion of any share-based payment transaction, the company will issue shares, generally as new issuances.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

18. SHARE-BASED COMPENSATION (cont.)

Stock Options

On March 20, 2019, the Company granted options outside of any equity plan to two employees and one non-employee for the purchase of an aggregate of 180,000 shares of the Company’s common stock. All the options have an exercise price of $1.06 per share and expire on March 20, 2023. The fair value of the 180,000 options on the date of grant was estimated at $123,130.

During the nine-months ended September, 30, 2020, and in conjunction with the acquisition of VNC, the Company issued immediately vested options to non-employees outside of any equity plan to four individuals for the purchase of an aggregate 2,525,506 shares of the Company’s common stock. These options have an exercise price ranging from $0.499 — $0.2882 per share and expire July 6, 2025. The fair value of these options on the grant date was estimated to be $2,261,275.

On July 6, 2020, the Company issued replacement options for outstanding VNC options in conjunction with the acquisition of VNC and separately to two employees as stock-based compensation under the Company’s Non-Qual 2020 Long-Term Incentive Plan for the purchase of an aggregate of 2,725,506 shares of the common stock, 100,000 of which were forfeited. These options expire on July 6, 2025 and have an exercise price of $1.08 per share and the requisite service period of half of these options is six months, with the remainder at 12 months from the date of issuance. The fair value of these options on the grant date was estimated to be $59,000. Of the employee options, 100,000 options with a weighted average grant date fair value of $0.295 were forfeited during the three and nine months ended September 30, 2019 and 100,000 remained outstanding as of September 30, 2020.

All options issued during the nine months ended September 30, 2020 have been valued utilizing the Black-Scholes pricing model using the assumptions listed below. The weighted average grant date fair value of all options issued during the nine months ended September 30, 2020 was $0.85 per share and during the period January 10, 2019 (inception) through September 30, 2019 was $0.68 per share.

The following table summarizes the assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2020:

 

2020

Expected dividend yield

 

0

%

Expected volatility

 

38.17

%

Risk-free interest rate

 

0.205 – 0.310

%

Expected life of options

 

3.25 – 5.00 years

 

The following tables represents stock option activity for the nine months ended September 30, 2020 and the period January 10, 2019 (Inception) to September 30, 2019:

 

Number of
Options

 

Weighted-
Average
Exercise
Price per
Share

 

Weighted-
Average
Contractual
Life in
Years

 

Aggregate
Intrinsic
Value

Outstanding – December 31, 2019

 

8,695,000

 

 

$

0.63

 

1.34

 

$

2,264,760

Exercisable – December 31, 2019

 

8,695,000

 

 

 

0.63

 

1.34

 

 

2,264,760

Granted

 

2,725,506

 

 

 

0.26

     

 

 

Exercised

 

 

 

 

     

 

 

Cancelled or Expired

 

(1,100,000

)

 

 

0.67

 

 

 

 

 

Outstanding – September 30, 2020

 

10,320,506

 

 

$

0.53

 

2.26

 

$

19,338,950

Exercisable – September 30, 2020

 

10,220,506

 

 

$

0.53

 

2.24

 

$

19,206,950

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

18. SHARE-BASED COMPENSATION (cont.)

 

Number of
Options

 

Weighted-
Average
Exercise
Price per
Share

 

Weighted-
Average
Contractual
Life in
Years

 

Aggregate
Intrinsic
Value

Outstanding – January 10, 2019

 

13,990,000

 

 

$

0.61

 

3.15

 

$

Exercisable – January 10, 2019

 

13,610,000

 

 

 

0.59

 

2.42

 

 

Granted

 

180,000

 

 

 

1.06

     

 

 

Exercised

 

 

 

 

     

 

 

Cancelled or Expired

 

(50,000

)

 

 

0.90

 

 

 

 

 

Outstanding – September 30, 2019

 

14,120,000

 

 

$

0.61

 

1.68

 

$

3,796,960

Exercisable – September 30, 2019

 

13,745,000

 

 

$

0.60

 

1.67

 

$

3,796,960

The Company recognized $4,916 of share-based compensation expense related to options for the nine months ended September 30, 2020. Compensation expense related to stock options is recorded in share-based compensation expense in the Consolidated Statement of Operations. For the nine months ended September 30, 2020, the Company has $24,584 of unrecognized compensation expense related to options. For the period January 10, 2019 (Inception) to September 30, 2019, there was no unrecognized compensation expense related to stock options.

Restricted Stock Awards

On March 25, 2019, ComSovereign Corp.’s Board of Directors granted an aggregate of 80,000 restricted stock awards (“RSAs”) to a non-employee for consulting services, of which 60,000 RSAs immediately vested and 20,000 RSAs vested upon the change in control of ComSovereign in connection with the ComSovereign Acquisition. The grant date fair value of these RSAs was $4.40 per share of common stock for a total value of $352,000. ComSovereign recognized the full $352,000 of stock compensation expense for the RSAs during the period January 10, 2019 (inception) to September 30, 2019.

On December 2, 2019, the Company issued 1,900,000 RSAs to employees and those classified as employees for share-based award purposes. These shares were not administratively issued as of September 30, 2020 and were not included in any dilutive calculation. These awards have requisite service periods ranging from 2 — 3 years and had an award date fair value of $1,558,000. These RSAs were administratively issued in October 2020.

There were no RSAs that were either forfeited or vested in the nine months ended September 30, 2020. For the nine months ended September 30, 2020, the Company recognized $526,241 of compensation expense related to RSAs and had unrecognized compensation cost for RSAs totalling $977,190 as of September 30, 2020. For the period January 10, 2019 (Inception) through September 30, 2019, the Company recognized $62,500 compensation expense related to RSAs. See Note 1 — Description of Business and Basis of Presentation for information about the shares issued in connection with the formation of ComSovereign.

2020 Long-Term Incentive Plan

On April 22, 2020, the Company’s Board of Directors adopted the 2020 Long-Term Incentive Plan (the “2020 Plan”) which was approved by the stockholders on or about May 6, 2020. Employees, officers, directors and consultants that provide services to the Company or one of its subsidiaries may be selected to receive awards under the 2020 Plan. Awards under the 2020 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards and performance-based awards.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

18. SHARE-BASED COMPENSATION (cont.)

A total of 10,000,000 shares of the Company’s common stock are authorized for issuance with respect to awards granted under the 2020 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 Plan. As of September 30, 2020, 2,725,506 options have been issued under the 2020 Plan, of which 100,000 were forfeited, and 7,274,494 shares authorized under the 2020 Plan remained available for award purposes.

The 2020 Plan will terminate on May 1, 2030. The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2020 Plan is ten years after the initial date of the award.

19. WARRANTS

On April 13, 2020, the Company issued warrants to purchase an aggregate of 100,000 shares of the Company’s common stock. The warrants were issued as compensation to a vendor and had no vesting requirements. The warrants have an exercise price of $1.20 per share and an expiration date of April 12, 2025. None of these warrants were exercised during the nine months ended September 20, 2020.

On April 29, 2020, the Company issued a warrant to purchase 158,730 shares of the Company’s common stock. The warrant was issued in conjunction with the sale of the Company’s 12.5% OID Convertible Note and had no vesting requirements. The warrant has an exercise price of $0.99 per share and an expiration date of April 29, 2025. In connection with this transaction and as a placement fee to an unrelated third party, the Company also issued warrants to purchase an aggregate of 27,778 shares of the Company’s common stock. The warrants have an exercise price of $0.99 per share and an expiration date of April 29, 2025. None of these warrants were exercised during the nine months ended September 30, 2020.

On July 7, 2020, the Company issued warrants to purchase an aggregate of 290,000 shares of the Company’s common stock. The warrants were issued as part of a convertible debenture offering with no vesting requirement, have an exercise price of $1.00 per share, and expire on December 31, 2022. None of these warrants were exercised during the nine months ended September 20, 2020.

On July 7, 2020, the Company issued a warrant to purchase 158,730 shares of the Company’s common stock. The warrant was issued in conjunction with the sale of the Company’s 12.5% OID Convertible Note and had no vesting requirements. The warrant has an exercise price of $0.99 per share and an expiration date of April 29, 2025. In connection with this transaction and as a placement fee to an unrelated third party, the Company also issued warrants to purchase an aggregate of 27,778 shares of the Company’s common stock. The warrants have an exercise price of $0.99 per share and an expiration date of April 29, 2025. None of these warrants were exercised during the nine months ended September 30, 2020.

On August 21, 2020, the Company issued a warrant to purchase an aggregate of 53,571 shares of the Company’s common stock in conjunction with the sale of the Company’s 13.33% OID Convertible Note. These warrants were issued as payment of a placement fee to an unrelated third party and had no vesting requirements. The warrant has an exercise price of $2.80 per share and an expiration date of August 20, 2025. None of these warrants were exercised during the nine months ended September 30, 2020.

On July 6, 2020, and in conjunction with the acquisition of VNC, the Company issued replacement warrants for outstanding VNC warrants to purchase an aggregate of 1,736,284 shares of the Company’s common stock. The warrants have an exercise price of ranging from $0.0499 to $0.2404 per share and an expiration date of July 6, 2025. None of these warrants were exercised during the nine months ended September 30, 2020.

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

19. WARRANTS (cont.)

On June 8, 2020, the Company issued warrants to purchase an aggregate of 24,000 shares of the Company’s common stock at an exercise price of $1.00 per share to a vendor in conjunction with a consulting agreement. These warrants expire on June 7, 2023. None of these warrants were exercised during the nine months ended September 30, 2020.

The following warrants were issued by the Company prior to the ComSovereign Acquisition with the attributes described below to purchase the Company’s common stock (amounts in US$’s, except share data):

Issuance Date

 

Warrants
Issued

 

Exercise
Price

 

Full Vesting
Date

 

Expiration
Date

November 20, 2015

 

70,000

 

$

5.00

 

November 20, 2015

 

November 20, 2020

April 27, 2016

 

60,000

 

$

2.91

 

April 27, 2016

 

April 27, 2019

During the third quarter of 2019, ComSovereign issued eight warrants to purchase an aggregate of 100,000 shares of ComSovereign’s common stock. The warrants were issued in conjunction with the sale of the ComSovereign’s 9% Senior Convertible Debentures and had no vesting requirements. The warrants had an exercise price of $5.00 per share and an expiration date of December 31, 2021. Prior to conversion of the related debentures, ComSovereign cancelled warrants to purchase 80,000 shares of common stock at $5.00 per share, and reissued warrants to purchase 112,500 shares of common stock at $1.50 per share. ComSovereign valued the new warrants at $250,835 using the Black-Scholes pricing model, which is included in interest expense on the Consolidated Statement of Operations. Warrants to purchase all 132,500 shares of common stock were exercised in November 2019 prior to the ComSovereign Acquisition.

On September 24, 2019, ComSovereign issued a warrant to purchase 150,000 shares of ComSovereign’s common stock, which was converted into the ability to purchase 283,530 shares of the Company’s common stock as a result of the ComSovereign Merger. The warrant was issued in conjunction with the sale of ComSovereign’s 10% Senior Convertible Debentures and had no vesting requirements. The warrant had an exercise price of $0.01 per share and an expiration date of December 31, 2021. No warrants were exercised during fiscal 2019. On April 21, 2020, these warrants were exercised to purchase for 283,530 shares of the Company’s common stock.

During September 2019, ComSovereign issued two warrants to purchase 2,000,000 shares of ComSovereign’s common stock. The warrants were issued in conjunction with the sale by ComSovereign of a promissory note and had no vesting requirements. The warrants had an exercise price of $0.01 per share and an expiration date of December 31, 2021. Warrants to purchase the full 2,000,000 shares of ComSovereign’s common stock were exercised in November 2019 prior to the ComSovereign Acquisition.

All warrants are valued utilizing the Black-Scholes pricing model using the assumptions listed below. The weighted average grant date fair value of all warrants issued during the nine months ended September 30, 2020 was $0.80 per share and during the period January 10, 2019 (inception) through September 30, 2019 was $4.23 per share.

The following table summarizes the assumptions used to estimate the fair value of warrants granted during the nine months ended September 30, 2020:

 

2020

Expected dividend yield

 

0

%

Expected volatility

 

36.96 – 41.55

%

Risk-free interest rate

 

0.190 – 0.440

%

Expected life of warrants

 

2.5 – 5.0 years

 

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

19. WARRANTS (cont.)

The following tables represents warrant activity for the nine months ended September 30, 2020 and the period January 10, 2019 (Inception) to September 30, 2019:

 

Number of
Warrants

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Life in
Years

 

Aggregate
Intrinsic
Value

Outstanding – December 31, 2019

 

503,523

 

 

$

0.95

 

1.96

 

$

258,328

Exercisable – December 31, 2019

 

503,523

 

 

$

0.95

 

1.96

 

$

258,328

Granted

 

2,576,878

 

 

 

0.46

     

 

 

Exercised

 

(283,530

)

 

 

0.01

     

 

 

Forfeited or Expired

 

 

 

 

 

 

 

 

 

Outstanding – September 30, 2020

 

2,796,871

 

 

$

0.60

 

4.17

 

$

5,250,630

Exercisable – September 30, 2020

 

2,796,871

 

 

$

0.60

 

4.17

 

$

5,250,647

 

Number of
Warrants

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Life in
Years

 

Aggregate
Intrinsic
Value

Outstanding – January 10, 2019

 

2,280,000

 

 

$

0.72

 

3.44

 

$

Exercisable – January 10, 2019

 

2,280,000

 

 

$

0.72

 

3.44

 

$

Granted

 

2,250,000

 

 

 

0.23

     

 

 

Exercised

 

 

 

 

     

 

 

Forfeited or Expired

 

(60,000

)

 

 

2.91

 

 

 

 

 

Outstanding – September 30, 2019

 

4,470,000

 

 

$

0.45

 

2.51

 

$

2,557,100

Exercisable – September 30, 2019

 

4,470,000

 

 

$

0.45

 

2.51

 

$

2,557,100

20. INCOME TAXES

The Company’s income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to loss from continuing operations before tax for the nine months ended September 30, 2020 and the period January 10, 2019 (Inception) to September 30, 2019 due to the following:

(Amounts in US$’s)

 

Nine months Ended
September 30, 2020

 

January 10, 2019
(Inception) to
September 30, 2019

US$’s

 

Rates

 

US$’s

 

Rates

Income tax benefit at statutory federal income tax rate

 

$

5,233,600

 

 

21.00

%

 

$

2,941,011

 

21.00

%

State tax expense, net of federal benefit

 

 

996,900

 

 

4.00

%

 

 

560,193

 

4.00

%

Permanent items

 

 

(400

)

 

(0.00

)%

 

 

 

 

Other

 

 

(6,100

)

 

(0.02

)%

 

 

 

 

Valuation allowance

 

 

(6,224,000

)

 

(24.98

)%

 

$

 

 

Income tax benefit

 

 

 

 

%

 

$

3,501,204

 

25.00

%

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

20. INCOME TAXES (cont.)

To determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in various jurisdictions in which the Company is subject to tax. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. The Company recognizes interest and penalties related to uncertain tax positions, if any, as an income tax expense. As of September 30, 2020, and December 31, 2019, the Company had not recorded any liabilities for uncertain tax positions. There were no discrete items for the quarter ended September 30, 2020.

The Company records valuation allowances to reduce its deferred tax asset to an amount that it believes is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the period in which those temporary differences become deductible. During the three months ended September 30, 2020, the Company recorded a change in the valuation allowance of $2,648,200 as compared to $0 for the three months ended September 30, 2019.

It is the Company’s policy to establish reserves based on management’s assessment of exposure for certain tax positions taken in previously filed tax returns that may become payable upon audit by taxing authorities. The Company’s tax reserves are analyzed quarterly, and adjustments are made as events occur that the Company believes warrant adjustments to those reserves. Management has not recorded any reserves for uncertain tax positions.

21. COMMITMENTS AND CONTINGENCIES

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

On January 17, 2020, Arrow Electronics, Inc. (“Arrow”) filed suit against DragonWave and the Company in the United States District Court for the District of Colorado, Case No. 1:20-cv-00149-NRN. Arrow alleged that in November and December 2018, DragonWave took delivery of merchandise from Arrow worth approximately $124,000 and ordered additional merchandise from Arrow worth approximately $520,000, but that DragonWave defaulted in December 2018 on its obligations to pay Arrow. Arrow further alleged that in November 2019, Arrow, DragonWave entered into a forbearance agreement acknowledging indebtedness to Arrow of approximately $124,000, plus an additional commitment to purchase inventory of $520,000 plus fees of $10,000, to be paid in certain installments. On June 12, 2020, Arrow and DragonWave entered into a settlement agreement whereby DragonWave was obligated to pay Arrow $503,500 on or before August 15, 2020, DragonWave-X gave a consent judgment to Arrow in the amount of $503,000, and the Company guaranteed DragonWave-X’s payment to Arrow. The consent judgment against DragonWave-X was entered on June 15, 2020. Also on June 15, 2020 the Company was dismissed from the case. On August 14, 2020, Arrow and DragonWave entered into an amendment to the June 12, 2020 settlement agreement whereby DragonWave was obligated to pay Arrow $200,000 on or before August 17, 2020 and $313,000 on or before September 18, 2020. As of August 18, 2020, the $200,000 was paid to Arrow. On September 28, 2020, Arrow and DragonWave entered into an amendment to the June 12, 2020, settlement agreement whereby DragonWave was obligated to pay Arrow a remaining balance of $323,500 on or before November 6, 2020, which remains unpaid.

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Table of Contents

COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

21. COMMITMENTS AND CONTINGENCIES (cont.)

On February 7, 2020, DragonWave agreed to repurchase inventory held by Tessco Technologies Incorporated (“Tessco”), one of DragonWave’s customers and note holders. Upon receipt of the inventory, which is valued at $121,482, DragonWave agreed to reimburse Tessco $56,766, representing the balance due after making the initial payment of $60,000. The return of inventory and payment to Tessco of $56,776 was required by February 28, 2020 but has not yet been made. On June 5, 2020, Tessco filed a complaint for confessed judgment against DragonWave in the Circuit Court for Baltimore, Maryland, Case No. 5539212, for approximately $60,000, which it claims is the reimbursement amount. On June 8, 2020, Tessco obtained an order entering judgement against DragonWave. The judgment was satisfied, and on August 26, 2020, Tessco filed a notice of satisfaction of judgment.

On May 22, 2020, Michael Powell filed suit against DragonWave-X, LLC, DragonWave-X, Inc., Transform-X, Inc., ComSovereign Corp, and the 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. The Company disputes Mr. Powell’s allegations and it intends to vigorously defend the lawsuit.

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 the Company and its 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, the Company has agreed to acquire Fastback. The Company believes 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 the Company is obligated to pay for Fastback will consist of (i) $1,250,000 in cash, (ii) $1,500,000 aggregate principal amount of our term debentures, and (iii) $11,150,000 aggregate principal amount of the Company’s convertible debentures that are convertible into the Company’s common stock at a conversion price of $1.74 per share, subject to adjustment. The Company’s proposed acquisition of Fastback is subject to the condition that the Company raises at least $12 million of gross proceeds from the sale of its equity or debt securities and certain other customary closing conditions.

22. CONCENTRATION

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral related to its trade accounts receivable. At September 30, 2020, accounts receivable from two customers comprised 27% of the Company’s total trade accounts receivable, and none of this balance had been characterized as uncollectible as of September 30, 2020.

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COMSOVEREIGN HOLDING CORP.
Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)

23. SUBSEQUENT EVENTS

Share-Based Activity

Subsequent to September 30, 2020, the Company issued all of the Unissued Shares. See discussion in Note 17 — Shareholder’s Equity.

In October 2020, an individual exercised warrants in a cashless purchase. In accordance with the warrant agreement, 55,714 warrants were exchanged for 50,000 shares of common stock. The original exercise price was $0.24 per share. However, the cashless purchase resulted in an average unit price of $0.27 per share.

On November 9, 2020, the Company entered into a settlement agreement with an investor and former lender regarding such lender’s disputed claims for interest and penalties arising out of loan agreements with the Company and DragonWave. While the Company believes that the loan agreements were satisfied and that the lender was repaid in full, the lender claimed it was owed additional interest and penalties. In order to avoid the administrative burden of continued discussions with this lender and expense and uncertainty of litigation, the Company and the lender settled prior to the filing of any litigation for the issuance of 300,000 restricted common shares to the lender.

Debt Agreements

Between November 4, 2020 and November 13, 2020, the Company borrowed an aggregate of $450,000 from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes are between $50,000 and $100,000. The loans bear interest at a rate of 15% and have maturity dates between January 1, 2021 and February 12, 2021. As additional consideration for such loans, Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, guaranteed the notes and transferred to such investors an aggregate of 90,000 shares of common stock.

In October 2020, the Company entered into an agreement with TM to exchange the aggregate principal, interest and penalties outstanding of $1,414,301 in full for 565,721 common shares of the Company with a fair value of $2.50 per share.

24. UNAUDITED PRO-FORMA INFORMATION

The Company has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission in connection with a proposed offering of its securities. On May 26, 2020, the board of directors of the Company and stockholders holding a majority of the outstanding shares of the Company’s common stock approved resolutions authorizing the board of directors to effect a reverse split (the “split”) of the Company’s common stock at an exchange ratio of up to 1-for-3, with the board of directors retaining the discretion as to whether to implement the reverse stock split. On December 16, 2020, the Company’s board of directors approved a ratio for the split of 1-for-3 subject to such registration statement being declared effective by the Commission. Following the effectiveness of such registration statement, and prior to the closing of the public offering contemplated thereby, the Company will effect the stock split at a ratio of 1 share for each 3 shares.

Pro forma basic earnings (loss) per share presented as unaudited on the statement of operations is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period after the effect of the split. Diluted earnings (loss) per share presented as unaudited on the statement of operations is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period after the effect of the split.

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3,968,253 Units

ComSovereign Holding Corp.

____________________________

PROSPECTUS

____________________________

Kingswood Capital Markets

division of Benchmark Investments, Inc.

December    , 2020

   

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.     Other Expenses of Issuance and Distribution

The following table sets forth the expenses expected to be incurred by us in connection with the issuance and distribution of the Securities registered hereby, all of which expenses, except for the Securities and Exchange Commission registration fee and the Financial Industry Regulatory Authority, Inc. (FINRA) filing fee, are estimates:

Description

 

Amount

SEC Filing Fee

 

$

8,327

FINRA Filing Fee

 

 

5,500

Nasdaq Listing Fee

 

 

80,000

Underwriters’ Legal Fees and Expenses

 

 

100,000

Printing Expenses

 

 

30,000

Accounting Fees and Expenses

 

 

40,000

Legal Fees and Expenses

 

 

450,000

Transfer Agent and Registrar Expenses

 

 

20,000

Miscellaneous

 

 

16,173

Total

 

$

750,000

____________

*        To be filed by amendment.

Item 14.     Indemnification of Directors and Officers

Nevada Revised Statutes (“NRS”) Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.

NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

NRS Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

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NRS Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.

Our Articles of Incorporation and Bylaws provide that we shall indemnify our directors, officers, employees and agents to the full extent permitted by NRS, including in circumstances in which indemnification is otherwise discretionary under such law.

These indemnification provisions may be sufficiently broad to permit indemnification of our officers, directors and other corporate agents for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of our company pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

We have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors or officers, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other business against any liability asserted against the person or incurred by the person in any of these capacities, or arising out of the person’s fulfilling one of these capacities, and related expenses, whether or not we would have the power to indemnify the person against the claim under the provisions of the NRS. We do not currently maintain director and officer liability insurance on behalf of our director and officers; however, we intends to so purchase and maintain such insurance when economically feasible.

Item 15.     Recent Sales of Unregistered Securities

During the past three years, we have issued securities in the following transactions, each of which was exempt from the registration requirements of the Securities Act. Except for the shares of our common stock that were issued upon the conversion of convertible indebtedness, all of the below-referenced securities were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act. There were no underwriters or placement agents employed in connection with any of these transactions. Use of the exemption provided in Section 4(a)(2) for transactions not involving a public offering is based on the following facts:

•        Neither we nor any person acting on our behalf solicited any offer to buy or sell securities by any form of general solicitation or advertising.

•        The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.

•        The recipients had access to business and financial information concerning our company.

•        All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws.

The shares of our common stock that were issued upon the conversion of our Series A preferred stock and convertible indebtedness were issued pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act.

The number of shares of common stock issued or issuable in each transaction, and the price per share of common stock in each transaction, has been adjusted to give effect to the proposed one-for-three reverse stock split of the common stock to be effected following the effective date of Registration Statement but prior to the closing of the offering contemplated hereby.

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2017 Common Stock Issuance

During the year ended December 31, 2017, we issued a total of 116,750 shares of common stock as follows:

(a)     On April 24, 2017, the holder of Series A preferred stock converted a total of 33,367 shares of Series A preferred stock for an aggregate of 83,417 shares of common stock in accordance with such holder’s conversion rights.

(b)    On August 3, 2017, we issued 83,334 shares of common stock to two members of our strategic advisory board as compensation for their extended service agreement from May 1, 2017 until April 30, 2018.

2017 Options Issuance

During the year ended December 31, 2017, we issued options to purchase a total of 2,503,335 common stock as follows:

(a)     On January 9, 2017, we issued an option to a director to purchase 33,334 shares of common stock with an exercise price of $8.70 per share.

(b)    On August 3, 2017, we issued options to purchase an aggregate of 1,736,667 shares of common stock outside our 2015 Equity Plan to officers, directors and employees for services provided with an exercise price of $3.00 per share.

(c)     On November 9, 2017, we issued options to purchase an aggregate of 666,667 shares of common stock outside our 2015 Equity Plan to officers and directors for services provided with an exercise price of $4.05 per share.

(d)    On December 13, 2017, we issued options to purchase an aggregate of 66,667 shares of common stock outside our 2015 Equity Plan to two newly-appointed directors with an exercise price of $3.00.

2017 Warrants Issuance

During the year ended December 31, 2017, we issued warrants to purchase a total of 683,334 shares common stock as follows:

(a)     On August 3, 2017, we issued warrants to purchase an aggregate of 10,000 shares of common stock outside our 2015 Equity Plan to consultants for services provided with an exercise price of $3.00 per share.

(b)    On August 3, 2017, we issued a warrant to purchase 666,667 shares of common stock to Dr. Philip Frost for services to be provided under the terms of his service to the strategic advisory board through April 2018 with an exercise price of $3.00 per share.

(c)     On November 9, 2017, we issued a warrant to purchase 6,667 shares of common stock outside our 2015 Equity Plan to consultants for services provided with an exercise price of $4.05 per share.

2018 Common Stock Issuance

During the year ended December 31, 2018, we issued a total of 4,819,385 shares of common stock as follows:

(a)     On October 25, 2018, we issued 83,334 shares of common stock to two members of our strategic advisory board as compensation for their extended service agreement from November 1, 2018 until October 31, 2019.

(b)    On December 21, 2018, we issued 2,059,137 shares of common stock pursuant to conversion of the 2016 convertible notes payable and 1,343,580 shares of common stock pursuant to conversion of the 2017 convertible note payable.

(c)     On December 27, 2018, we completed the sale of 1,333,334 shares of common stock at $1.50 per share for an aggregate purchase price of $2,000,000.

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2018 Option Issuance

During the year ended December 31, 2018, we issued options to purchase a total of 3,853,335 shares common stock as follows:

(a)     On March 28, 2018, we issued options to purchase an aggregate of 33,334 shares of common stock outside our 2015 Equity Plan to a newly-appointed directors with an exercise price of $3.00.

(b)    On May 16, 2018, we issued options to purchase an aggregate of 153,334 shares of common stock outside our 2015 Equity Plan to four employees with an exercise price of $3.00.

(c)     On August 22, 2018, we granted options to purchase an aggregate of 1,666,667 shares of common stock outside our 2015 Equity Plan to five management employees and four directors at an exercise price of $3.00 per share. On September 26, 2018, the Board cancelled these options, which had not vested.

(d)    On September 26, 2018, we granted options to purchase an aggregate of 2,000,000 shares of common stock outside our 2015 Equity Plan to five management employees and four directors at an exercise price of $1.95 per share.

2018 Warrant Issuance

During the year ended December 31, 2018, we issued warrants to purchase a total of 33,334 shares common stock as follows:

(a)     On September 26, 2018, we issued a warrant to purchase 33,334 shares of common stock outside our 2015 Equity Plan to Global Security Innovative Strategies, LLC for services rendered at an exercise price of $3.00 per share.

2019 Common Stock Issuance

During the year ended December 31, 2019, we issued a total of 2,138,501 shares of common stock as follows:

(a)     On January 25, 2019, we completed the sale of 1,338,500 shares of common stock pursuant a securities purchase agreement at a purchase price of $1.50 per share, for an aggregate purchase price 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, (3) a full-recourse promissory note payable by Daniyel Erdberg, our Chief Executive Officer and President at that time, in the amount of $50,000 and (4) a full-recourse promissory note payable by Kendall Carpenter, our Chief Financial Officer at that time, in the amount of $25,000. On April 30, 2019, we and Mr. Erdberg entered into an agreement whereby we redeemed 33,334 shares of common stock and cancelled the $50,000 note.

(b)    On September 4, 2019, we redeemed 33,334 shares of common stock from a former director of our company pursuant to a redemption agreement at $1.50 per share for an aggregate redemption price of $50,000.

(c)     On November 12, 2019, we issued pursuant to our 2015 Equity Plan, an aggregate of 766,667 shares of common stock to officers, directors and a consultant for services rendered, which shares were valued at $0.75 per share.

2019 Options Issuance

During the year ended December 31, 2019, we issued options to purchase a total of 43,334 shares of common stock as follows:

(a)     On March 20, 2019, we issued options to purchase an aggregate of 43,334 shares of common stock outside our 2015 Equity Plan to two employees for services provided with an exercise price of $3.18 per share.

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2019 Warrants Issuance

During the year ended December 31, 2019, we issued warrants to purchase a total of 16,667 shares of common stock as follows:

(a)     On March 20, 2019, we issued a warrant to purchase 16,667 shares of common stock outside our 2015 Equity Plan to a contractor for services provided with an exercise price of $3.18 per share.

2020 Common Stock Issuance

During the year ending December 31, 2020, we issued a total of 6,657,420 shares of common stock as follows:

(a)     On March 12, 2020, we issued to a consultant 55,032 shares of common stock for services rendered, which shares were valued at $1.93 per share.

(b)    On March 5, 2020, as partial consideration for a loan, we issued to an accredited investor 16,667 shares of common stock for a purchase price of $0.03 per share.

(c)     On April 30, 2020, we issued to an investor 94,510 shares of our common stock upon the exercise of warrants previously issued to such investor by our subsidiary, ComSovereign Corp., with an exercise price of $0.03 per share and 7,066 shares of common stock in lieu of an aggregate cash interest payment payable by our subsidiary, ComSovereign Corp., through December 31, 2019 on its outstanding convertible debentures and promissory notes held by such investor.

(d)    On July 6, 2020, we issued an aggregate of 3,912,737 shares of our common stock to an aggregate of eight equity holders of Virtual Network Communications Inc. in connection with our acquisition of that company.

(e)     On July 29, 2020, we sold an aggregate of 30,614 shares of common stock at a price of $3.00 per share to two accredited investors.

(f)     On August 8, 2020, we issued an aggregate of 51,004 share of common stock to two consultants for services rendered, which shares were valued between $3.11 and $3.75 per share.

(g)    Between August 4, 2020 and August 19, 2020, we issued an aggregate of 844,496 shares of our common stock upon the conversion of principal of, and accrued interest on, an aggregate of $2,633,400 principal amount of outstanding indebtedness at conversion prices ranging from $3.00 to $4.50 per share.

(h)    On August 24, 2020, as partial consideration for a loan, we issued to an accredited investor 133,334 shares of our common stock for no additional consideration.

(i)     On August 26, 2020, we issued 18,334 shares of our common stock to a consultant for services rendered, which shares were valued at $3.00 per share.

(j)     On September 28, 2020, we sold 33,334 shares of common stock at a price of $7.20 per share to an accredited investor.

(k)    On October 2, 2020, we issued 147,824 shares of our common stock upon the conversion of principal and interest on outstanding indebtedness at $2.70 per share

(l)     On October 6, 2020 issued 16,667 shares of our common stock upon the partial exercise of a common stock purchase warrant at $0.81 per share

(m)   On October 6, 2020, we issued 5,255 shares of our common stock as payment to a consultant at a weighted average price of $3.81 per share

(n)    On October 7, 2020, we issued 633,334 shares of our common stock to fulfill restricted stock grants made at $2.46 per share.

(o)    On October 14, 2020, we issued 33,334 shares of our common stock attributable to a debt modification agreement at $3.15 per share. In addition, we issued 333,334 shares of our common stock in exchange for the cancellation of $1,500,000 of principal at $4.50 per share.

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(p)    On October 27, 2020, we issued 1,970 shares of our common stock to a consultant for services rendered, which shares were valued at $7.74 per share.

(q)    On November 16, 2020, we issued 188,574 shares of our common stock upon the exchange of principal, interest and fees on outstanding indebtedness totaling $1,414,301 at $7.50 per share.

(r)     On November 17, 2020, we issued 100,000 shares of our common stock upon settlement of a litigation matter at $6.90 per share.

2020 Options Issuance

During the year ending December 31, 2020, we issued options to purchase a total of 908,503 shares of common stock as follows:

(a)     On July 6, 2020, we issued options to purchase an aggregate of 841,836 shares of our common stock with exercise prices ranging from $0.15 to $0.86 per share to an aggregate of three equity holders of Virtual Network Communications Inc. in connection with our acquisition of that company.

(b)    On July 6, 2020, we issued to two of our executive officers pursuant to our 2020 Long Term Incentive Plan, an aggregate of 66,667 stock options with an exercise price of $3.24 per share.

2020 Warrants Issuance

During the year ending December 31, 2020, we issued warrants to purchase a total of 858,960 shares of common stock as follows:

(a)     On April 13, 2020, in connection with a loan transaction, we issued to the placement agent warrants to purchase 33,334 shares of common stock with an exercise price of $3.60 per share.

(b)    On April 29, 2020, as partial consideration for a loan, we issued to an accredited investor warrants to purchase 52,910 shares of common stock with an exercise price of $2.97 per share. In connection with such transaction, we issued to a placement agent warrants to purchase 9,260 shares of common stock with an exercise price of $2.97 per share.

(c)     On June 8, 2020, as partial consideration in a payment to a vendor, warrants to purchase 8,000 shares of common stock with an exercise price of $3.00 per share.

(d)    On July 2, 2020, as partial consideration for a loan, we issued to two accredited investors warrants to purchase an aggregate of 96,667 shares of common stock with an exercise of $3.00 per share.

(e)     On July 6, 2020, we issued warrants to purchase an aggregate of 315,688 shares of our common stock with an exercise price of $0.15 per share and warrants to purchase an aggregate of 263,074 shares of our common stock with an exercise price of $0.72 per share to one equity holder of Virtual Network Communications Inc. in connection with our acquisition of that company.

(f)     On July 7, 2020, as partial consideration for a loan, we issued to an accredited investor warrants to purchase 52,910 shares of common stock with an exercise price of $2.97 per share. In connection with such transaction, we issued to a placement agent warrants to purchase 9,260 shares of common stock with an exercise price of $2.97 per share.

(g)    On August 21, 2020, in connection with a loan transaction, we issued to the placement agent warrants to purchase 17,857 shares of common stock with an exercise price of $8.40 per share.

2020 Convertible Debt Issuance

During the year ending December 31, 2020, we issued debt instruments that are convertible into an indeterminate number of shares of common stock as follows:

(a)     On April 29, 2020, we issued an accredited investor a 12.5% OID Convertible Promissory note in the principal amount of $285,714 that is convertible into our common stock only at the option of the holder prior to the maturity date of January 29, 2021 at $2.70 per share or, upon the occurrence and during the continuance of an Event of Default as defined in the contract.

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(b)    On July 2, 2020, we issued to two accredited investors $2,900,000 aggregate principal amount of our 9% Senior Convertible Debentures that are convertible into shares of our common stock at a conversion price of $3.00 per share

(c)     On July 7, 2020, we issued an accredited investor a 12.5% OID Convertible Promissory note in the principal amount of $285,714 that is convertible into our common stock only at the option of the holder prior to the maturity date of January 29, 2021 at $2.70 per share or, upon the occurrence and during the continuance of an Event of Default as defined in the contract.

(d)    On August 21, 2020, we issued an accredited investor a 12.5% OID Convertible Promissory Note in the principal amount of $1,700,000 that is convertible into our common stock only after the maturity date of November 21, 2020 at a conversion price equal to 65% of the VWAP of our common stock for the 20-day period prior to the date of conversion.

2020 Secured Promissory Notes

During the year ending December 31, 2020, we issued, assumed, or entered into secured promissory notes as follows:

(a)     On February 26, 2020, we entered into a $600,000 secured business loan bearing interest at 78.99% per annum.

(b)    On March 6, 2020, we assumed a secured loan with FirstBank in the principal amount of $979,381 bearing interest at 5% per annum that was modified on August 5, 2020, to extend the maturity date and allow a single payment of all unpaid principal and accrued interest upon maturity. The interest rate was also increased to 36% per annum for any principal balance remaining unpaid past the extended maturity date.

(c)     On March 19, 2020, we entered into a secured loan agreement in the amount of $2,007,971 bearing interest at 5% per annum that was modified on August 5, 2020 to extend the maturity date. The interest rate automatically increases to 18% per annum or the maximum amount permitted by applicable law on any unpaid principal, and a late charge of 5% may be charged for any balance overdue by more than 10 days.

(d)    On December 8, 2020, we entered into a secured loan agreement with a single lender pursuant to which we received a loan in the amount of $1,000,000 that is evidenced by a promissory note in the principal amount of $1,100,000, including $100,000 of original issue discount, that bears interest at the rate of 10% per annum and matures on January 6, 2021. Interest and principal are payable in full at maturity. The loan is secured by our equity in VNC, substantially all of the assets of VNC and certain of our intellectual property assets.

2020 Promissory Notes

During the year ending December 31, 2020, we issued promissory notes as follows:

(a)     On March 5, 2020, we issued to an accredited investor a promissory note in the principal amount of $500,000 for a purchase price of $446,000 and issued 16,667 shares of our common stock in lieu of interest.

(b)    In connection with the acquisition of the business by our subsidiary Sovereign Plastics on March 6, 2020:

i.       we entered into several promissory notes with the sellers in the aggregate principal amount of $409,586 that do not bear interest;

ii.      we agreed to pay an aggregate principal amount of $165,986 to the sellers in a non-interest bearing agreement;

iii.     we assumed a promissory note in the principal amount of $86,866 bearing interest at 3% per annum;

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iv.      we assumed an equipment financing loan with an aggregate principal balance of $64,865 bearing interest at 8.5% per annum;

v.       we assumed an equipment financing loan with an aggregate principal balance of $95,810 bearing interest at 6.7% per annum; and

vi.     we assumed an equipment financing loan with an aggregate principal balance of $43,957 bearing interest at 6.7% per annum.

(c)     On May 29, 2020, we issued a promissory note to an accredited investor in the principal amount of $290,000 with an original issue discount of $40,000, bearing interest at 12% per annum for any principal balance remaining unpaid past the maturity date.

(d)    On July 1, 2020, we sold to an accredited investor for a purchase price of $50,000 a promissory note in the principal amount of $50,000 that bears interest at 4.8% and matures on November 30, 2020.

(e)     Between July 2, 2020 and August 21, 2020, we issued to seven accredited investors $1,200,000 aggregate principal amount of 15% promissory notes for a purchase price of 100% of the principal amount of such notes purchased.

(f)     Between November 4, 2020 and November 24, 2020, we issued to seven accredited investors $550,000 aggregate principal amount of 15% promissory notes for a purchase price of 100% of the principal amount of such notes purchased.

(g)    Paycheck Protection Program of the CARES Act

a.      Between April 30 and May 26, 2020, six of our subsidiaries received loan proceeds in the aggregate principal amount of $455,184 under the PPP bearing interest at 1% per annum.

b.      In connection with the VNC acquisition on July 6, 2020, we assumed a PPP loan in the principal amount of $24,028 bearing interest at 1% per annum.

c.      August 11, 2020, one of our subsidiaries received loan proceeds in the aggregate principal amount of $103,659 under the PPP bearing interest at 1% per annum.

Item 16. — Exhibits and Financial Statement Schedules.

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

(1)    Our Consolidated Financial Statements and Notes thereto begin on page F-1 of this prospectus immediately after the signature page.

Index to Financial Statements:

   

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 Stockholders’ Equity

 

F-6

Consolidated Statement of Cash Flows

 

F-7

Notes to Consolidated Financial Statements

 

F-8

(2)    Financial Statement Schedules: All schedules have been omitted because the required information is included in the Consolidated Financial Statements or the Notes thereto, or because it is not required.

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Table of Contents

(3)    Exhibits:

Exhibit Number

 

Exhibit Description

 

Incorporation by Reference

Form

 

Filing Date

 

Exhibit Number

1.1

 

Underwriting Agreement

 

 

*

 

2.1

 

Agreement and Plan of Merger, dated as of November 27, 2019 by and among the Company, COMSovereign Corp. and DACS Merger Sub., Inc.

 

8-K

 

12/4/2019

 

2.1

3.1

 

Restated Articles of Incorporation

 

10-K

 

7/6/2020

 

3.1

3.2

 

Amended and Restated By-Laws

 

10-K

 

7/6/2020

 

3.2

4.1

 

Form of Convertible Promissory Note Series 2016 due October 1, 2017

 

8-K

 

9/30/2016

 

4.1

4.2

 

Form of August 2017 Amendment to Convertible Promissory Note Series 2016

 

10-Q

 

8/4/2017

 

4.1(a)

4.3

 

Form of November 2017 Amendment to Convertible Promissory Note Series 2016

 

10-Q

 

11/13/2017

 

4.1(b)

4.4

 

Form of March 2018 Amendment to Convertible Promissory Note Series 2016

 

10-K

 

3/23/2018

 

4.1(c)

4.5

 

Form of December 2018 Amendment to Secured Convertible Promissory Note Series 2016

 

8-K

 

12/27/2018

 

10.3a

4.6

 

Form of Secured Convertible Promissory Note Series 2017-08 due August 2, 2018

 

10-Q

 

8/4/2017

 

4.2

4.7

 

Form of December 2018 Amendment to Secured Convertible Promissory Note Series 2017-18

 

8-K

 

12/27/2018

 

10.3b

4.8

 

Amendment dated September 26, 2018 to Secured Convertible Promissory Note issued by the Company to Frost Nevada Investment Trust

 

8-K

 

9/28/2018

 

10.2

4.9

 

Form of Promissory Note dated October 25, 2018 issued by the Company to Jay Nussbaum

 

10-Q

 

10/26/2018

 

10.26

4.10

 

OID Promissory Note dated March 5, 2020 of Sovereign Plastics LLC in favor of Mark Vanderbeek

 

10-K

 

7/6/2020

 

4.10

4.11

 

12.5% OID Convertible Note dated April 29, 2020 of the Registrant in favor of Red Diamond Partners LLC

 

8-K

 

5/5/2020

 

4.1

4.12

 

Form of 9% Senior Convertible Debentures

 

8-K

 

7/7/2020

 

4.1

4.13

 

Form of July Warrants to purchase common stock

 

8-K

 

7/7/2020

 

4.2

4.14

 

Form of Warrant Agency Agreement between the Company and ClearTrust, LLC, including form of Warrant Certificate

 

 

*

 

4.15

 

12.5% OID Convertible Note dated August 24, 2020 of the Registrant in favor of Red Diamond Partners LLC

 

8-K

 

8/26/2020

 

4.1

5.1

 

Legal Opinion of Flangas Law Group

 

 

*

 

5.2

 

Legal Opinion of Pryor Cashman LLP

 

 

*

 

10.1

 

Form of Indemnification Agreement for Directors and Officers#

 

8-K

 

6/5/2014

 

10.4

10.2

 

Independent Contractor Agreement dated July 29, 2013 by and among US Technik, Inc., Lighter Than Air Systems Corp., and World Surveillance Group, Inc.

 

8-K

 

6/5/2014

 

10.9

10.3

 

2015 Equity Incentive Plan#

 

8-K

 

9/11/2015

 

99.1

10.4

 

Form of Nonqualified Stock Option Agreement under 2015 Equity Incentive Plan#

 

8-K

 

1/12/2017

 

10.3

10.5

 

Form of Amendment No. 1 dated December 2017 to the Form of Nonqualified Stock Option Agreement

 

8-K

 

12/27/2018

 

10.5

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Exhibit Number

 

Exhibit Description

 

Incorporation by Reference

Form

 

Filing Date

 

Exhibit Number

10.6

 

Form of Amendment No. 2 dated November 2019 to the Form of Nonqualified Stock Option Agreement

 

10-Q

 

11/14/2019

 

10.1

10.7

 

Form of Subscription Agreement for Convertible Promissory Notes Series 2016 due October 1, 2017

 

8-K

 

9/30/2016

 

10.1

10.8

 

Director Agreement dated January 9, 2017 by and among the Company, Global Security Innovative Strategies, LLC and David Aguilar#

 

8-K

 

1/12/2017

 

10.2

10.9

 

Amendment No. 1 dated September 4, 2019 to Director Agreement by and among the Company, Global Security Innovative Strategies, LLC and David Aguilar#

 

8-K

 

9/5/2019

 

10.2

10.10

 

Warrant dated August 3, 2017 issued by the Company to Dr. Phillip Frost

 

10-Q

 

8/4/2017

 

10.34

10.11

 

Amendment dated August 3, 2018 to Warrant issued by the Company to Dr. Phillip Frost

 

8-K

 

12/27/2018

 

10.4

10.12

 

Promissory Note and Security Agreement dated August 2, 2017 issued by the Company to City National Bank of Florida

 

10-Q

 

8/4/2017

 

10.29

10.13

 

Form of Guarantee dated August 2, 2017 issued by Jay Nussbaum to City National Bank of Florida

 

10-Q

 

8/4/2017

 

10.30

10.14

 

Promissory and Guaranty dated September 26, 2018 among the Company, City National Bank of Florida and Jay Nussbaum

 

8-K

 

9/28/2018

 

10.1

10.15

 

Consulting Agreement dated November 10, 2017 between the Company and Global Security Innovative Strategies, LLC

 

10-Q

 

11/13/2017

 

10.35

10.16

 

Amendment No. 1 dated September 26, 2018 to the Consulting Agreement between the Company and Global Security & Innovative Strategies, LLC

 

8-K

 

9/28/2018

 

10.4

10.17

 

Form of Amendment No. 3 dated August 3, 2017 to Independent Contractor Agreement

 

10-Q

 

10/26/2018

 

10.2

10.18

 

Form of Common Stock Purchase Agreement dated October 24, 2018 between the Purchasers thereto and the Company

 

10-Q

 

10/26/2018

 

10.1

10.19

 

Form of Amended and Restated Stock Purchase Agreement dated December 12, 2018 between the Purchasers thereto and the Company

 

8-K

 

12/27/2018

 

10.1

10.20

 

Stock Redemption and Note Cancellation Agreement dated as of April 30, 2019 between the Company and Daniyel Erdberg

 

10-Q

 

5/3/2019

 

10.5

10.21

 

Form of Promissory Note dated January 28, 2019 in favor of the Company (the Non-Affiliate Note)

 

8-K

 

1/31/2019

 

10.2

10.22

 

Form of Promissory Note in favor of the Company (the Erdberg and Carpenter Trust Note)

 

8-K

 

1/31/2019

 

10.3

10.23

 

Independent Contractor Agreement dated March 21, 2019 between the Company and Cognitive Carbon Corporation

 

10-K

 

3/22/2019

 

10.55

10.24

 

Stock Redemption Agreement dated September 4, 2019 between the Company and Robert Guerra

 

8-K

 

9/5/2019

 

10.1

10.25

 

Form of the Company Restricted Stock Agreement

 

10-Q

 

11/14/2019

 

10.2

10.26

 

Employment Agreement dated December 2, 2019 between the Company and Daniel L. Hodges#

 

8-K

 

12/12/2019

 

10.1

10.27

 

Employment Agreement dated December 2, 2019 between the Company and John E. Howell#

 

8-K

 

12/12/2019

 

10.2

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Table of Contents

Exhibit Number

 

Exhibit Description

 

Incorporation by Reference

Form

 

Filing Date

 

Exhibit Number

10.28

 

Employment Agreement dated December 2, 2019 between the Company and Dr. Dustin McIntire, Ph.D. 9#

 

8-K

 

12/12/2019

 

10.3

10.29

 

Employment Agreement dated December 2, 2019 between the Company and Brian T. Mihelich#

 

8-K

 

12/12/2019

 

10.3

10.30

 

Employment Agreement dated January 2, 2020 between the Company and Kevin M. Sherlock#

 

8-K

 

1/8/2020

 

10.2

10.31

 

COMSovereign Holding Corp. 2020 Long-Term Incentive Plan

 

8-K

 

5/12/2020

 

10.1

10.32

 

Stock Agreement dated as of March 5, 2020 between the Company and Mark Vanderbeek

 

10-K

 

7/6/2020

 

10.32

10.33

 

Warrant dated April 29, 2020 issued to Red Diamond Partners LLC

 

8-K

 

5/5/2020

 

4.2

10.34

 

Securities Purchase Agreement dated as of April 29, 2020 between the Company and Red Diamond Partners LLC

 

8-K

 

5/5/2020

 

10.1

10.35

 

Registration Rights Agreement dated as of April 29, 2020 between the Company and Red Diamond Partners LLC

 

8-K

 

5/5/2020

 

10.2

10.36

 

Agreement and Plan of Merger and Reorganization dated as of May 21, 2020 among the Company, CHC Merger Sub 7, Inc., VNC Acquisition LLC, Virtual Network Communications Inc. and the Stockholders’ Representative Named Therein

 

8-K

 

5/22/2020

 

10.1

10.37

 

Manufacturing Services Agreement dated as of April 4, 2018 between DragonWave-X and Benchmark Electronics, Inc.

 

10-K

 

7/6/2020

 

10.37

10.38

 

Employment Agreement dated as of July 6, 2020 between Mohan Tammisetti and ComSovereign Holding Corp.#

 

8-K

 

7/7/2020

 

10.2

10.39

 

Employment Agreement dated as of July 6, 2020 between Keith Kaczmarek and ComSovereign Holding Corp.#

 

8-K

 

7/7/2020

 

10.3

10.40

 

Agreement and Plan of Merger, dated as of August 24, 2020, by and among the Company, CHC Merger Sub 8, LLC, and Skyline Technology Partners d/b/a Fastback Networks and the Stockholders’ Representative named therein.

 

 

**

 

10.41

 

Securities Purchase Agreement, dated as of August 24, 2020 between the Registrant and RedDiamond Partners LLC

 

8-K

 

8/26/2020

 

10.2

10.42†

 

Transpositional Modulation Technology Licensing Agreement dated as of August 3, 2020 among TM Technologies, Inc., TM IP Holdings, LLC and ComSovereign Holding Corp.

 

 

**

 

10.43

 

Secured Loan Agreement dated as of December 8, 2020 among ComSovereign Holding Corp, as Borrower, Virtual Netcom, LLC, as Guarantor, and DWX Servicing Agent, LLC.

 

 

*

 

10.44

 

Pledge and Security Agreement dated as of December 8, 2020 among ComSovereign Holding Corp, as Borrower, Virtual Netcom, LLC, as Guarantor, and DWX Servicing Agent, LLC.

 

 

*

 

10.45

 

Secured Promissory Note dated December 8, 2020 of ComSovereign Holding Corp. in favor of DWX Servicing Agent, including the Guarantee of Virtual Netcom, LLC.

 

 

*

 

II-11

Table of Contents

Exhibit Number

 

Exhibit Description

 

Incorporation by Reference

Form

 

Filing Date

 

Exhibit Number

21

 

List of Subsidiaries

 

 

**

 

23.1

 

Consent of Haskell & White

 

 

*

 

23.2

 

Consent of Flangas Law Group (contained in Exhibit 5.1)

 

 

*

 

23.3

 

Consent of Pryor Cashman LLP (contained in Exhibit 5.2)

 

 

*

 

24.1

 

Power of Attorney (included on page II-10 of the original filing of this registration statement on Form S-1)

           

99.1

 

Consent of Kay Kapoor

 

 

**

 

____________

#        Indicates management contract or compensatory plan or arrangement.

*        Filed herewith.

**      Previously filed.

†        Portions of this exhibit have been redacted in compliance with Item 601(b)(10) of Regulation S-K. Schedules, exhibits and similar supporting attachments to this exhibit are omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to furnish a supplemental copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

Item 17.     Undertakings

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned Company hereby undertakes that:

(1)    To file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to:

(i)     Include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii)    Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; and

(iii)   Include any additional or changed information on the plan of distribution.

(2)    For determining liability under the Securities Act, the Company will treat each such post-effective amendment as a new Registration Statement of the securities offered, and the offering of such securities at that time to be the initial bona fide offering.

(3)    To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4)    For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new Registration Statement for the securities offered in the Registration Statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

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Table of Contents

(5)    For determining liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(6)    For determining liability under the Securities Act, if securities are offered or sold to a purchaser by means of any of the following communications, the Company will be a seller to such purchaser and will be considered to offer or sell such securities to such purchaser:

(i)     Any preliminary prospectus or prospectus relating to the offering required to be filed pursuant to Rule 424;

(ii)    Any free writing prospectus relating to the offering prepared by or on behalf of the Company or used or referred to by the Company;

(iii)   The portion of any other free writing prospectus relating to the offering containing material information about the Company or its securities provided by or on behalf of the Company; and

(iv)   Any other communication that is an offer in the offering made by the Company to a purchaser.

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Dallas, State of Texas, on December 17, 2020.

 

ComSovereign Holding Corp.

   

By:

 

/s/ Daniel L. Hodges

       

Daniel L. Hodges

       

Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Name

 

Position

 

Date

/s/ Daniel L. Hodges

 

Chairman and Chief Executive Officer

 

December 17, 2020

Daniel L. Hodges

 

(Principal Executive Officer)

   

/s/ Brian T. Mihelich

 

Chief Financial Officer

 

December 17, 2020

Brian T. Mihelich

 

(Principal Financial and Accounting Officer)

   

/s/ *

 

Director

 

December 17, 2020

John E. Howell

       

/s/ *

 

Director

 

December 17, 2020

David Aguilar

       

/s/ *

 

Director

 

December 17, 2020

Richard J. Berman

       

/s/ *

 

Director

 

December 17, 2020

Brent M. Davies

       

/s/ *

 

Director

 

December 17, 2020

James A. Marks

       

* By:

 

/s/ Daniel L. Hodges

   
   

Daniel L. Hodges
Attorney-in-fact

   

II-14

Exhibit 1.1

 

 

 

 

 

UNDERWRITING AGREEMENT

 

between

 

COMSOVEREIGN HOLDING CORP.

 

and

 

KINGSWOOD CAPITAL MARKETS,

division of Benchmark Investments, Inc., 

as Representative of the Several Underwriters

 

 

 

 

 

 

 

 

 

 

 

COMSOVEREIGN HOLDING CORP.

 

UNDERWRITING AGREEMENT

 

New York, New York
[●], 2020

Kingswood Capital Markets,

division of Benchmark Investments, Inc.

as Representative of the several Underwriters named on Schedule 1 attached hereto
17 Battery Place, Suite 625

New York, New York 10004

 

Ladies and Gentlemen:

 

The undersigned, ComSovereign Holding Corp., a corporation formed under the laws of the State of Nevada (the “Company”), hereby confirms its agreement (this “Agreement”) with Kingswood Capital Markets, division of Benchmark Investments, Inc. (hereinafter referred to as “you” (including its correlatives) or the “Representative”), and with the other underwriters named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:

 

1. Purchase and Sale of Shares.

 

1.1 Firm Securities.

 

1.1.1. Nature and Purchase of Firm Securities.

 

(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [●] shares (“Firm Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). For every one Firm Share issued and sold by the Company, the Company shall issue and sell to the several Underwriters one warrant to purchase one share of Common Stock each at an exercise price of $[●] per share (125% of the public offering price per Firm Share in the Offering) (each, a “Warrant” and collectively, the “Warrants”), or an aggregate of [●] Warrants to purchase an aggregate of [●] shares of Common Stock (the “Firm Warrants” and together with the Firm Shares, the “Firm Securities”). The Firm Shares and Firm Warrants shall be sold as a unit (a “Firm Unit”), consisting of one Firm Share and one Firm Warrant.

 

(ii) The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Units set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at a purchase price of $[●] per Firm Unit (92% of the per Firm Unit public offering price), and the purchase price of each Firm Unit shall be allocated as follows: (i) $[●] per Firm Share ([●]% of the per Firm Share public offering price) and (ii) $[●] per Firm Warrant ([●]% of the per Firm Warrant offering price). The Firm Units are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).

 

1.1.2. Firm Securities Payment and Delivery.

 

(i) Delivery and payment for the Firm Securities shall be made at 10:00 a.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Nelson Mullins Riley & Scarborough LLP, 101 Constitution Avenue NW, Suite 900, Washington, DC 20001 (“Representative Counsel”), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Securities is called the “Closing Date.”

 

2

 

 

(ii) Payment for the Firm Securities shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Securities (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Securities except upon tender of payment by the Representative for all of the Firm Securities. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.

 

1.2 Over-allotment Option.

 

1.2.1. Option Securities. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Securities, the Company hereby grants to the Underwriters an option to purchase up to [●] additional shares of Common Stock, representing fifteen percent (15%) of the Firm Shares included in the Firm Units sold in the offering (the “Option Shares”) and/or up to [●] additional Warrants to purchase an additional [●] shares of Common Stock, representing fifteen percent (15%) of the Firm Warrants included in the Firm Units sold in the offering (the “Option Warrants”), from the Company (the “Over-allotment Option”). The purchase price to be paid per Option Share and Option Warrant shall be equal to the portion of the purchase price per Firm Unit allotted to the Firm Shares and Firm Warrants, respectively. The Over-allotment Option is, at the Underwriters’ sole discretion, for Option Shares and Option Warrants together, solely Option Shares, solely Option Warrants, or any combination thereof (each, an “Option Security,” and, collectively, the “Option Securities”). The Firm Securities and the Option Securities are collectively referred to as the “Securities.” The Securities, the shares of Common Stock underlying the Firm Warrants and the shares of Common Stock underlying the Option Warrants are referred to herein collectively as the “Public Securities.” The Firm Warrants and the Option Warrants, if any, shall be issued pursuant to, and shall have the rights and privileges set forth in, a warrant agreement, dated on or before the Closing Date, between the Company and ClearTrust, LLC, as warrant agent (the “Warrant Agreement”). The offering and sale of the Public Securities is herein referred to as the “Offering.”

 

1.2.2. Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares and/or the Option Warrants, in any combination thereof, within 45 days after the Effective Date. The purchase price to be paid per Option Share shall be equal to the Firm Share purchase price. The purchase price to be paid per Option Warrant shall be equal to the Firm Warrant purchase price. The Underwriters shall not be under any obligation to purchase any Option Securities prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or facsimile or other electronic transmission setting forth the number of Option Shares and/or Option Warrants to be purchased and the date and time for delivery of and payment for the Option Securities (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Securities does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Securities, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares and/or Option Warrants specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares and Option Warrants then being purchased that the number of Firm Units as set forth on Schedule 1 opposite the name of such Underwriter bears to the total number of Firm Units (except as otherwise agreed to by the Underwriters).

 

1.2.3. Option Securities Payment and Delivery. Payment for the Option Securities shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Securities (or through the facilities of DTC) for the account of the Underwriters. The Option Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Securities except upon tender of payment by the Representative for applicable Option Securities.

 

3

 

 

1.3 Representative’s Warrants.

 

1.3.1. Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designees) on the Closing Date a warrant (“Representative’s Warrant”) for the purchase of an aggregate of [●] shares of Common Stock, representing 5.0% of the Firm Shares, for an aggregate purchase price of $100.00. The Representative’s Warrant agreement, in the form attached hereto as Exhibit A (the “Representative’s Warrant Agreement”), shall be exercisable, in whole or in part, commencing on a date which is six (6) months after the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price per share of Common Stock of $[●], which is equal to 110.0% of the initial public offering price of the Firm Shares. The Representative’s Warrant Agreement and the shares of Common Stock issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrant and the underlying shares of Common Stock during the one hundred eighty (180) day period after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.

 

1.3.2. Delivery. Delivery of the Representative’s Warrant Agreement shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request.

 

2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:

 

2.1 Filing of Registration Statement.

 

2.1.1. Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-248490), including any related prospectus or prospectuses, for the registration of the Public Securities and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.

 

Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], 2020, that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.

 

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Applicable Time” means [TIME] [a.m./p.m.], Eastern time, on the date of this Agreement.

 

Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

 

Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.

 

Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

 

Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.

 

2.1.2. Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A/A (File Number 001-39379) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Common Stock and Warrants. The registration of the shares of Common Stock and Warrants under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the shares of Common Stock and Warrants under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.

 

2.2 Stock Exchange Listing. The shares of Common Stock and Warrants have been approved for listing on The Nasdaq Capital Market (the “Exchange”), subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the shares of Common Stock and/or Warrants from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.3 No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.

 

2.4 Disclosures in Registration Statement.

 

2.4.1. Compliance with Securities Act and 10b-5 Representation.

 

(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to the Commission’s EDGAR filing system (“EDGAR”), except to the extent permitted by Regulation S-T promulgated under the Securities Act (“Regulation S-T”).

 

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(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date and at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus hereto does not conflict in any material respect with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the following disclosure contained in the “Underwriting” section of the Prospectus: (i) the table showing the number of securities to be purchased by each Underwriter, (ii) the fourth full paragraph, (iii) the second and third sentences of the second paragraph under the heading “Discounts, Commissions and Reimbursement” and (iv) the sub-sections titled “Discretionary Accounts,” “Electronic Offer, Sale and Distribution of Securities,” “Stabilization” and “Passive Market Making” (the “Underwriters’ Information”).

 

(iv) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.

 

2.4.2. Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder except for such defaults that would not reasonably be expected to result in a Material Adverse Change (as defined in Section 2.5.1 below). To the best of the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental or regulatory agency, authority, body, entity or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations.

 

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2.4.3. Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.

 

2.4.4. Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign laws, rules and regulations relating to the Offering and the Company’s business as currently conducted or contemplated are correct and complete in all material respects and no other such laws, rules or regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.

 

2.4.5. No Other Distribution of Offering Materials. The Company has not, directly or indirectly, distributed and will not distribute any offering material in connection with the Offering other than any Preliminary Prospectus, any Issuer Free Writing Prospectus, the Prospectus and other materials, if any, permitted under the Securities Act and consistent with Section 3.2 below.

 

2.5 Changes After Dates in Registration Statement.

 

2.5.1. No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company or its Subsidiaries taken as a whole, nor to the Company’s knowledge any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company or its Subsidiaries taken as a whole (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company or its Subsidiaries, other than as contemplated pursuant to this Agreement; and (iii) no executive officer or director of the Company has resigned from any position with the Company.

 

2.5.2. Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

 

2.6 Disclosures in Commission Filings. None of the Company’s filings with, or other documents furnished to, the Commission contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Since January 1, 2020, the Company has made all filings with the Commission required under the Exchange Act and the rules and regulations of the Commission promulgated thereunder (the “Exchange Act Regulations”).

 

2.7 Independent Accountants. To the knowledge of the Company, Haskell & White LLP (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.

 

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2.8 Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods stated therein; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and the supporting schedules, if any, included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) since the date of the last balance sheet included in the Registration Statement, the Proxy Disclosure Package and the Prospectus, neither the Company nor any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a “Subsidiary” and, collectively, the “Subsidiaries”), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries, or, other than in the ordinary course of business, any grants under any stock compensation plan, and (d) there has not been any material adverse change in the Company’s long-term or short-term debt. The Company represents that it has no direct or indirect subsidiaries other than those listed in Exhibit 21.1 to the Registration Statement.

 

2.9 Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.

 

2.10 Valid Issuance of Securities, etc.

 

2.10.1. Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no contractual rights of rescission or the ability to force the Company to repurchase such securities with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights, rights of first refusal or rights of participation of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock, options, warrants and other rights to purchase or exchange such securities for shares of the Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares of Common Stock, exempt from such registration requirements. The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, accurately and fairly present, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights.

 

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2.10.2. Securities Sold Pursuant to this Agreement. The Public Securities and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities and Representative’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has been duly and validly taken. The Public Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Warrants and the Representative’s Warrant has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Warrants and the Representative’s Warrant have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Warrants and Warrant Agreement or the Representative’s Warrant Agreement, as applicable, such underlying shares of Common Stock will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; and such shares of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company.

 

2.11 Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any options, warrants, rights or other securities exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in the Registration Statement or any other registration statement to be filed by the Company.

 

2.12 Validity and Binding Effect of Agreements. The execution, delivery and performance of this Agreement, the Warrants, the Warrant Agreement and the Representative’s Warrant Agreement have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except in each case: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

2.13 No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Warrants, the Warrant Agreement and the Representative’s Warrant Agreement and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a breach of, or conflict with, in any material respect any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or any other agreement or instrument to which the Company is a party or as to which any property of the Company is a party; (ii) result in any violation of the provisions of the Company’s Articles of Incorporation (as the same have been amended or restated from time to time, the “Charter”) or the bylaws of the Company (the “Bylaws”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof.

 

2.14 No Defaults; Violations. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not (i) in violation of any term or provision of its Charter or Bylaws, or (ii) in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except for such violations that would not be reasonably expected to result in a Material Adverse Change.

 

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2.15 Corporate Power; Licenses; Consents.

 

2.15.1. Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary consents, authorizations, approvals, licenses, certificates, clearances, permits and orders and supplements and amendments thereto (collectively, “Authorizations”) of and from all Governmental Entities that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for such Authorizations, the absence of which would not reasonably be expected to have a Material Adverse Change.

 

2.15.2. Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement, the Warrants, the Warrant Agreement and the Representative’s Warrant Agreement and to carry out the provisions and conditions hereof and thereof, and all Authorizations required in connection therewith have been obtained. No Authorization of, and no filing with, any Governmental Entity, the Exchange or another body is required for the valid issuance, sale and delivery of the Public Securities and the Representative’s Securities and the consummation of the transactions and agreements contemplated by this Agreement, the Warrants, the Warrant Agreement and the Representative’s Warrant Agreement and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable federal and state securities or blue-sky laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

2.16 D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors and officers as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.

 

2.17 Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or in connection with the Company’s listing application for the listing of the Public Securities on the Exchange, and is required to be disclosed therein.

 

2.18 Good Standing. The Company has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of the State of Nevada as of the date hereof, and is duly qualified to do business and is in good standing as a foreign corporation in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to be so qualified or in good standing, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.

 

2.19 Insurance. The Company carries or is entitled to the benefits of insurance (including, without limitation, as to directors and officers insurance coverage), with reputable insurers, in such amounts and covering such risks which the Company believes are adequate, and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.

 

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2.20 Transactions Affecting Disclosure to FINRA.

 

2.20.1. Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA.

 

2.20.2. Payments Within Twelve (12) Months. Except as disclosed in writing to the Representative or as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments in connection with the Offering (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder in connection with the Offering.

 

2.20.3. Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.

 

2.20.4. FINRA Affiliation. There is no (i) officer or director of the Company, (ii) to the Company’s knowledge, beneficial owner of 5% or more of any class of the Company’s securities or (iii) to the Company’s knowledge, beneficial owner of the Company’s unregistered equity securities who acquired any equity securities of the Company during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

2.20.5. Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.

 

2.21 Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.

 

2.22 Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

2.23 Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

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2.24 Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative Counsel on the Closing Date or the Option Closing Date shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.

 

2.25 Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of 5% or more of the Company’s outstanding shares of Common Stock (or securities convertible or exercisable into shares of Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in a form substantially similar to that attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.

 

2.26 Subsidiaries. All direct and indirect Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a material adverse effect on the assets, business or operations of the Company taken as a whole. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.27 Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.

 

2.28 Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.

 

2.29 Sarbanes-Oxley Compliance.

 

2.29.1. Disclosure Controls. The Company has developed and currently maintains disclosure controls and procedures that will comply in all material respects with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.

 

2.29.2. Compliance. The Company is and at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and has taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.

 

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2.30 Accounting Controls. The Company and its Subsidiaries maintain systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

 

2.31 No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.

 

2.32 No Labor Disputes. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent. The Company is not aware that any key employee or significant group of employees of the Company plans to terminate employment with the Company.

 

2.33 Intellectual Property Rights. The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and necessary for the conduct of the business of the Company and each of its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others. Neither the Company nor any of its Subsidiaries has received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims in this Section 2.33, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.33, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.33, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is knowingly being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in violation of the rights of any persons.

 

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2.34 Taxes. Each of the Company and its Subsidiaries has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries. There are no tax liens against the assets, properties or business of the Company or its Subsidiaries. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.

 

2.35 ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.

 

2.36 Compliance with Laws. Each of the Company and each Subsidiary: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the business of the Company as currently conducted (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any Governmental Entity alleging or asserting noncompliance with any Applicable Laws or any Authorizations; (C) possesses all material Authorizations and such Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any activity conducted by the Company is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding; (E) has not received notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Entity is considering such action; and (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission).

 

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2.37 Environmental Laws. The Company is in compliance with all foreign, federal, state and local rules, laws and regulations relating to the use, treatment, storage and disposal of hazardous or toxic substances or waste and protection of health and safety or the environment which are applicable to their businesses (“Environmental Laws”), except where the failure to comply would not, singularly or in the aggregate, result in a Material Adverse Change. There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company (or, to the Company’s knowledge, any other entity for whose acts or omissions the Company is or may otherwise be liable) upon any of the property now or previously owned or leased by the Company, or upon any other property, in violation of any law, statute, ordinance, rule, regulation, order, judgment, decree or permit or which would, under any law, statute, ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Change; and there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company has knowledge, except for any such disposal, discharge, emission, or other release of any kind which would not have, singularly or in the aggregate with all such discharges and other releases, a Material Adverse Change. In the ordinary course of business, the Company conducts periodic reviews of the effect of Environmental Laws on its business and assets, in the course of which they identify and evaluate associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or governmental permits issued thereunder, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such reviews, the Company has reasonably concluded that such associated costs and liabilities would not have, singularly or in the aggregate, a Material Adverse Change.

 

2.38 Title to Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.

 

2.39 Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or its Subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.

 

2.40 Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company, its Subsidiaries, or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

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2.41 Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the Effective Date and at the time of any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the Effective Date, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.

 

2.42 Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.

 

2.43 Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.

 

2.44 Reverse Stock Split. The Company has taken all necessary corporate action to effectuate a reverse stock split of its shares of Common Stock on the basis of one (1) such share for each three (3) shares issued and outstanding shares thereof (the “Reverse Stock Split”), such Reverse Stock Split to be effective no later than the first trading day of the Firm Shares following the date hereof.

 

2.45 Electronic Road Show. The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) of the Securities Act Regulations such that no filing of any “road show” (as defined in Rule 433(h) of the Securities Act Regulations) is required in connection with the Offering.

 

2.46 Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the shares of Common Stock to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.

 

2.47 Dividends and Distributions. Except as disclosed in the Pricing Disclosure Package, Registration Statement and the Prospectus, no Subsidiary of the Company is currently prohibited or restricted, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary’s capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary’s property or assets to the Company or any other Subsidiary of the Company.

 

2.48 Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

2.49 Exchange Act Reports. Except as disclosed in writing to the Representative, the Company has filed in a timely manner all reports required to be filed pursuant to Sections 13(a), 13(e), 14 and 15(d) of the Exchange Act during the preceding 12 months (except to the extent that Section 15(d) requires reports to be filed pursuant to Sections 13(d) and 13(g) of the Exchange Act, which shall be governed by the next clause of this sentence); and the Company has filed in a timely manner all reports required to be filed pursuant to Sections 13(d) and 13(g) of the Exchange Act, except where the failure to timely file could not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Change.

 

2.50 Integration. Neither the Company nor any of its Subsidiaries, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities under the Securities Act.

 

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2.51 Confidentiality and Non-Competitions. To the Company’s knowledge, no director, officer, key employee or consultant of the Company or any Subsidiary is subject to any confidentiality, non-disclosure, non-competition agreement or non-solicitation agreement with any employer (other than the Company) or prior employer that could materially affect his or her ability to be and act in his or her respective capacity of the Company or such Subsidiary or be expected to result in a Material Adverse Change.

 

2.52 Corporate Records. The minute books of the Company have been made available to the Representative and Representative Counsel and such books (i) contain minutes of all material meetings and actions of the Board of Directors (including each board committee) and stockholders of the Company, and (ii) reflect all material transactions referred to in such minutes.

 

2.53 Diligence Materials. The Company has provided to the Representative and Representative Counsel all materials required or necessary to respond in all material respects to the diligence request submitted to the Company or Company Counsel by the Representative.

 

3. Covenants of the Company. The Company covenants and agrees as follows:

 

3.1 Amendments to Registration Statement. The Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

 

3.2  Federal Securities Laws.

 

3.2.1. Compliance. The Company, subject to Section 3.2.2, shall comply in all material respects with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of its receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its best efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.

 

3.2.2. Continued Compliance. The Company shall comply in all material respects with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of Representative Counsel or Company Counsel, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within two (2) Business Days prior to the Applicable Time. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or Representative Counsel shall reasonably object.

 

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3.2.3. Exchange Act Registration. For a period of five (5) years after the date of this Agreement, (i) the Company shall use its reasonable best efforts to maintain the registration of the shares of Common Stock and the Warrants under the Exchange Act, and (ii) the Company shall not deregister any of the Common Stock or Warrants under the Exchange Act without the prior written consent of the Representative.

 

3.2.4. Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus set forth in Schedule 2-B. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representative as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

 

3.3 Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to each Underwriter, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) upon receipt of a written request therefor from such Underwriter. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

3.4 Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

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3.5 Effectiveness and Events Requiring Notice to the Representative. The Company shall use its best efforts to cause the Registration Statement to remain effective with a current prospectus for at least nine (9) months after the Applicable Time, and shall notify the Representative promptly and confirm the notice in writing: (i) of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company shall use its commercially reasonable efforts to obtain promptly the lifting of such order.

 

3.6 Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.

 

3.7 Listing. The Company shall use its reasonable best efforts to maintain the listing of the shares of Common Stock (including the Firm Shares, the Option Shares and the shares of Common Stock issuable upon exercise of the Warrants) and the Warrants on the Exchange for at least three (3) years from the date of this Agreement.

 

3.8 Financial Public Relations Firm. As of the Effective Date, the Company shall have retained a financial public relations firm reasonably acceptable to the Representative and the Company, which shall initially be Haskell & White LLP, which firm shall be experienced in assisting issuers in initial public offerings of securities and in their relations with their security holders, and shall retain such firm or another firm reasonably acceptable to the Representative for a period of not less than two (2) years after the Effective Date.

 

3.9 Reports to the Representative.

 

3.9.1. Periodic Reports, etc. For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K prepared and filed by the Company; (iv) a copy of each registration statement filed by the Company under the Securities Act; (v) a copy of each report or other communication furnished to stockholders and (vi) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.9.1.

 

3.9.2. Transfer Agent; Transfer Sheets. For a period of three (3) years after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. ClearTrust, LLC is acceptable to the Representative to act as Transfer Agent for the shares of Common Stock.

 

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3.9.3 Warrant Agent. For so long as the Warrants are outstanding, the Company shall retain a warrant agent for the Warrants reasonably acceptable to the Representative (the “Warrant Agent”). ClearTrust, LLC is acceptable to the Representative to act as Warrant Agent for the Warrants.

 

3.9.4. Trading Reports. For a period of three (3) years after the date of this Agreement, during such time as the Public Securities are listed on the Exchange, the Company shall provide to the Representative, at the Company’s expense, such reports published by the Exchange relating to price trading of the Public Securities, as the Representative shall reasonably request.

 

3.10 Payment of Expenses

 

3.10.1. General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the shares of Common Stock to be sold in the Offering (including the Option Shares) with the Commission; (b) all Public Offering System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Public Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine, including any fees charged by DTC; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such states or foreign jurisdictions as the Representative may reasonably designate; (f) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (g) the costs and expenses of a public relations firm; (h) the costs of preparing, printing and delivering certificates representing the Public Securities; (i) fees and expenses of the transfer agent for the shares of Common Stock; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (k) the costs associated with one set of bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, each of which the Company or its designee shall provide within a reasonable time after the Closing Date in such quantities as the Representative may reasonably request; (l) the fees and expenses of the Company’s accountants; (m) the fees and expenses of the Company’s legal counsel and other agents and representatives; (n) the fees and expenses of Representative Counsel; (o) the cost associated with the Underwriters’ use of Ipreo’s book-building, prospectus tracking and compliance software for the Offering; and (p) the Underwriters’ actual accountable “road show” expenses for the Offering. Notwithstanding the foregoing, the Company’s obligations to reimburse the Representative for any out-of-pocket expenses actually incurred as set forth in the preceding sentence shall not exceed $200,000.00 in the aggregate, including but not limited to the legal fees and road show expenses as described therein. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters other than amounts advanced to the Representative as of the date of this Agreement.

 

3.10.2. Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.10.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.0%) of the gross proceeds received by the Company from the sale of the Public Securities, less the Advance (as such term is defined in Section 8.3 hereof), provided, however, that in the event the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.

 

3.11 Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

3.12 Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by an independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.

 

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3.13 Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

 

3.14 Internal Controls. The Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

3.15 Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm, as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board, reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that the Auditor is acceptable to the Representative.

 

3.16 FINRA. For a period of 90 days from the later of the Closing Date or the Option Closing Date, the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

3.17 No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.

 

3.18 Company Lock-Up Agreements.

 

3.18.1. Restriction on Sales of Capital Stock. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 90 days after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; provided, however, that this clause (i) shall not apply to the issuance of any shares of capital stock, options or warrants in connection with any acquisition of a business that the Company currently has agreed to purchase or with which the Company is currently in discussions to purchase; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit or senior credit facility with a traditional bank or other lending institution, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii), (iii) or (iv) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.

 

The restrictions contained in this Section 3.18.1 shall not apply to (i) the shares of Common Stock to be sold hereunder (including shares of Common Stock issuable upon the exercise of the Warrants and the Representative’s Warrant), (ii) the issuance by the Company of shares of Common Stock upon the exercise of an outstanding stock option or warrant or the conversion of a security outstanding on the date hereof, of which the Representative has been advised in writing, (iii) the issuance by the Company of any security under any equity compensation plan of the Company or (iv) any issuance of securities disclosed in the Registration Statement, the Pricing Disclosure Package or the Prospectus; provided that, prior to the issuance of any such stock options or shares of capital stock of the Company that are vested or vest during the Lock-Up Period, each recipient thereof shall sign and deliver a Lock-Up Agreement.

 

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3.19 Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.25 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.

 

3.20 Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

 

3.21 Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.

 

3.22 Press Releases. Prior to the Closing Date and any Option Closing Date, the Company shall not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Representative is notified), without the prior written consent of the Representative, which consent shall not be unreasonably withheld, unless in the judgment of the Company and its counsel, and after notification to the Representative, such press release or communication is required by law.

 

3.23 Sarbanes-Oxley. The Company shall at all times comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act in effect from time to time.

 

3.24 IRS Forms. If requested by the Representative, the Company shall deliver to each Underwriter (or its agent), prior to or at the Closing Date, a properly completed and executed Internal Revenue Service (“IRS”) Form W-9 or an IRS Form W-8, as appropriate, together with all required attachments to such form.

 

3.25 Corporation Records Service. As of the date hereof and for a period of three (3) years from the Closing Date, the Company shall have registered and shall continue to maintain its registration with the Corporation Records Service (including annual report information) published by the Standard & Poor’s Corporation.

 

3.26 “Key Man” Life Insurance. The Company shall procure and shall during the 12-month period following the Effective Date continue to maintain “key man” life insurance (in reasonable amounts agreed to by the Representative and with the Company as the sole beneficiary thereof) with an insurer rated at least AA or better in the most recent edition of “Best’s Life Reports” on the life of the Chief Executive Officer of the Company.

 

4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:

 

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4.1 Regulatory Matters.

 

4.1.1. Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:30 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus shall have been issued and no proceedings for any of those purposes shall have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) under the Securities Act Regulations (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A under the Securities Act Regulations.

 

4.1.2. FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

 

4.1.3. Exchange Clearance. On the Closing Date, the Company’s shares of Common Stock (including the Firm Shares and the shares of Common Stock underlying the Firm Warrants) and the Firm Warrants shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company’s shares of Common Stock (including the Option Shares and the shares of Common Stock underlying the Option Warrants) and the Option Warrants shall have been approved for listing on the Exchange, subject only to official notice of issuance..

 

4.2 Company Counsel Matters.

 

4.2.1. Closing Date Opinion of Counsel. On the Closing Date, the Representative shall have received (i) the favorable opinion and written statement providing certain “10b-5” negative assurances of Pryor Cashman LLP (“Company Counsel”), counsel to the Company, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative, and (ii) the favorable opinion of Flangas Law Group, special Nevada counsel to the Company, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

 

4.2.2. Option Closing Date Opinions of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinions of counsel listed in Section 4.2.1, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsels in their respective opinions delivered on the Closing Date.

 

4.3 Comfort Letters.

 

4.3.1. Cold Comfort Letter. At the time this Agreement is executed the Representative shall have received a cold comfort letter from the Auditor containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to the Representative and to Representative Counsel from the Auditor, dated as of the date of this Agreement.

 

4.3.2. Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) Business Days prior to the Closing Date or the Option Closing Date, as applicable.

 

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4.4 Officers’ Certificates.

 

4.4.1. Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer or President, and its Chief Financial Officer stating on behalf of the Company and not in an individual capacity that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto after the Effective Date, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto after the Effective Date, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to the best of their knowledge after reasonable investigation, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included in the Pricing Disclosure Package, a Material Adverse Change.

 

4.4.2. Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, certifying on behalf of the Company and not in an individual capacity: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; and (iii) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

 

4.5 No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no Material Adverse Change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may reasonably be expected to cause a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

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4.6 No Material Misstatement or Omission. The Underwriters shall not have discovered and disclosed to the Company on or prior to the Closing Date and any Option Closing Date that the Registration Statement or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Representative Counsel, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in the opinion of Representative Counsel, is material or omits to state any fact which, in the opinion of Representative Counsel, is material and is necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.

 

4.7 Corporate Proceedings. All corporate proceedings and other legal matters incident to the authorization, form and validity of each of this Agreement, the Representative’s Warrant Agreement, the Public Securities, the Registration Statement, the Pricing Disclosure Package, each Issuer Free Writing Prospectus, if any, and the Prospectus and all other legal matters relating to this Agreement, the Representative’s Warrant Agreement and the transactions contemplated hereby and thereby shall be reasonably satisfactory in all material respects to Representative Counsel, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters.

 

4.8 Delivery of Agreements.

 

4.8.1. Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.

 

4.8.2 Warrant Agreement. On or before the Closing Date, the Company shall have delivered to the Representative executed copies of the Warrant Agreement.

 

4.8.3. Representative’s Warrant Agreement. On the Closing Date, the Company shall have delivered to the Representative an executed copy of the Representative’s Warrant Agreement.

 

4.9 Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative’s Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.

 

4.10  Reverse Stock Split. Not later than the first trading day of the Firm Shares following the date hereof, the Reverse Stock Split shall be effective.

 

5. Indemnification.

 

5.1 Indemnification of the Underwriters.

 

5.1.1. General. The Company shall indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives, partners, shareholders, affiliates, counsel and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus or any Issuer Free Writing Prospectus (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities and Representative’s Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof.

 

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5.1.2. Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have been advised by its counsel that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Parties who are party to such action (in addition to local counsel) shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if any Underwriter Indemnified Party shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld.

 

5.2 Indemnification of the Company. Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to such losses, liabilities, claims, damages and expenses (or actions in respect thereof) which arise out of or are based upon untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus or any Issuer Free Writing Prospectus.

 

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5.3 Contribution.

 

5.3.1. Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and each of the Underwriters, on the other hand, from the Offering, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total proceeds from the Offering purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discount and commissions received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, on the one hand, and the Underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company through the Representative by or on behalf of any Underwriter for use in any Preliminary Prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriters’ Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage, expense, liability, action, investigation or proceeding referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third party witness in respect of, or otherwise incurred in connection with, any such loss, claim, damage, expense, liability, action, investigation or proceeding. Notwithstanding the provisions of this Section 5.3.1 no Underwriter shall be required to contribute any amount in excess of the total discount and commission received by such Underwriter in connection with the Offering less the amount of any damages which such Underwriter has otherwise paid or becomes liable to pay by reason of any untrue or alleged untrue statement, omission or alleged omission, act or alleged act or failure to act or alleged failure to act. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

5.3.2. Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. The Underwriters’ obligations to contribute as provided in this Section 5.3 are several and in proportion to their respective underwriting obligation, and not joint.

 

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6. Default by an Underwriter.

 

6.1 Default Not Exceeding 10% of Firm Securities or Option Securities. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Securities or the Option Securities, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Securities or Option Securities with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Securities or Option Securities that all Underwriters have agreed to purchase hereunder, then such Firm Securities or Option Securities to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.

 

6.2 Default Exceeding 10% of Firm Securities or Option Securities. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Securities or Option Securities, the Representative may in its discretion arrange for itself or for another party or parties to purchase such Firm Securities or Option Securities to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Securities or Option Securities, the Representative does not arrange for the purchase of such Firm Securities or Option Securities, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to the Representative to purchase said Firm Securities or Option Securities on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Securities or Option Securities to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3.10 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Securities, this Agreement will not terminate as to the Firm Securities; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.

 

6.3 Postponement of Closing Date. In the event that the Firm Securities or Option Securities to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of Representative Counsel may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Firm Securities or Option Securities.

 

7. Additional Covenants.

 

7.1 Board Composition and Board Designations. The Company shall ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of the Board of Directors comply with the Sarbanes-Oxley Act, the Exchange Act and the listing rules of the Exchange or any other national securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of Directors qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange.

 

7.2 Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity, without the Representative’s prior written consent, for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the fortieth (40th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.

 

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7.3 Right of First Refusal. Provided that the Firm Securities are sold in accordance with the terms of this Agreement, the Representative shall have an irrevocable right of first refusal (the “Right of First Refusal”), for a period of six (6) months after the Effective Date, to act as sole investment banker, sole book-runner, and/or sole placement agent, at the Representative’s sole discretion, for each and every future public and private equity and debt offering, including all equity linked financings (each, a “Subject Transaction”), during such six (6) month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the Representative for such Subject Transactions. For the avoidance of any doubt, the Company shall not retain, engage or solicit any additional investment banker, book-runner, financial advisor, underwriter and/or placement agent in a Subject Transaction during the six (6) month period referred to above without the express written consent of the Representative. The Company shall notify the Representative of its intention to pursue a Subject Transaction, including the material terms thereof, by providing written notice thereof by registered mail or overnight courier service addressed to the Representative. If the Representative fails to exercise its Right of First Refusal with respect to any Subject Transaction within ten (10) Business Days after the mailing of such written notice, then the Representative shall have no further claim or right with respect to the Subject Transaction. The Representative may elect, in its sole and absolute discretion, not to exercise its Right of First Refusal with respect to any Subject Transaction; provided that any such election by the Representative shall not adversely affect the Representative’s Right of First Refusal with respect to any other Subject Transaction during the six (6) month period agreed to above. The terms and conditions of any such engagements shall be set forth in separate agreements and may be subject to, among other things, satisfactory completion of due diligence by the Representative, market conditions, the absence of a material adverse change to the Company’s business, financial condition and prospects, approval of the Representative’s internal committee and any other conditions that the Representative may deem appropriate for transactions of such nature.

 

8. Effective Date of this Agreement and Termination Thereof.

 

8.1 Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.

 

8.2 Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative’s opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Firm Securities or Option Securities; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of a Material Adverse Change, or an adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities.

 

8.3 Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the reasonable fees and disbursements of Representative Counsel not to exceed $50,000) up to $50,000, inclusive of the $50,000 advance for accountable expenses previously paid by the Company to the Representative (the “Advance”) and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement.

 

Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(g)(4)(A).

 

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8.4 Survival of Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

 

8.5 Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.

 

9. Miscellaneous.

 

9.1 Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission and confirmed and shall be deemed given when so delivered or faxed and confirmed or if mailed, two (2) days after such mailing.

 

If to the Representative:

 

Kingswood Capital Markets
17 Battery Place, Suite 625
New York, New York 10004
Attn: Joseph T. Rallo

 

with a copy (which shall not constitute notice) to:


Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue NW, Suite 900

Washington, DC 20001

Attn: Andrew M. Tucker, Esq.

Fax No.: (202) 689-2860

 

If to the Company:

 

ComSovereign Holding Corp.

5000 Quorum Drive, Suite 400

Dallas, TX 75254

Attn: Daniel L. Hodges

Email: dhodges@comsovereign.com

Fax No.: [●]

 

with a copy (which shall not constitute notice) to:

 

Pryor Cashman LLP

7 Times Square

New York, NY 10036

Attn: Eric M. Hellige, Esq.

Email: ehellige@pryorcashman.com

Fax No.: (212) 326-0806

 

9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

 

9.3 Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.

 

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9.4 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

9.5 Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.

 

9.6 Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

9.7 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.

 

9.8 Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

[Signature Page Follows]

 

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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

 

  Very truly yours,
   
  COMSOVEREIGN HOLDING CORP.
     
  By:  
    Name:
    Title:
     
Confirmed as of the date first written above mentioned, on behalf of itself and as Representative of the several Underwriters named on Schedule 1 hereto:    

 

KINGSWOOD CAPITAL MARKETS,

division of Benchmark Investments, Inc.

 

By:    
  Name:  
  Title:  

 

[Signature Page]

ComSovereign Holding Corp. – Underwriting Agreement

 

 

 

 

SCHEDULE 1

 

Underwriter  

Total Number of

Firm Units

to be Purchased

    Number of Option Securities to be Purchased if the Over-Allotment Option is Fully Exercised  
      Number of
Option
Shares
  Number of
Option
Warrants
 
Kingswood Capital Markets, division of Benchmark Investments, Inc.                  
                   
TOTAL                  

 

 

 

 

SCHEDULE 2-A

Pricing Information

 

Number of Firm Units: [●]

Number of Option Shares: [●]

Number of Option Warrants: [●]

Public Offering Price per Firm Unit: $[●]

Public Offering Price per Option Share: $[●]

Public Offering Price per Option Warrant: $[●]

Underwriting Discount per Firm Unit: $[●]

Underwriting Discount per Option Share: $[●]

Underwriting Discount per Option Warrant: $[●]

Proceeds to Company per Firm Unit (before expenses): $[●]

Proceeds to Company per Option Share (before expenses): $[●]

Proceeds to Company per Option Warrant (before expenses): $[●]

Underwriting Non-accountable expense allowance per Firm Unit: $[●]

 

 

SCHEDULE 2-B

 

Issuer General Use Free Writing Prospectuses

 

[None.]

 

 

 

 

SCHEDULE 3

 

List of Lock-Up Parties

 

1. Daniel L. Hodges
2. John E. Howell
3. Brian T. Mihelich
4. Dr. Dustin McIntire
5. Mohan Tammisetti
6. Kevin M. Sherlock
7. David Aguilar
8. Richard J. Berman
9. Brent M. Davies
10. Kay Kapoor
11. James A. Marks
12. Dr. Phillip Frost

 

 

 

 

EXHIBIT A

 

Form of Representative’s Warrant Agreement

 

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) KINGSWOOD CAPITAL MARKETS, DIVISION OF BENCHMARK INVESTMENTS, INC. OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF KINGSWOOD CAPITAL MARKETS, DIVISION OF BENCHMARK INVESTMENTS, INC. OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.

 

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [________________] [DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING]. VOID AFTER 5:00 P.M., EASTERN TIME, [___________________] [DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING].

 

COMMON STOCK PURCHASE WARRANT

 

For the Purchase of [_____] Shares of Common Stock

of

COMSOVEREIGN HOLDING CORP.

 

1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of Kingswood Capital Markets, division of Benchmark Investments, Inc. (“Holder”), as registered owner of this Purchase Warrant, ComSovereign Holding Corp., a Nevada corporation (the “Company”), Holder is entitled, at any time or from time to time from [________________] [DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [____________] [DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING] (the ”Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [____] shares of common stock of the Company, par value $0.0001 per share (the “Shares”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[___] per Share [110% of the public offering price of the Firm Shares sold in the Offering]; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context. The term “Effective Date” shall mean [ ], the date on which the Registration Statement on Form S-1 (File No. 333-248490) of the Company was declared effective by the Securities and Exchange Commission.

 

2. Exercise.

 

2.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

 

A-1

 

 

2.2 Cashless Exercise. If at any time after the Commencement Date there is no effective registration statement registering, or no current prospectus available for, the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 2.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:

 

X = Y(A-B)  
A  

 

Where,      
  X = The number of Shares to be issued to Holder;
  Y = The number of Shares for which the Purchase Warrant is being exercised;
  A = The fair market value of one Share; and
  B = The Exercise Price.

 

For purposes of this Section 2.2, the fair market value of a Share is defined as follows:

 

  (i) if the Company’s common stock is traded on a securities exchange, the value shall be deemed to be the closing price on such exchange prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or

 

  (ii) if the Company’s common stock is actively traded over-the-counter, the value shall be deemed to be the closing bid price prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.

 

2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE LAW. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE LAW WHICH, IN THE OPINION OF COUNSEL TO THE COMPANY, IS AVAILABLE.”

 

3. Transfer.

 

3.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) Kingswood Capital Markets, division of Benchmark Investments, Inc. (“Kingswood”) or an underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of Kingswood or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(e)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(e)(2). On and after 180 days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) business days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

 

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3.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Pryor Cashman LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.

 

4 Registration Rights.

 

4.1 Demand Registration.

 

4.1.1 Grant of Right. The Company, upon written demand (a “Demand Notice”) of the Holders of at least 51% of the Purchase Warrants and/or the underlying Shares, agrees to register, on one occasion, all or any portion of the Shares underlying the Purchase Warrants (collectively, the “Registrable Securities”). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty (30) days after such offering is consummated. The demand for registration may be made at any time during a period of three (3) years beginning on the Commencement Date. The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holders to all other registered Holders of the Purchase Warrants and/or the Registrable Securities within ten (10) days after the date of the receipt of any such Demand Notice.

 

4.1.2 Terms. The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 4.1.1, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such states as are reasonably requested by the Holders; provided, however, that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal stockholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the prospectuses provided by the Company to sell the shares covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder shall be entitled to a demand registration under this Section 4.1.2 on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary of the Effective Date in accordance with FINRA Rule 5110(g)(8)(C).

 

4.2 “Piggy-Back” Registration.

 

4.2.1 Grant of Right. In addition to the demand right of registration described in Section 4.1 hereof, the Holder shall have the right, for a period of no more than seven (7) years from the Effective Date in accordance with FINRA Rule 5110(g)(8)(D), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or Form S-4 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

 

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4.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days’ written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2; provided, however, that such registration rights shall terminate on the sixth anniversary of the Commencement Date.

 

4.3 General Terms.

 

4.3.1 Indemnification. The Company shall indemnify the Holders of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement between the Underwriters and the Company, dated as of [___________], 2020. The Holders of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

 

4.3.2 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holders to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

 

4.3.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

 

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4.3.4 Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by any Holders whose Registrable Securities are being registered pursuant to this Section 4, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.

 

4.3.5 Documents to be Delivered by Holders. Each of the Holders participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.

 

4.3.6 Damages. Should the registration or the effectiveness thereof required by Sections 4.1 and 4.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holders shall, in addition to any other legal or other relief available to the Holders, be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

 

5.  New Purchase Warrants to be Issued.

 

5.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.

 

5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

 

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6. Adjustments.

 

6.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:

 

6.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.

 

6.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.

 

6.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.

 

6.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.

 

6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.

 

6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.

 

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7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. The Company further covenants and agrees that upon exercise of the Purchase Warrants and payment of the exercise price therefor, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.

 

8.  Certain Notice Requirements.

 

8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.

 

8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.

 

8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.

 

8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:

 

If to the Holder:

 

Kingswood Capital Markets
17 Battery Place, Suite 625
New York, New York 10004
Attn: Joseph T. Rallo

 

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with a copy (which shall not constitute notice) to:


Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue NW, Suite 900

Washington, DC 20001

Attn: Andrew M. Tucker, Esq.

Fax No.: (202) 689-2860

 

If to the Company:

 

ComSovereign Holding Corp.

5000 Quorum Drive, Suite 400

Dallas, TX 75254

Attn: Daniel L. Hodges

Email: dhodges@comsovereign.com

Fax No.: [●]

 

with a copy (which shall not constitute notice) to:

 

Pryor Cashman LLP

7 Times Square

New York, NY 10036

Attn: Eric M. Hellige, Esq.

Email: ehellige@pryorcashman.com

Fax No.: (212) 326-0806

 

9. Miscellaneous.

 

9.1 Amendments. The Company and Kingswood may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and Kingswood may deem necessary or desirable and that the Company and Kingswood deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.

 

9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.

 

9.3 Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.

 

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9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

9.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

9.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.

 

9.8 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and Kingswood enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ____ day of _______, 2020.

 

COMSOVEREIGN HOLDING CORP.  
                                
By:    
  Name:  
  Title:  

 

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[Form to be used to exercise Purchase Warrant]

 

Date: __________, 20___

 

The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______ shares of common stock, par value $0.0001 per share (the “Shares”), of ComSovereign Holding Corp., a Nevada corporation (the “Company”), and hereby makes payment of $____ (at the rate of $____ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.

 

or

 

The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:

 

  X = Y(A-B)  
A  
Where,      
  X = The number of Shares to be issued to Holder;
  Y = The number of Shares for which the Purchase Warrant is being exercised;
  A = The fair market value of one Share which is equal to $_____; and
  B = The Exercise Price which is equal to $______ per share
             

The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.

 

Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.

 

Signature    

 

Signature Guaranteed    

 

INSTRUCTIONS FOR REGISTRATION OF SECURITIES

 

Name:    
  (Print in Block Letters)  

 

Address:    
     
     
     
     

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

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[Form to be used to assign Purchase Warrant]

 

ASSIGNMENT

 

(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):

 

FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of ComSovereign Holding Corp., a Nevada corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

 

Dated: __________, 20__

 

Signature    

 

Signature Guaranteed    

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. 

 

A-12

 

 

EXHIBIT B

 

Form of Lock-Up Agreement

Lock-Up Agreement

[●], 2020

 

Kingswood Capital Markets,

division of Benchmark Investments, Inc.

as Representative of the Underwriters
17 Battery Place, Suite 625

New York, New York 10004 

 

Ladies and Gentlemen:

 

The undersigned understands that Kingswood Capital Markets, division of Benchmark Investments, Inc. (the “Representative”) proposes to enter into an Underwriting Agreement (the “Underwriting Agreement”) with ComSovereign Holding Corp., a Nevada corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock, par value $0.0001 per share, of the Company (the “Shares”) and warrants.

 

To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending 90 days after the date of the final prospectus (the “Prospectus”) relating to the Public Offering (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into or exercisable or exchangeable for Shares, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 13 or Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or other public announcement shall be required or shall be voluntarily made during the Lock-Up Period in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; or (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock-Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) it shall be a condition to any such transfer that (i) the transferee/donee agrees to be bound by the terms of this lock-up agreement (including, without limitation, the restrictions set forth in the preceding sentence) to the same extent as if the transferee/donee were a party hereto; (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the Lock-Up Period; and (iii) the undersigned notifies the Representative at least two (2) business days prior to the proposed transfer or disposition.

 

B-1

 

 

In addition, the foregoing restrictions shall not apply to (i) the exercise of stock options granted pursuant to the Company’s equity incentive plans or to any of the undersigned’s common stock issued upon such exercise, (ii) exercise of warrants; provided that it shall apply to any of the undersigned’s common stock issued upon such exercise, or (iii) pursuant to an existing contract, instruction or plan (a “Plan”) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act, (iv) the establishment of any new Plan; provided that no sales of the undersigned’s common stock shall be made pursuant to such new Plan prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof), and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof).

 

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s securities subject to this lock-up agreement except in compliance with this this lock-up agreement.

 

If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any Shares that the undersigned may purchase in the Public Offering; (ii) the Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.

 

The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

 

The undersigned understands that, if the Underwriting Agreement does not become effective on or prior to January 15, 2021, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares to be sold thereunder, the undersigned shall be released from all obligations under this lock-up agreement.

 

This lock-up agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

  Very truly yours,
   
   
  (Name - Please Print)
   
   
  (Signature)
   
   
  (Name of Signatory, in the case of entities - Please Print)
   
   
  (Title of Signatory, in the case of entities - Please Print)
     
  Address:  
     
     
     
     

 

B-2

 

 

EXHIBIT C

 

Form of Press Release

 

COMSOVEREIGN HOLDING CORP.
[Date]

 

ComSovereign Holding Corp. (the “Company”) announced today that Kingswood Capital Markets, division of Benchmark Investments, Inc., acting as representative for the underwriters in the Company’s recent public offering of _______ units consisting of the Company’s common stock and warrants, is [waiving] [releasing] a lock-up restriction with respect to securities, including _________ shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on _________, 20___, and the securities may be sold on or after such date.

 

This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.

 

 

C-1

 

 

Exhibit 4.14

 

WARRANT AGENT AGREEMENT

 

WARRANT AGENT AGREEMENT (this “Warrant Agreement”) dated as of _________, 2020 (the “Issuance Date”) between ComSovereign Holding Corp., a company incorporated under the laws of the State of Nevada (the “Company”), and ClearTrust, LLC (the “Warrant Agent”).

 

WHEREAS, pursuant to the terms of that certain Underwriting Agreement (“Underwriting Agreement”), dated _________, 2020, by and among the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc., as representative of the underwriters set forth therein, the Company is engaged in a public offering (the “Offering”) of up to _________ shares (the “Shares”) of common stock, par value $0.0001 per share (the “Common Stock”) of the Company and up to _________ Warrants (the “Warrants”) to purchase shares of Common Stock (the “Warrant Shares”), including Shares and Warrants issuable pursuant to the underwriters’ over-allotment option;

 

WHEREAS, the Company has filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement, No. 333-248490, on Form S-1 (as the same may be amended from time to time, the “Registration Statement”), for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the Shares, Warrants and Warrant Shares, and such Registration Statement was declared effective on _______, 2020;

 

WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in accordance with the terms set forth in this Warrant Agreement in connection with the issuance, registration, transfer, exchange and exercise of the Warrants;

 

WHEREAS, the Company desires to provide for the provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants; and

 

WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Warrant Agreement.

 

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:

 

1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company with respect to the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the express terms and conditions set forth in this Warrant Agreement (and no implied terms or conditions).

 

2. Warrants.

 

2.1. Form of Warrants. The Warrants shall be registered securities and shall be initially evidenced by a global Warrant certificate (“Global Certificate”) in the form of Annex A to this Warrant Agreement, which shall be deposited on behalf of the Company with a custodian for The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., as nominee of DTC. If DTC subsequently ceases to make its settlement system available for the Warrants, the Company may instruct the Warrant Agent regarding making arrangements for book-entry settlement. In the event that the Warrants are not eligible for, or it is no longer necessary to have the Warrants available in, registration in the name of Cede & Co., as nominee of DTC, the Company may instruct the Warrant Agent to provide written instructions to DTC to deliver to the Warrant Agent for cancellation the Global Certificate, and the Company shall instruct the Warrant Agent to deliver to each Holder (as defined below) separate certificates evidencing the Warrants (“Definitive Certificates” and, together with the Global Certificate, “Warrant Certificates”), in the form of Annex C to this Warrant Agreement. The Warrants represented by the Global Certificate are referred to as “Global Warrants”.

 

 

 

 

2.2. Issuance and Registration of Warrants.

 

2.2.1. Warrant Register. The Warrant Agent shall maintain books (“Warrant Register”) for the registration of original issuance and the registration of transfer of the Warrants. Any person in whose name ownership of a beneficial interest in the Warrants evidenced by a Global Certificate is recorded in the records maintained by DTC or its nominee shall be deemed the “beneficial owner” thereof, provided that all such beneficial interests shall be held through a Participant (as defined below), which shall be the registered holder of such Warrants.

 

2.2.2. Issuance of Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue the Global Certificate and deliver the Warrants in the DTC settlement system in accordance with written instructions delivered to the Warrant Agent by the Company. Ownership of beneficial interests in the Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained (i) by DTC and (ii) by institutions that have accounts with DTC (each, a “Participant”), subject to a Holder’s right to elect to receive a Definitive Certificate. Any Holder desiring to elect to receive a Warrant in certificated form shall make such request in writing delivered to the Warrant Agent pursuant to Section 2.2.8, and shall surrender to the Warrant Agent the interest of the Holder on the books of the Participant evidencing the Warrants which are to be represented by a Definitive Certificate through the DTC settlement system. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Definitive Certificate or Definitive Certificates, as the case may be, as so requested.

 

2.2.3. Beneficial Owner; Holder. Prior to due presentment for registration of transfer of any Warrant, the Company and the Warrant Agent may deem and treat the person in whose name that Warrant shall be registered on the Warrant Register (the “Holder”) as the absolute owner of such Warrant for purposes of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC governing the exercise of the rights of a holder of a beneficial interest in any Warrant. The rights of beneficial owners in a Warrant evidenced by the Global Certificate shall be exercised by the Holder or a Participant through the DTC system, except to the extent set forth herein or in the Global Certificate.

 

2.2.4. Execution. The Warrant Certificates shall be executed on behalf of the Company by any authorized officer of the Company (an “Authorized Officer”), which need not be the same authorized signatory for all of the Warrant Certificates, either manually or by facsimile signature. The Warrant Certificates shall be countersigned by an authorized signatory of the Warrant Agent, which need not be the same signatory for all of the Warrant Certificates, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any Authorized Officer of the Company that signed any of the Warrant Certificates ceases to be an Authorized Officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be an Authorized Officer of the Company authorized to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such an Authorized Officer.

 

2

 

 

2.2.5. Registration of Transfer. At any time at or prior to the Expiration Date (as defined below), a transfer of any Warrants may be registered and any Warrant Certificate or Warrant Certificates may be split up, combined or exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. Any Holder desiring to register the transfer of Warrants or to split up, combine or exchange any Warrant Certificate shall make such request in writing delivered to the Warrant Agent, and shall surrender to the Warrant Agent the Warrant Certificate or Warrant Certificates evidencing the Warrants the transfer of which is to be registered or that is or are to be split up, combined or exchanged. Thereupon, the Warrant Agent shall countersign and deliver to the person entitled thereto a Warrant Certificate or Warrant Certificates, as the case may be, as so requested. The Warrant Agent may require reasonable and customary payment, by the Holder requesting a registration of transfer of Warrants or a split-up, combination or exchange of a Warrant Certificate (but, for purposes of clarity, not upon the exercise of the Warrants and issuance of Warrant Shares to the Holder), of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with such registration of transfer, split-up, combination or exchange, together with reimbursement to the Warrant Agent of all reasonable expenses incidental thereto.

 

2.2.6. Loss, Theft and Mutilation of Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security in customary form and amount, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Warrant Agent shall, on behalf of the Company, countersign and deliver a new Warrant Certificate of like tenor to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated. The Warrant Agent may charge the Holder an administrative fee for processing the replacement of lost Warrant Certificates, which shall be charged only once in instances where a single surety bond obtained covers multiple certificates. The Warrant Agent may receive compensation from the surety companies or surety bond agents for administrative services provided to them.

 

2.2.7. Proxies. The Holder of a Warrant may grant proxies or otherwise authorize any person, including the Participants and beneficial holders that may own interests through the Participants, to take any action that a Holder is entitled to take under this Agreement or the Warrants; provided, however, that at all times that Warrants are evidenced by a Global Certificate, exercise of those Warrants shall be effected on their behalf by Participants through DTC in accordance the procedures administered by DTC.

 

3

 

 

2.2.8. Warrant Certificate Request. A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Warrant Agent for the exchange of some or all of such Holder’s Global Warrants for a Definitive Certificate evidencing the same number of Warrants, which request shall be in the form attached hereto as Annex E (a “Warrant Certificate Request Notice” and the date of delivery of such Warrant Certificate Request Notice by the Holder, the “Warrant Certificate Request Notice Date” and the deemed surrender upon delivery by the Holder of a number of Global Warrants for the same number of Warrants evidenced by a Definitive Certificate, a “Warrant Exchange”), the Warrant Agent shall promptly effect the Warrant Exchange and shall promptly issue and deliver to the Holder a Definitive Certificate for such number of Warrants in the name set forth in the Warrant Certificate Request Notice. Such Definitive Certificate shall be dated the original issue date of the Warrants, shall be manually executed by an authorized signatory of the Company, shall be in the form attached hereto as Annex C, and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to deliver, or to direct the Warrant Agent to deliver, the Definitive Certificate to the Holder within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice (“Warrant Certificate Delivery Date”). If the Company fails for any reason to deliver to the Holder the Definitive Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares evidenced by such Definitive Certificate (based on the VWAP (as defined in the Warrants) of the Common Stock on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Delivery Date until such Definitive Certificate is delivered or, prior to delivery of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Definitive Certificate and, notwithstanding anything to the contrary set forth herein, the Definitive Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Warrants evidenced by such Warrant Certificate and the terms of this Warrant Agreement.

 

2.2.9. For purposes of clarity, if there is a conflict between the express terms of this Warrant Agreement and the Warrant certificate in the form of Annex C hereto with respect to terms of the Warrants, the terms of the Warrant certificate shall govern and control.

 

3. Terms and Exercise of Warrants.

 

3.1. Exercise Price. Each Warrant shall entitle the Holder, subject to the provisions of the applicable Warrant Certificate and of this Warrant Agreement, to purchase from the Company the number of shares of Common Stock stated therein, at the price of $____ per whole share, subject to the subsequent adjustments provided in Section 4 hereof. The term “Exercise Price” as used in this Warrant Agreement refers to the price per share at which shares of Common Stock may be purchased at the time a Warrant is exercised.

 

3.2. Duration of Warrants. Warrants may be exercised only during the period (“Exercise Period”) commencing on the Issuance Date and terminating at 5:00 P.M., New York City time (the “close of business”) on ______, 2025 (“Expiration Date”). Each Warrant not exercised on or before the Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Warrant Agreement shall cease at the close of business on the Expiration Date.

 

4

 

 

3.3. Exercise of Warrants.

 

3.3.1. Exercise and Payment.

 

(a) Exercise of the purchase rights represented by a Warrant may be made, in whole or in part, at any time or times during the Exercise Period by delivery to the Warrant Agent (with a copy to the Company) of the Notice of Exercise in the form annexed as Annex B hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following the date the Holder delivers the Notice of Exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 3.3.6 below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender a Warrant Certificate to the Warrant Agent until the Holder has purchased all of the Warrant Shares available thereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender such Warrant to the Warrant Agent for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Warrant Agent. Partial exercises of a Warrant resulting in purchases of a portion of the total number of Warrant Shares available thereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Warrant Agnet shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Warrant Agent shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of a Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares under a Warrant, the number of Warrant Shares available for purchase thereunder at any given time may be less than the amount stated on the face thereof.

 

(b) Notwithstanding the foregoing in this Section 3.3.1, a holder whose interest in a Warrant is a beneficial interest in certificate(s) representing such Warrant held in registered form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 3.3.1 by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a holder’s right to elect to receive a Definitive Warrant pursuant to the terms of this Warrant Agreement, in which case this sentence shall not apply. Upon giving irrevocable instructions to its Participant to exercise Warrants, solely for purposes of Regulation SHO, the holder whose interest in the Warrant is a beneficial interest shall be deemed to have exercised such Warrant, regardless of when the applicable Warrant Shares are delivered to such holder.

 

3.3.2. Issuance of Warrant Shares.

 

(a) The Warrant Agent shall, on the Trading Day following the date it receives a Notice of Exercise, advise the Company and the transfer agent and registrar for the Company’s Common Stock (if the Warrant Agent is not the transfer agent), in respect of (i) the number of Warrant Shares indicated on the Notice of Exercise as issuable upon such exercise with respect to such exercised Warrants, (ii) the instructions of the Holder or Participant, as the case may be, provided to the Warrant Agent with respect to the delivery of the Warrant Shares and the number of Warrants that remain outstanding after such exercise and (iii) such other information as the Company or such transfer agent and registrar shall reasonably request.

 

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(b) The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with DTC through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which a Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days of and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as the Warrants remain outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.

 

3.3.3. Valid Issuance. All Warrant Shares issued by the Company upon the proper exercise of a Warrant in conformity with this Warrant Agreement shall be validly issued, fully paid and non-assessable.

 

3.3.4. No Fractional Exercise. No fractional Warrant Shares will be issued upon the exercise of the Warrant. If, by reason of any adjustment made pursuant to Section 4, a Holder would be entitled, upon the exercise of such Warrant, to receive a fractional interest in a share, the Company shall, upon such exercise, round up or down, as applicable, to the nearest whole number the number of Warrant Shares to be issued to such Holder.

 

3.3.5. No Transfer Taxes. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, the Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the DTC (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

 

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3.3.6. Restrictive Legend Events; Cashless Exercise Under Certain Circumstances.

 

(i) The Company shall use its reasonable best efforts to maintain the effectiveness of the Registration Statement and the current status of the prospectus included therein or to file and maintain the effectiveness of another registration statement and another current prospectus covering the Warrants and the Warrant Shares at any time that the Warrants are exercisable. The Company shall provide to the Warrant Agent and each Holder prompt written notice of any time that the Company is unable to deliver the Warrant Shares via DTC transfer or otherwise without restrictive legend because (A) the Commission has issued a stop order with respect to the Registration Statement, (B) the Commission otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (C) the Company has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, (D) the prospectus contained in the Registration Statement is not available for the issuance of the Warrant Shares to the Holder or (E) otherwise (each a “Restrictive Legend Event”). To the extent that the Warrants cannot be exercised as a result of a Restrictive Legend Event or a Restrictive Legend Event occurs after a Holder has exercised Warrants in accordance with the terms of the Warrants but prior to the delivery of the Warrant Shares, the Company shall, at the election of the Holder, which shall be given within five (5) days of receipt of such notice of the Restrictive Legend Event, either (A) rescind the previously submitted Notice of Exercise and the Company shall return all consideration paid by registered holder for such shares upon such rescission or (B) treat the attempted exercise as a cashless exercise as described in paragraph (ii) below and refund the cash portion of the exercise price to the Holder.

 

(ii) If a Restrictive Legend Event has occurred and is continuing, the Warrants may also be exercisable on a cashless basis. Notwithstanding anything herein to the contrary, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. Upon a “cashless exercise”, the Holder shall be entitled to receive the number of Warrant Shares equal to the quotient (if such quotient would be a positive number) obtained by dividing (A-B) (X) by (A), where:

 

(A) = the last VWAP immediately preceding the date of exercise giving rise to the applicable “cashless exercise”, as set forth in the applicable Notice of Exercise (to clarify, the “last VWAP” will be the last VWAP as calculated over an entire Trading Day such that, in the event that a Warrant is exercised at a time that the Trading Market is open, the prior Trading Day’s VWAP shall be used in this calculation

 

(B) = the Exercise Price of the Warrant, as adjusted as set forth herein; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of the Warrant in accordance with the terms of the Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

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If the Warrant Shares are issued in such a cashless exercise, the Company acknowledges and agrees that, in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised and the holding period of the Warrants being exercised may be tacked to the holding period of the Warrant Shares, and the Company agrees not to take any position contrary thereto, except as required by applicable law based on additional facts and circumstances. Upon receipt of a Notice of Exercise for a cashless exercise, the Warrant Agent will promptly deliver a copy of the Notice of Exercise to the Company to confirm the number of Warrant Shares issuable in connection with the cashless exercise. The Company shall calculate and transmit to the Warrant Agent in a written notice, and the Warrant Agent shall have no duty, responsibility or obligation under this section to calculate, the number of Warrant Shares issuable in connection with any cashless exercise. The Warrant Agent shall be entitled to rely conclusively on any such written notice provided by the Company, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with such written instructions or pursuant to this Warrant Agreement.

 

3.3.7. Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares issuable in connection with any exercise, the Company shall promptly deliver to the Holder the number of Warrant Shares that are not disputed.

 

3.3.8. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 3.3.2(b) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

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3.3.9. Beneficial Ownership Limitation. The Company shall not be required to effect any exercise of a Warrant, and a Holder shall not have the right to exercise any portion of a Warrant, pursuant to Section 3 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates (as defined below), and any other persons acting as a group together with the Holder or any of the Holder’s Affiliates (such persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of such Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, non-exercised portion of such Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other securities of the Company which would entitle the holder thereof to acquire at any time shares of Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, shares of Common Stock (“Common Stock Equivalents”)) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties.  Except as set forth in the preceding sentence, for purposes of this Section 3.3.9, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 3.3.9 applies, the determination of whether a Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of a Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether a Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of a Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 3.3.9, in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including such Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of a Warrant. The Holder, upon written notice to the Company and the Warrant Agent, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 3.3.9, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of a Warrant held by the Holder and the provisions of this Section 3.3.9 shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 3.3.9 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of a Warrant.

 

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4. Adjustments.

 

4.1. Adjustment upon Subdivisions or Combinations. If the Company, at any time while the Warrants are outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of the Warrants), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of each Warrant shall be proportionately adjusted such that the aggregate Exercise Price of such Warrant shall remain unchanged. Any adjustment made pursuant to this Section 4.1 shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

4.2. Adjustment for Other Distributions.

 

(a) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 4.1 above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of a Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

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(b) Dividends. If the Company, at any time during the Exercise Period, shall pay a dividend in cash, securities or other assets to all holders of Common Stock (or other shares of the Company’s capital stock for which the Warrants are exercisable), other than a transaction described in Sections 4.1, 4.2(a) or 4.3 (any such non-excluded event being referred to herein as a “Dividend”), then the Exercise Price shall be decreased, effective immediately after the effective date of such Dividend, by the quotient of (i) the gross amount of cash and/or fair market value (as determined by the Company’s Board of Directors, in good faith) of all securities or other assets paid to the holders of Common Stock (or other shares of the Company’s capital stock for which the Warrants are exercisable) in respect of such Dividend divided by (ii) the sum of the number of shares of Common Stock (or other shares of the Company’s capital stock into which the Warrants are exercisable) outstanding at the time of the Dividend plus the number of shares of Common Stock then issuable upon exercise of all outstanding Warrants, provided, that the Exercise Price shall not be reduced below zero.

 

4.3. Fundamental Transaction. If, at any time while the Warrants are outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which all holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which all outstanding shares of Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another person or group of persons whereby such other person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other person or other persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of a Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of a Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and such amount of cash or any other consideration (collectively, the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which a Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 3.3.9 on the exercise of a Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of a Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under the Warrants in accordance with the provisions of this Section 4.3 pursuant to written agreements prior to or during such Fundamental Transaction. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company therein.

 

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The Company shall instruct the Warrant Agent in writing to mail by first class mail, postage prepaid, to each Holder, written notice of the execution of any such amendment, supplement or agreement with the Successor Entity. Any supplemented or amended agreement entered into by the successor corporation or transferee shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4.3. The Warrant Agent shall have no duty, responsibility or obligation to determine the correctness of any provisions contained in such agreement or such notice, including but not limited to any provisions relating either to the kind or amount of securities or other property receivable upon exercise of warrants or with respect to the method employed and provided therein for any adjustments, and shall be entitled to rely conclusively for all purposes upon the provisions contained in any such agreement. The provisions of this Section 4.3 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and conveyances of the kind described above.

 

4.4. Notices to Holder.

 

(a) Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 4, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

(b) Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice required by this Warrant Agreement constitutes, or contains, material, non-public information regarding the Company or any of its Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise a Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

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4.5. Other Events. If any event occurs of the type contemplated by the provisions of Section 4.1 or 4.2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, Adjustment Rights, phantom stock rights or other rights with equity features to all holders of Common Stock for no consideration), then the Company's Board of Directors will, at its discretion and in good faith, make an adjustment in the Exercise Price and the number of Warrant Shares or designate such additional consideration to be deemed issuable upon exercise of a Warrant, so as to protect the rights of the registered Holder. No adjustment to the Exercise Price will be made pursuant to more than one sub-section of this Section 4 in connection with a single issuance.

 

4.6. Notices of Changes in Warrant. Upon every adjustment of the Exercise Price or the number of Warrant Shares issuable upon exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 4.1 or 4.2, then, in any such event, the Company shall give written notice to each Holder, at the last address set forth for such holder in the Warrant Register, as of the record date or the effective date of the event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. The Warrant Agent shall be entitled to rely conclusively on, and shall be fully protected in relying on, any certificate, notice or instructions provided by the Company with respect to any adjustment of the Exercise Price or the number of shares issuable upon exercise of a Warrant, or any related matter, and the Warrant Agent shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with any such certificate, notice or instructions or pursuant to this Warrant Agreement. The Warrant Agent shall not be deemed to have knowledge of any such adjustment unless and until it shall have received written notice thereof from the Company.

 

5. Restrictive Legends; Fractional Warrants. In the event that a Warrant Certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not register that transfer until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the Warrants must also bear a restrictive legend upon that transfer. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the transfer of or delivery of a Warrant Certificate for a fraction of a Warrant.

 

6. Other Provisions Relating to Rights of Holders of Warrants.

 

6.1. No Rights as Stockholder. Except as otherwise specifically provided herein, a Holder, solely in its capacity as a holder of Warrants, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant Agreement be construed to confer upon a Holder, solely in its capacity as the registered holder of Warrants, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of share capital, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights or rights to participate in new issues of shares, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of Warrants.

 

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6.2. Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants issued pursuant to this Warrant Agreement.

 

7. Concerning the Warrant Agent and Other Matters.

 

7.1. Any instructions given to the Warrant Agent orally, as permitted by any provision of this Warrant Agreement, shall be confirmed in writing by the Company as soon as practicable. The Warrant Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in accordance with any oral instructions which do not conform with the written confirmation received in accordance with this Section 7.1.

 

7.2. (a) Whether or not any Warrants are exercised, for the Warrant Agent’s services as agent for the Company hereunder, the Company shall pay to the Warrant Agent such fees as may be separately agreed between the Company and Warrant Agent and the Warrant Agent’s out of pocket expenses in connection with this Warrant Agreement, including, without limitation, the reasonable fees and expenses of the Warrant Agent’s counsel. While the Warrant Agent endeavors to maintain out-of-pocket charges (both internal and external) at competitive rates, these charges may not reflect actual out-of-pocket costs, and may include handling charges to cover internal processing and use of the Warrant Agent’s billing systems.

 

(b) All amounts owed by the Company to the Warrant Agent under this Warrant Agreement are due within 30 days of the Company’s receipt of an invoice.

 

(c) No provision of this Warrant Agreement shall require Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Warrant Agreement or in the exercise of its rights.

 

7.3. As agent for the Company hereunder, the Warrant Agent:

 

(a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to in writing by the Warrant Agent and the Company;

 

(b) shall be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value, or genuineness of the Warrants or any Warrant Shares;

 

(c) shall not be obligated to take any legal action hereunder; if, however, the Warrant Agent determines to take any legal action hereunder, and where the taking of such action might, in its judgment, subject or expose it to any expense or liability it shall not be required to act unless it has been furnished with an indemnity reasonably satisfactory to it;

 

(d) may rely on and shall be fully authorized and protected in acting or failing to act upon any certificate, instrument, opinion, notice, letter, telegram, telex, facsimile transmission or other document or security delivered to the Warrant Agent and believed by it to be genuine and to have been signed by the proper party or parties;

 

(e) shall not be liable or responsible for any recital or statement contained in the Registration Statement or any other documents relating thereto;

 

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(f) shall not be liable or responsible for any failure on the part of the Company to comply with any of its covenants and obligations relating to the Warrants, including without limitation obligations under applicable securities laws;

 

(g) may rely on and shall be fully authorized and protected in acting or failing to act upon the written, telephonic or oral instructions with respect to any matter relating to its duties as Warrant Agent covered by this Warrant Agreement (or supplementing or qualifying any such actions) of officers of the Company, and is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Company or counsel to the Company, and may apply to the Company, for advice or instructions in connection with the Warrant Agent’s duties hereunder, and the Warrant Agent shall not be liable for any delay in acting while waiting for those instructions; any applications by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Warrant Agreement and the date on or after which such action shall be taken or such omission shall be effective; the Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five business days after the date such application is sent to the Company, unless the Company shall have consented in writing to any earlier date) unless prior to taking any such action, the Warrant Agent shall have received written instructions in response to such application specifying the action to be taken or omitted;

 

(h) may consult with counsel satisfactory to the Warrant Agent, including its in-house counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in accordance with the advice of such counsel;

 

(i) may perform any of its duties hereunder either directly or by or through nominees, correspondents, designees, or subagents, and it shall not be liable or responsible for any misconduct or negligence on the part of any nominee, correspondent, designee, or subagent appointed with reasonable care by it in connection with this Warrant Agreement;

 

(j)  is not authorized, and shall have no obligation, to pay any brokers, dealers, or soliciting fees to any person and

 

(k) shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof.

 

7.4. (a) In the absence of gross negligence or willful or illegal misconduct on its part, the Warrant Agent shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Warrant Agreement. Anything in this Warrant Agreement to the contrary notwithstanding, in no event shall Warrant Agent be liable for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the possibility of such losses or damages and regardless of the form of action. Any liability of the Warrant Agent will be limited in the aggregate to the amount of fees paid by the Company hereunder. The Warrant Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, fires, civil disobedience, riots, rebellions, storms, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, earthquakes, floods, acts of God or similar occurrences.

 

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(b) In the event any question or dispute arises with respect to the proper interpretation of the Warrants or the Warrant Agent’s duties under this Warrant Agreement or the rights of the Company or of any Holder, the Warrant Agent shall not be required to act and shall not be held liable or responsible for its refusal to act until the question or dispute has been judicially settled (and, if appropriate, it may file a suit in interpleader or for a declaratory judgment for such purpose) by final judgment rendered by a court of competent jurisdiction, binding on all persons interested in the matter which is no longer subject to review or appeal, or settled by a written document in form and substance satisfactory to Warrant Agent and executed by the Company and each such Holder. In addition, the Warrant Agent may require for such purpose, but shall not be obligated to require, the execution of such written settlement by all the Holders and all other persons that may have an interest in the settlement.

 

7.5. The Company covenants to indemnify the Warrant Agent and hold it harmless from and against any loss, liability, claim or expense (“Loss”) arising out of or in connection with the Warrant Agent’s duties under this Warrant Agreement, including the costs and expenses of defending itself against any Loss, unless such Loss shall have been determined by a court of competent jurisdiction to be a result of the Warrant Agent’s gross negligence or willful misconduct.

 

7.6. Unless terminated earlier by the parties hereto, this Warrant Agreement shall terminate 90 days after the earlier of the Expiration Date and the date on which no Warrants remain outstanding (the “Termination Date”). On the business day following the Termination Date, the Warrant Agent shall deliver to the Company any entitlements, if any, held by the Warrant Agent under this Warrant Agreement. The Warrant Agent’s right to be reimbursed for fees, charges and out-of-pocket expenses as provided in this Section 7 shall survive the termination of this Warrant Agreement.

 

7.7. If any provision of this Warrant Agreement shall be held illegal, invalid, or unenforceable by any court, this Warrant Agreement shall be construed and enforced as if such provision had not been contained herein and shall be deemed an agreement among the parties to it to the full extent permitted by applicable law.

 

7.8. The Company represents and warrants that (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation, (b) the offer and sale of the Warrants and the execution, delivery and performance of all transactions contemplated thereby (including this Warrant Agreement) have been duly authorized by all necessary corporate action and will not result in a breach of or constitute a default under the articles of association, bylaws or any similar document of the Company or any indenture, agreement or instrument to which it is a party or is bound, (c) this Warrant Agreement has been duly executed and delivered by the Company and constitutes the legal, valid, binding and enforceable obligation of the Company, (d) the Warrants will comply in all material respects with all applicable requirements of law and (e) to the best of its knowledge, there is no litigation pending or threatened as of the date hereof in connection with the offering of the Warrants.

 

7.9. In the event of inconsistency between this Warrant Agreement and the descriptions in the Registration Statement, as they may from time to time be amended, the terms of this Warrant Agreement shall control.

 

7.10. Set forth in Annex D hereto is a list of the names and specimen signatures of the persons authorized to act for the Company under this Warrant Agreement (the “Authorized Representatives”). The Company shall, from time to time, certify to you the names and signatures of any other persons authorized to act for the Company under this Warrant Agreement.

 

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7.11. Any notice, statement or demand authorized by this Warrant Agreement to be given or made by the Warrant Agent or by the holder of any Warrant to or on the Company, including, without limitation, the copy of any Notice of Exercise, shall be in writing and delivered by e-mail, hand or sent by a nationally recognized overnight courier service, addressed (until another address is filed in writing by the Company with the Warrant Agent) as set forth below and if to any holder any notice, statement or demand shall be given to the last address set forth for such holder (if any) in the Warrant Register:

 

ComSovereign Holding Corp.

5000 Quorum Drive, STE 400

Dallas, TX 75254

Attention: Chief Financial Officer

Fax:

Email: bmihelich@comsovereign.com

 

with a copy (which shall not constitute notice) to:

 

Pryor Cashman LLP

7 Times Square

New York, NY 10036

Attention: Eric M. Hellige, Esq.

Fax No: (212) 326-0806

Email: ehellige@pryorcashman.com

 

Any notice, statement or demand authorized by this Warrant Agreement to be given or made by the holder of any Warrant or by the Company to or on the Warrant Agent, including, without limitation, any Notice of Exercise, shall be in writing and delivered by facsimile, hand or sent by a nationally recognized overnight courier service, addressed (until another address is filed in writing by the Warrant Agent with the Company), as follows:

 

ClearTrust LLC

16540 Pointe Village Drive, Suite 205

Lutz, FL 33558

Fax No: (813) 388-4549

Email: Inbox@cleartrusttransfer.com

 

Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth above in this Section 7.11 prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Notwithstanding any other provision of this Warrant Agreement, where this Warrant Agreement provides for notice of any event to the Holder, if a Warrant is held in global form by DTC (or any successor depositary), such notice shall be sufficiently given if given to DTC (or any successor depositary) pursuant to the procedures of DTC (or such successor depositary).

 

17

 

 

7.12. (a) This Warrant Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions and proceedings relating to or arising from, directly or indirectly, this Warrant Agreement may be litigated in courts located within the Borough of Manhattan in the City and State of New York. The Company hereby submits to the personal jurisdiction of such courts and consents that any service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder.

 

(b) This Warrant Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. This Warrant Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay; except that (i) consent is not required for an assignment or delegation of duties by Warrant Agent to any Affiliate of Warrant Agent and (ii) any reorganization, merger, consolidation, sale of assets or other form of business combination by Warrant Agent or the Company shall not be deemed to constitute an assignment of this Warrant Agreement.

 

(c) No provision of this Warrant Agreement may be amended, modified or waived, except in a written document signed by both parties. The Company and the Warrant Agent may amend or supplement this Warrant Agreement without the consent of any Holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained herein or adding or changing any other provisions with respect to matters or questions arising under this Warrant Agreement as the parties may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the Holders. All other amendments and supplements shall require the vote or written consent of Holders of at least 50.1% of the then outstanding Warrants, provided that adjustments may be made to the Warrant terms and rights in accordance with Section 4 without the consent of the Holders.

 

7.13. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of Warrant Shares upon the exercise of Warrants, but the Company may require the Holders to pay any transfer taxes in respect of the Warrants or such shares. The Warrant Agent may refrain from registering any transfer of Warrants or any delivery of any Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax or charge, if any, or shall have established to the reasonable satisfaction of the Company and the Warrant Agent that such tax or charge, if any, has been paid. 

 

7.14. Resignation of Warrant Agent.

 

7.14.1. Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days’ notice in writing to the Company, or such shorter period of time agreed to by the Company. The Company may terminate the services of the Warrant Agent, or any successor Warrant Agent, after giving thirty (30) days’ notice in writing to the Warrant Agent or successor Warrant Agent, or such shorter period of time as agreed. If the office of the Warrant Agent becomes vacant by resignation, termination or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent, then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent at the Company’s cost. Pending appointment of a successor to such Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent (but not including the initial Warrant Agent), whether appointed by the Company or by such court, shall be a person organized and existing under the laws of any state of the United States of America, in good standing, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by federal or state authority. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed, and except for executing and delivering documents as provided in the sentence that follows, the predecessor Warrant Agent shall have no further duties, obligations, responsibilities or liabilities hereunder, but shall be entitled to all rights that survive the termination of this Warrant Agreement and the resignation or removal of the Warrant Agent, including but not limited to its right to indemnity hereunder. If for any reason it becomes necessary or appropriate or at the request of the Company, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.

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7.14.2. Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment.

 

7.14.3. Merger or Consolidation of Warrant Agent. Any person into which the Warrant Agent may be merged or converted or with which it may be consolidated or any person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party or any person succeeding to the shareowner services business of the Warrant Agent or any successor Warrant Agent shall be the successor Warrant Agent under this Warrant Agreement, without any further act or deed.

 

8. Miscellaneous Provisions.

 

8.1. Persons Having Rights under this Warrant Agreement. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto and the Holders any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof.

 

8.2. Examination of the Warrant Agreement. A copy of this Warrant Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose for inspection by any Holder. Prior to such inspection, the Warrant Agent may require any such holder to provide reasonable evidence of its interest in the Warrants.

 

8.3. Counterparts. This Warrant Agreement may be executed in any number of original, facsimile or electronic counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

 

8.4. Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.

 

19

 

 

9. Certain Definitions. As used herein, the following terms shall have the following meanings:

 

(i) “Adjustment Right” means any right granted with respect to any securities issued in connection with, or with respect to, any issuance, sale or delivery (or deemed issuance, sale or delivery in accordance with Section 4) of Common Stock (other than rights of the type described in Section 4.2 and 4.3 hereof) that could result in a decrease in the net consideration received by the Company in connection with, or with respect to, such securities (including, without limitation, any cash settlement rights, cash adjustment or other similar rights) but excluding anti-dilution and other similar rights (including pursuant to Section 4.4 of this Agreement).

 

(ii) “Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

 

(iii) “person” shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust or other entity, and shall include any successor (by merger or otherwise) thereof or thereto.

 

(iv) “Trading Day” means any day on which the Common Stock is traded on the Trading Market, or, if the Trading Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market in the United States on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00 P.M., New York City time)

 

(v) “Trading Market” means the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (or any successors to any of the foregoing).

 

(vi) “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Open Market” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

[SIGNATURE PAGE FOLLOWS]

 

20

 

 

IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the parties hereto as of the day and year first above written.

 

  COMSOVEREIGN HOLDING CORP.
     
  By:  
    Name:
    Title:
     
  CLEARTRUST LLC,
  as Warrant Agent
     
  By:  
    Name:
    Title:

 

Annex A Form of Global Certificate
Annex B Notice of Exercise
Annex C Form of Certificated Warrant
Annex D Authorized Representatives
Annex E Form of Warrant Certificate Request Notice

 

21

 

 

ANNEX A

 

[FORM OF GLOBAL CERTIFICATE]

 

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

COMSOVEREIGN HOLDING CORP.
WARRANT CERTIFICATE
NOT EXERCISABLE AFTER ______, 2025

 

This certifies that the person whose name and address appears below, or registered assigns, is the registered owner of the number of Warrants set forth below. Each Warrant entitles its registered holder to purchase from ComSovereign Holding Corp., a company incorporated under the laws of the State of Nevada (the “Company”), at any time prior to 5:00 P.M. (New York City time) on ________, 2025, one share of common stock, par value $0.0001 per share, of the Company (each, a “Warrant Share” and collectively, the “Warrant Shares”), at an exercise price of $___ per share, subject to possible adjustments as provided in the Warrant Agreement (as defined below).

 

This Warrant Certificate, with or without other Warrant Certificates, upon surrender at the designated office of the Warrant Agent, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing the same number of Warrants as the Warrant Certificate or Warrant Certificates surrendered. A transfer of the Warrants evidenced hereby may be registered upon surrender of this Warrant Certificate at the designated office of the Warrant Agent by the registered holder in person or by a duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer, a signature guarantee, and such other and further documentation as the Warrant Agent may reasonably request and duly stamped as may be required by the laws of the State of New York and of the United States of America.

 

The terms and conditions of the Warrants and the rights and obligations of the holder of this Warrant Certificate are set forth in the Warrant Agency Agreement dated as of _______, 2020 (the “Warrant Agreement”) between the Company and ClearTrust LLC, as Warrant Agent (the “Warrant Agent”). A copy of the Warrant Agreement is available for inspection during business hours at the office of the Warrant Agent.

 

A-1

 

 

This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by an authorized signatory of the Warrant Agent.

 

WITNESS the facsimile signature of a proper officer of the Company.

 

  COMSOVEREIGN HOLDING CORP.
     
  By:  
  Name:  
  Title:  

 

Dated: ____________, 2020

 

Countersigned:

 

CLEARTRUST LLC,

as Warrant Agent

 

By:    
Name:     
Title:    

 

PLEASE DETACH HERE
——————————————————————————————————————

 

Certificate No.:_________ Number of Warrants:__________

 

WARRANT CUSIP NO.: ___________

 

  COMSOVEREIGN HOLDING CORP.
   
[Name & Address of Holder] CLEARTRUST LLC, Warrant Agent
   
  By Mail:
   
   
  By hand or overnight courier:
   
   

 

A-2

 

 

ANNEX B

 

NOTICE OF EXERCISE

 

  To: COMSOVEREIGN HOLDING CORP.

 

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box):

 

¨ in lawful money of the United States; or

 

¨ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

     

 

The Warrant Shares shall be delivered to the following DWAC Account Number:

 

     
     
     
     
     

 

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: ________________________________________________________________

 

Signature of Authorized Signatory of Investing Entity: __________________________________________

 

Name of Authorized Signatory:___________________________________________________________

 

Title of Authorized Signatory: ____________________________________________________________

 

Date: ________________________________________________________________________________

 

 

B-1

 

 

ANNEX C

 

[FORM OF CERTIFICATED WARRANT]

 

COMMON STOCK PURCHASE WARRANT

 

COMSOVEREIGN HOLDING CORP.

 

Warrant Shares: _______ Initial Exercise Date: [●] ___, 2020
  Issue Date: [●] ___, 2020

 

  CUSIP: ______________
   
  ISIN: _______________

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after [●] ___, 2020 (the “Initial Exercise Date”) and on or prior to the close of business on the five (5) year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter (the “Exercise Period”), to subscribe for and purchase from ComSovereign Holding Corp., a Nevada corporation (the “Company”), up to ______ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Section 1. Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:

 

Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

 

Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

Commission” means the United States Securities and Exchange Commission.

 

Common Stock” means the common stock, par value $0.0001 per share, of the Company and any other class of securities into which such securities may hereafter be reclassified or changed.

 

Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock

 

Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

Liens” means a lien, charge pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

 

C-1

 

 

Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

Registration Statement” means the Company’s registration statement on Form S-1 (File No. 333-248940).

 

Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

Trading Day” means a day on which the Common Stock is traded on a Trading Market.

 

Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).

 

Transfer Agent” means ClearTrust LLC, with a mailing address of 16540 Pointe Village Drive, Suite 205, Lutz, FL 33558 and a facsimile number of (813) 388-4549, and any successor transfer agent of the Company.

 

Warrant Agency Agreement” means that certain Warrant Agency Agreement, dated as of the Issue Date, between the Company and the Warrant Agent.

 

Warrant Agent” means the Transfer Agent and any successor warrant agent of the Company.

 

Warrants” means this Warrant and other Common Stock Purchase Warrants issued by the Company pursuant to the Registration Statement.

 

Section 2. Exercise.

 

(a) Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times during the Exercise Period by delivery to the Warrant Agent (with a copy to the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto. Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Warrant Agent until the Holder has purchased all of the Warrant Shares available hereunder and this Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Warrant Agent for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Warrant Agent. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Warrant Agent shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Warrant Agent shall deliver any objection to any Notice of Exercise within one (1) Trading Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

C-2

 

 

(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $_____, subject to adjustment hereunder (the “Exercise Price”).

 

(c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained (if such quotient would be a positive number) by dividing [(A-B) (X)] by (A), where:

 

(A) = the last VWAP immediately preceding the time of delivery of the Notice of Exercise giving rise to the applicable “cashless exercise”, as set forth in the applicable Notice of Exercise (to clarify, the “last VWAP” will be the last VWAP as calculated over an entire Trading Day such that, in the event that this Warrant is exercised at a time that the Trading Market is open, the prior Trading Day’s VWAP shall be used in this calculation);

 

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Open Market” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

C-3

 

 

Notwithstanding anything herein to the contrary, the Company shall not be required to make any cash payments or net cash settlement to the Holder in lieu of delivery of the Warrant Shares. If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c), except as permitted or required by law.

 

(d) Mechanics of Exercise.

 

i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is earlier of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received by the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period, following the delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.

 

ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Warrant Agent shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

C-4

 

 

iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, upon such exercise, round up or down, as applicable, to the nearest whole number the number of Warrant Shares to be issued to the Holder.

 

vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

 

C-5

 

 

vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

(e) Holder’s Exercise Limitations. The Company shall not be required to effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties.  Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of and representative as to, whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

 

C-6

 

 

Section 3. Certain Adjustments.

 

(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

(b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

(c) Dividends. If the Company, at any time during the Exercise Period, shall pay a dividend in cash, securities or other assets to all holders of Common Stock (or other shares of the Company’s capital stock into which the Warrants are convertible), other than a transaction described in Sections 3(a), 3(b) or 3(d) (any such non-excluded event being referred to herein as a “Dividend”), then the Exercise Price shall be decreased, effective immediately after the effective date of such Dividend, by the quotient of (i) the gross amount of cash and/or fair market value (as determined by the Company’s Board of Directors, in good faith) of all securities or other assets paid to the holders of Common Stock (or other shares of the Company’s capital stock for which the Warrants are exercisable) in respect of such Dividend divided by (ii) the sum of the number of shares of Common Stock (or other shares of the Company’s capital stock for which the Warrants are exercisable) outstanding at the time of the Dividend plus the number of shares of Common Stock then issuable upon exercise of all outstanding Warrants, provided, that the Exercise Price shall not be reduced below zero.

 

C-7

 

 

(d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which all outstanding shares of Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and such amount of cash or any other consideration (collectively, the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements prior or during such Fundamental Transaction. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of the Warrants referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Warrants with the same effect as if such Successor Entity had been named as the Company therein.

 

(e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

C-8

 

 

(f) Notice to Holder.

 

i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. Provided such notice occurs within the Exercise Period, the Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

Section 4. Transfer of Warrant.

 

(a) Transferability. This Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Warrant Agent or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Warrant Agent shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Warrant Agent unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Warrant Agent within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

C-9

 

 

(b) New Warrants. If this Warrant is not held in global form through DTC (or any successor depository), this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Warrant Agent, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Warrant Agent shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issuance Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

(c) Warrant Register. The Warrant Agent shall register this Warrant, upon records to be maintained by the Warrant Agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

Section 5. Miscellaneous.

 

(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

 

(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will, or will cause the Warrant Agent to, make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

 

(d) Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

C-10

 

 

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

(e) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal Proceedings concerning the interpretation, enforcement and defense of this Warrant shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any provision hereunder), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such Proceeding. If any party shall commence an action or Proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or Proceeding.

 

(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate Proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

C-11

 

 

(h) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by facsimile or by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at ComSovereign Holding Corp., Attention: Chief Financial Officer, facsimile number: ([●]) [●]-[●], email address: bmihelich@comsovereign.com, or such other facsimile number, email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of such Holder appearing on the books of the Warrant Agent. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Notwithstanding any other provision of this Warrant, where this Warrant provides for notice of any event to the Holder, if this Warrant is held in global form by DTC (or any successor depositary), such notice shall be sufficiently given if given to DTC (or any successor depositary) pursuant to the procedures of DTC (or such successor depositary), subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.

 

(i) Warrant Agency Agreement. If this Warrant is held in global form through DTC (or any successor depositary), this Warrant is issued subject to the Warrant Agency Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agency Agreement, the provisions of this Warrant shall govern and be controlling.

 

(j) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

(k) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

(l) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

(m) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and either: (i) the Holder or the beneficial owner of this Warrant, on the other hand, or (ii) the vote or written consent of the Holders of at least 50.1% of the then outstanding Warrants issued pursuant to the Warrant Agency Agreement, on the other hand, provided that adjustments may be made to the Warrant terms and rights of this Warrant in accordance with Section 3 of this Warrant without the consent of any Holder or beneficial owner of the Warrants.

 

(n) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

(o) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

(Signature Page Follows)

 

C-12

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  COmsovereign holding corp.
 

 

 
  By:  
    Name:
    Title:

 

C-13

 

 

NOTICE OF EXERCISE

 

  To: comsovereign Holding corp.

 

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box):

 

¨ in lawful money of the United States; or

 

¨ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

     

 

The Warrant Shares shall be delivered to the following DWAC Account Number:

 

     
     
     
     
     

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: ________________________________________________________________

 

Signature of Authorized Signatory of Investing Entity: __________________________________________

 

Name of Authorized Signatory: ___________________________________________________________

 

Title of Authorized Signatory: ____________________________________________________________

 

Date: ________________________________________________________________________________

 

C-14

 

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

 

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:      
    (Please Print)  
       
Address:      
    (Please Print)  
       
Phone Number:      
       
Email Address:      
       
Dated: _____________________ __, ______      
       
Holder’s Signature:        
         
Holder’s Address:        

 

 

 

C-15

 

 

ANNEX D

 

AUTHORIZED REPRESENTATIVES

 

Name   Title   Signature
Daniel T. Hodges   Chief Executive Officer      
Brian T. Mihelich   Chief Financial Officer    

 

D-1

 

 

ANNEX E

 

Form of Warrant Certificate Request Notice

 

WARRANT CERTIFICATE REQUEST NOTICE

 

 

  To: ClearTrust, LLC, as Warrant Agent for ComSovereign Holding Company (the “Company”)

 

The undersigned Holder of Common Stock Purchase Warrants (“Warrants”) in the form of Global Warrants issued by the Company hereby elects to receive a Definitive Certificate evidencing the Warrants held by the Holder as specified below:

 

1) Name of Holder of Warrants in form of Global Warrants:

 

2) Name of Holder in Definitive Certificate (if different from name of Holder of Warrants in form of Global Warrants):

 

3) Number of Warrants in name of Holder in form of Global Warrants:

 

4) Number of Warrants for which Definitive Certificate shall be issued:

 

5) Number of Warrants in name of Holder in form of Global Warrants after issuance of

 

Definitive Certificate, if any:

 

6) Definitive Certificate shall be delivered to the following address:

 

 

 
 
 
 
 
 

 

The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Definitive Certificate, the Holder is deemed to have surrendered the number of Warrants in form of Global Warrants in the name of the Holder equal to the number of Warrants evidenced by the Definitive Certificate.

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: _____________________________________________________________

 

Signature of Authorized Signatory of Investing Entity: ______________________________________

 

Name of Authorized Signatory: _________________________________________________________

 

Title of Authorized Signatory: __________________________________________________________

 

Date:____________________________________

 

 

E-1

 

 

Exhibit 5.1

 

 

 

Writer’s email: kps@fdlawlv.com

 

December 16, 2020

 

Board of Directors

ComSovereign Holding Corp.

5000 Quorum Drive, STE 400

Dallas, TX 75254

 

Re: Registration Statement on Form S-1/A for ComSovereign Holding Corp.

 

Ladies and Gentlemen:

 

We have acted as Nevada counsel to ComSovereign Holding Corp., a Nevada corporation (the “Company”), in connection with the preparation of the Company’s registration statement on Form S-1, Registration No. 333-248490 (the “Registration Statement”), under the Securities Act of 1933, as amended (the “Securities Act”), initially filed by the Company with the Securities and Exchange Commission (the “Commission”) on August 28, 2020, as thereafter amended or supplemented. The Registration Statement relates to the registration of the proposed offer and sale of (i) a proposed maximum aggregate offering price of $28,750,000 of units (“Units”), with each Unit being comprised of one share of the Company’s common stock, par value $0.0001 per share (the “Common Stock” and each such share of Common Stock, a “Share” and collectively, the “Shares”), and one warrant (collectively, the “Unit Warrants”) to purchase one share of Common Stock (the shares issuable upon exercise of the Unit Warrants, the “Unit Warrant Shares”) and (ii) a proposed maximum aggregate offering price of $1,581,250 of Common Stock issuable upon the exercise of warrants (the “Underwriter Warrants” and, together with the Unit Warrants, the “Warrants”) to purchase shares of Common Stock (the “Underwriter Warrant Shares” and, together with the Unit Warrant Shares, the “Warrant Shares”) to be issued to Kingswood Capital Markets, division of Benchmark Investments, Inc. (the “Representative”), or its designees, as compensation for its services pursuant to an underwriting agreement to be entered into by and between the Company, the Representative and the other underwriters named therein, substantially in the form filed as Exhibit 1.1 to the Registration Statement (the “Underwriting Agreement”). The Units, the Shares, the Warrants and the Warrant Shares are collectively referred to as the “Securities.”

 

In rendering the opinion set forth herein, we have examined the originals, or photostatic or certified copies, of (i) the Restated Articles of Incorporation and Bylaws of the Company, each as amended to date, (ii) certain resolutions of the Board of Directors of the Company related to the filing of the Registration Statement, the authorization and issuance of the Securities and related matters, (iii) the Registration Statement and all exhibits thereto, (iv) the form of Underwriting Agreement, (v) a certificate executed by an officer of the Company, dated as of the date hereof, (vi) the forms of the Warrants, and (vii) such other records, documents and instruments as we deemed relevant and necessary for purposes of the opinion stated herein. In making the foregoing examination we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic or certified copies, and the authenticity of the originals of such copies. As to all questions of fact material to this opinion, where such facts have not been independently established, we have relied, to the extent we have deemed reasonably appropriate, upon representations or certificates of officers of the Company or governmental officials.

 

3275 South Jones Blvd., Suite 105 | Las Vegas, Nevada 89146 | Phone: (702) 307-9500 | Fax: (702) 382-9452

 

 

 

 

December 16, 2020

Page 2 of 3

 

We are admitted to practice only in the state of Nevada and have not considered, and express no opinion herein as to, the laws of any state or jurisdiction other than the Chapter 78 of the Nevada Revised Statutes of the State of Nevada, as currently in effect. Based upon the foregoing, and subject to the qualifications, assumptions, limitations and exceptions stated herein, we are of the opinion that:

 

1. When the Underwriting Agreement has been duly executed and delivered by the respective parties thereto and the Shares have been issued and delivered in accordance with the Underwriting Agreement against payment in full of the consideration payable therefor as determined by the Board of Directors of the Company or a duly authorized committee thereof and as contemplated by the Underwriting Agreement, the Shares will be validly issued, fully paid and non-assessable.

 

2. When the Underwriting Agreement has been duly executed and delivered by the respective parties thereto, the Unit Warrants have been duly executed by the Company and delivered to and paid for by the Representative pursuant to the terms of the Underwriting Agreement against payment in full of the consideration payable therefor as determined by the Board of Directors of the Company or a duly authorized committee thereof and as contemplated by the Underwriting Agreement, the Unit Warrants and the Unit Warrant Shares will have been duly authorized and if, as and when issued in accordance with the terms of the Unit Warrants, the Unit Warrant Shares will be validly issued, fully paid and non-assessable.

 

3. When the Underwriting Agreement has been duly executed and delivered by the respective parties thereto, the Underwriter Warrants have been duly executed by the Company and delivered to and paid for by the Representative pursuant to the terms of the Underwriting Agreement against payment in full of the consideration payable therefor as determined by the Board of Directors of the Company or a duly authorized committee thereof and as contemplated by the Underwriting Agreement and the Underwriter Warrants, the Underwriter Warrants and the Underwriter Warrant Shares will have been duly authorized and if, as and when issued in accordance with the terms of the Underwriter Warrants, the Underwriter Warrant Shares will be validly issued, fully paid and non-assessable.

 

 

 

 

December 16, 2020

Page 3 of 3

  

We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We further consent to the reference to our firm under the caption “Legal Matters” in the prospectus constituting a part of the Registration Statement. In giving this consent, we are not admitting that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. This opinion is given as of the date hereof and we assume no obligation to update or supplement such opinion after the date hereof to reflect any facts or circumstances that may thereafter come to our attention or any changes that may thereafter occur.

 

  Very truly yours,
   
  /s/ Flangas law group
   
  FLANGAS LAW GROUP

 

 

 

 

Exhibit 5.2

 

 

 

December 16, 2020

 

Board of Directors

ComSovereign Holding Corp.

5000 Quorum Drive, STE 400

Dallas, TX 75254

 

Re: Registration Statement on Form S-1 for ComSovereign Holding Corp.

 

Ladies and Gentlemen:

 

We have acted as New York counsel to ComSovereign Holding Corp., a Nevada corporation (the “Company”), in connection with the preparation of the Company’s registration statement on Form S-1, Registration No. 333-248490 (the “Registration Statement”), under the Securities Act of 1933, as amended (the “Securities Act”), initially filed by the Company with the Securities and Exchange Commission (the “Commission”) on August 28, 2020, as thereafter amended or supplemented. The Registration Statement relates to the registration of the proposed offer and sale of (i) a proposed maximum aggregate offering price of $28,750,000 of units (“Units”), with each Unit being comprised of one share of the Company’s common stock, par value $0.0001 per share (the “Common Stock” and each such share of Common Stock, a “Share” and collectively, the “Shares”), and one warrant (collectively, the “Unit Warrants”) to purchase one share of Common Stock (the shares issuable upon exercise of the Unit Warrants, the “Unit Warrant Shares”) that will be issued under the warrant agency agreement (each, a “Warrant Agreement”), to be dated on or about the date of the first issuance of the Units, by and between the Company and ClearTrust, LLC, as warrant agent (the “Warrant Agent”), and (ii) a proposed maximum aggregate offering price of $1,581,250 of warrants (the “Underwriter Warrants” and, together with the Unit Warrants, the “Warrants”) to purchase shares of Common Stock (the “Underwriter Warrant Shares” and, together with the Unit Warrant Shares, the “Warrant Shares”), to be issued to Kingswood Capital Markets, division of Benchmark Investments, Inc. (the “Representative”), or its designees, as compensation for its services pursuant to the underwriting agreement to be entered into by and between the Company, the Representative and the other underwriters named therein (the “Underwriting Agreement”). The Warrants and the Warrant Shares are collectively referred to as the “Securities.”

 

In rendering the opinion set forth herein, we have examined the originals, or photostatic or certified copies, of (i) the Restated Articles of Incorporation (the “Articles”) and Amended and Restated Bylaws (the “Bylaws”) of the Company, each as amended to date and as filed as exhibits to the Registration Statement, (ii) certain resolutions of the Board of Directors of the Company related to the filing of the Registration Statement, the authorization and issuance of the Securities and related matters, (iii) the Registration Statement and all exhibits thereto, (iv) the form of Underwriting Agreement to be entered into by the Company and the Representative and the form of Warrant Agreement to be entered into by the Company and the Warrant Agent , (v) a certificate executed by an officer of the Company, dated as of the date hereof, (vi) the forms of the Warrants, and (vii) such other records, documents and instruments as we deemed relevant and necessary for purposes of the opinion stated herein. In making the foregoing examination we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic or certified copies, and the authenticity of the originals of such copies. As to all questions of fact material to this opinion, where such facts have not been independently established, we have relied, to the extent we have deemed reasonably appropriate, upon representations or certificates of officers of the Company or governmental officials.

 

 

 

 

 

December 16, 2020

Page 2 of 3

 

Our opinion herein is expressed solely with respect to the federal laws of the United States and the New York Business Corporation Law. Our opinion is based on these laws as in effect on the date hereof. We express no opinion as to whether the laws of any particular jurisdiction are applicable to the subject matter hereof. We are not rendering any opinion as to compliance with any federal or state law, rule or regulation relating to securities, or to the sale or issuance thereof.

 

On the basis of the foregoing and in reliance thereon, and subject to the qualifications herein stated, we are of the opinion that:

 

1. With respect to the Unit Warrants, provided that (i) the Registration Statement has become effective under the Securities Act and the Prospectus contained therein has been delivered and filed with the Commission as required by all applicable laws; (ii) the Underwriting Agreement has been duly authorized by the Company and each of the underwriters named therein by all necessary corporate action; (iii) the Underwriting Agreement is in substantially the form filed as an exhibit to the Registration Statement and has been duly executed and delivered by the Company and each of the underwriters named therein; (iv) the Warrant Agreement has been duly authorized by the Company and the Warrant Agent by all necessary corporate action; (v) the Warrant Agreement is in substantially the form filed as an exhibit to the Registration Statement and has been duly executed and delivered by the Company and the Warrant Agent; (vi) the issuance and terms of the Unit Warrants have been duly authorized by the Company by all necessary corporate action; (vii) the terms of the Unit Warrants and of their issuance and sale have been duly established in conformity with Underwriting Agreement and the Warrant Agreement and as described in the Registration Statement and the related Prospectus so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company, so as to be in conformity with the Articles and the Bylaws, and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company; and (viii) the Unit Warrants have been duly executed and delivered by the Company and authenticated by the Warrant Agent pursuant to the Warrant Agreement and delivered against payment therefor pursuant to the Underwriting Agreement, the Unit Warrants, when issued and sold as contemplated in the Registration Statement and the Prospectus and in accordance with the Underwriting Agreement and the Warrant Agreement, will be valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally, and by general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity).

 

 

 

 

 

December 16, 2020

Page 3 of 3

 

2. With respect to the Underwriter Warrants, provided that (i) the Registration Statement has become effective under the Securities Act and the Prospectus contained therein has been delivered and filed with the Commission as required by all applicable laws; (ii) the Underwriting Agreement has been duly authorized, executed and delivered by the Company and the underwriters named therein by all necessary corporate action; (iii) the Underwriting Agreement is in substantially the form filed as an exhibit to the Registration Statement; (iv) the issuance and terms of the Underwriter Warrants have been duly authorized by the Company by all necessary corporate action; (v) the terms of the Underwriter Warrants and of their issuance and sale have been duly established in conformity with the Underwriting Agreement and as described in the Registration Statement and the related Prospectus so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company, so as to be in conformity with the Articles and the Bylaws, and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company; and (vi) the Underwriter Warrants have been duly executed and delivered by the Company pursuant to the Underwriting Agreement and delivered against payment therefor, the Underwriter Warrants, when issued and sold as contemplated in the Registration Statement and the Prospectus and in accordance with the Underwriting Agreement, will be valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally, and by general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity)

 

We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We further consent to the reference to our firm under the caption “Legal Matters” in the prospectus constituting a part of the Registration Statement. In giving this consent, we are not admitting that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. This opinion is given as of the date hereof and we assume no obligation to update or supplement such opinion after the date hereof to reflect any facts or circumstances that may thereafter come to our attention or any changes that may thereafter occur.

 

  Very truly yours,
   
  /s/ Pryor Cashman LLP

 

 

 

 

Exhibit 10.43

 

 

 

SECURED LOAN AGREEMENT

 

Among

 

COMSOVEREIGN HOLDING CORP.,

 

as Borrower,

 

THE GUARANTORS FROM TIME TO TIME PARTY HERETO,

 

and

 

DWX SERVICING AGENT, LLC,

 

as Lender.

 

 

 

 

 

 

 

Dated as of December 8, 2020

 

 

 

 

 

 

SECURED LOAN AGREEMENT

 

This SECURED LOAN AGREEMENT (the “Agreement”) is entered into as of December 8, 2020, by and among COMSOVEREIGN HOLDING CORP., a Nevada corporation (the “Borrower”), the other Persons party hereto from time to time as Guarantors, and DWX SERVICING AGENT, LLC (the “Lender”).

 

WHEREAS, The Borrower wishes to obtain a loan from the Lender in the principal amount of up to ONE MILLION ONE HUNDRED THOUSAND DOLLARS and 00/100 ($1,100,000.00); which amount less US$100,000.00 (the “OID) will be wired to Borrower as follows: A) $700,000.00 upon execution of the Agreement and B) $300,000.00 on or before December 14, 2020 (“Term Loan”) and

 

WHEREAS, as a condition to the agreement of the Lender to enter into this Agreement, and to make the requested Term Loan, the Lender has required the Borrower Parties (as defined below) to grant a first priority lien on and security interest in all of the Collateral (as defined herein) in favor of the Lender in order to secure repayment of the obligations of the Borrower and the other Borrower Parties under this Agreement, the Note (as defined herein) and the other Loan Documents (as defined herein);

 

WHEREAS, as a condition to the agreement of the Lender to enter into this Agreement and to make the requested Term Loan, the Lender has required each Guarantor to provide an unconditional guaranty of the obligations of the Borrower under this Agreement, the Note and the other Loan Documents; and

 

WHEREAS, the Lender is willing to make the requested Term Loan to the Borrower on the terms and subject to the conditions set forth herein.

 

NOW, THEREFORE, in consideration of the premises and to induce the Lender to make the Term Loan and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1. DEFINITIONS AND CONSTRUCTION.

 

1.1 Definitions. As used in this Agreement, all capitalized terms shall have the definitions set forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.

 

1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and schedules.

 

1.3 Recitals. The recitals set forth above are, by this reference, incorporated into and deemed a part of this Agreement.

 

1

 

 

2. LOAN AND TERMS OF PAYMENT.

 

2.1 Credit Extensions.

 

(a) Promise to Pay. The Borrower promises to pay to the Lender, in lawful money of the United States of America, the unpaid principal amount of the Term Loan made by Lender to Borrower, together with interest on the unpaid principal amount of the Term Loan, at rates in accordance with the terms hereof, and any and all fees and expenses to which Lender is entitled under the Loan Documents.

 

(b) Advances Under Term Loan.

 

(i) Amount. Subject to and upon the terms and conditions of this Agreement, Lender shall make a Term Loan to Borrower in the aggregate principal amount of up to One Million One Hundred Thousand and 00/100 Dollars ($1,100,000.00) with an initial advance of Eight Hundred Thousand Dollars ($800,000.00) less the OID (“Initial Advance”) on the Closing Date. Lender shall make a second advance of Three Hundred Thousand Dollars ($300,000.00) on or before December 14, 2020.

 

(ii) Use of Proceeds. The Term Loan shall be used by Borrower only to pay obligations of the Borrower other than amounts owed to repay existing loans and other financial obligations to previous lenders or investors.

 

(c) Note. The Term Loan made by the Lender shall be evidenced by the Note, substantially in the form of Exhibit B attached hereto, which shall be payable to the order of the Lender and shall bear interest as provided in section 2.2.

 

2.2 Interest Rates, Payments, Computation and Fees.

 

(a) Interest Rate. The Term Loan shall bear interest, on the outstanding daily balance thereof, at a fixed rate equal to ten percent (10.0%) per annum.

 

(b) Default Interest. During the continuance of an Event of Default, the amount of any principal outstanding under the Term Loan shall bear interest, payable on demand, to the extent permitted by law compounded monthly at a fixed rate equal to three percent (3.00%) per month.

 

(c) Interest Rate Limitation. Notwithstanding anything to the contrary contained herein, including without limitation Section 2.2(b), and in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the “Maximum Rate”). If the Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Term Loan or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

 

2

 

 

(d) Payments. Borrower shall repay the principal amounts outstanding under the Term Loan along with all amounts of interest, fees, and other amounts due hereunder in full on the Term Loan Maturity Date. Borrower shall have the right, at any time and from time to time, to prepay, in whole or in part and without premium or penalty, the Term Loan. All outstanding principal and any accrued and unpaid interest, fees and other costs shall be due and payable on the Term Loan Maturity Date.

 

(e) Mandatory Repayment. The Borrower shall repay in full the outstanding principal balance of the Term Loan and all interest thereon upon the first to occur of: (x) the Term Loan Maturity Date, (y) an acceleration of the amounts due hereunder following an Event of Default (and the expiration of any applicable grace or cure period), or (z) the occurrence of an initial public offering or other financing/loan by Borrower or any of its Subsidiaries, including Guarantor (“Restructuring Event”).

 

(f) Computation; Application of Payments. All interest chargeable under the Loan Documents shall be computed on the basis of a 360-day year for the actual number of days elapsed. All payments made hereunder in respect of the Term Loan shall be applied: (i) first, to the payment of any fees or charges outstanding under any of the Loan Documents; (ii) second, to accrued interest on the Term Loan; and (iii) third, to the payment of the unpaid principal of the Term Loan. Notwithstanding the foregoing, after an Event of Default, all payments made hereunder may be applied by the Lender in such order, in such priority and in such proportion as the Lender shall elect in its sole discretion.

 

(g) Fees. As provided above, Borrower is paying to Lender an original issue discount of $100,000 to cover Lender’s costs and expenses (including legal fees) incurred in negotiating, conducting due diligence, documenting and closing the transactions contemplated by this Agreement, including, without limitation, the cost of perfecting the Liens granted to the Lender under the Loan Documents.

 

(h) Late Fees. The Borrower shall pay the Lender a late fee of ten (10%) of any payment not timely received by Lender (e.g., when due for interest payment; within two (2) business days of notice of non-payment for principal payments); provided, with respect to any late fees owed upon the acceleration of the Term Loan, the late fees incurred by the Borrower pursuant to this Section 2.2(h) shall not exceed the amount of $100,000.00 in the aggregate.

 

The Borrower acknowledges and agrees the Late Fee is not a charge for the use of the money, but is imposed to compensate the Lender for administrative services, costs and losses associated with any payment default (including a payment default upon maturity) under this Agreement, and any Late Fee is fully earned and nonrefundable when accrued.

 

2.3 Crediting Payments. Whenever any payment to the Lender under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional interest shall accrue and be payable for the period of such extension. Lender shall maintain records in which it will record (i) the amount of the Term Loan made hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable from Borrower to Lender hereunder and (iii) the amount of any sum received by Lender from Borrower or Guarantor. The entries made in the records maintained pursuant hereto shall be prima facie evidence of the existence and amounts of the obligations therein recorded absent manifest error; provided, however, that the failure of Lender to maintain such records or any error therein shall not in any manner affect the obligations of Borrower to repay the Term Loan in accordance with the terms of this Agreement.

 

3

 

 

2.4 Term. This Agreement shall become effective on the Closing Date and, subject to Section 14.8, shall continue in full force and effect for so long as any Obligations remain outstanding. Lender’s obligation to advance funds hereunder shall terminate upon the making of the Term Loan on the Closing Date.

 

3. CONDITIONS OF LOANS; CLOSING COVENANTS.

 

3.1 Conditions Precedent to Closing. The agreement of Lender to enter into this Agreement on the Closing Date and to fund the Term Loan is subject to the satisfaction, or waiver by Lender, immediately prior to or concurrently with the making of such Term Loan of the following conditions precedent:

 

(a) the Lender shall have received this Agreement and each other Loan Document duly executed and delivered by an Authorized Officer of each Borrower Party to which such Borrower Party is a party, other than such Loan Documents required to be delivered to the Lender pursuant to Section 3.2;

 

(b) the Lender shall have received a copy of the resolutions in form and substance reasonably satisfactory to the Lender, of the board of directors (or other managing body) of the Parent and the Borrower authorizing (i) the execution, delivery and performance of this Agreement, the Note, the Pledge and Security Agreement and the other Loan Documents, and (ii) the granting by each Borrower Party of the security interests in and liens upon the Collateral certified by an Authorized Officer thereof as of the Closing Date; and, such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate;

 

(c) the Lender shall have received a certificate of an Authorized Officer of the Parent and the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of each Borrower Party executing this Agreement, the Loan Documents, any certificate or other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary;

 

(d) no litigation, investigation or proceeding before or by any arbitrator or Governmental Body shall be continuing that is not disclosed in the most recent SEC filing of the Company, or to the knowledge of any of the Borrower Parties, threatened against any Borrower Party or against the respective officers or directors of any Borrower Party (A) in connection with this Agreement or the Loan Documents or any of the transactions contemplated thereby or (B) which, if determined adversely with respect to any such Borrower Party, could, in the reasonable opinion of Lender, be expected to have a Material Adverse Effect; and (ii) no injunction, writ, restraining order or other order of any nature materially adverse to any Borrower Party or the conduct of its business shall have been issued by any Governmental Body;

 

4

 

 

(e) since the date of the most recent SEC filing through the date of this Agreement, there shall not have occurred a Material Adverse Effect;

 

(f) no representations made by any Borrower Party under this Agreement or the Loan Documents or written information (other than projections or estimates or third party data) supplied by any Borrower Party to the Lender (taken as a whole and after giving effect to all supplements) shall have been proven to be inaccurate or misleading in any material respect;

 

(g) the Lender shall have received a closing certificate signed by an officer of the Borrower dated as of the date hereof, stating that (i) all representations and warranties set forth in this Agreement and the Loan Documents are true and correct in all material respects on and as of such date (provided that any such representations and warranties that by their express terms are made as of a specific date shall be true and correct as of such specific date), (ii) each Borrower Party is on such date in compliance with all the terms and provisions set forth in this Agreement and the Loan Documents, and (iii) on such date no Event of Default has occurred or is continuing;

 

(h) no injunction, writ, restraining order or other order of any nature materially adverse to any of the Borrower Parties or the subject matter of the Pledge and Security Agreement shall have been issued by any Governmental Body; and

 

(i) Lender shall have received such other documents or certificates, and completion of such other matters, as Lender may reasonably request to be delivered or completed on the Closing Date.

 

3.2 Closing Covenants. Each Borrower Party hereby covenants and agrees that, as soon as possible after the Closing Date, and in no event later than the tenth (10th) Business Day following the Closing Date, the Borrower Parties shall (unless any of the following is expressly waived by the Lender in writing):

 

(a) deliver to the Lender a good standing certificate for each of the Borrower Parties dated not more than ten (10) days prior to the Closing Date, issued by the appropriate official of each such Borrower Parties’ jurisdiction of organization or incorporation;

 

(b) cause each document (including any financing statement) required by this Agreement, any related agreement or under law or reasonably requested by the Lender to be filed, registered or recorded in order to create, in favor of the Lender, a perfected security interest in or lien upon the Collateral in each jurisdiction in which the filing, registration or recordation thereof is so required or requested, and deliver to the Lender an acknowledgment copy, or other evidence satisfactory to it, of each such filing, registration or recordation and satisfactory evidence of the payment of any necessary fee, tax or expense relating thereto;

 

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(c) deliver to the Lender a copy of the resolutions in form and substance reasonably satisfactory to the Lender, of the board of directors (or other managing body) of each Borrower Party (other than the Borrower) authorizing (i) the execution, delivery and performance of this Agreement, the Note, the Pledge and Security Agreement and the other Loan Documents, and (ii) the granting by such Borrower Party of the security interests in and liens upon the Collateral certified by an Authorized Officer thereof as of the Closing Date; and, such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate;

 

(d) deliver to the Lender a certificate of an Authorized Officer of each Borrower Party (other than the Borrower), dated the Closing Date, as to the incumbency and signature of the officers of such Borrower Party executing this Agreement, the Loan Documents, any certificate or other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary;

 

(e) deliver to the Lender such other documents or certificates, and complete such other matters, as Lender may reasonably request to be delivered or completed within said ten (10) Business Days following Closing Date in connection with the closing of the transaction contemplated by this Agreement.

 

4. GUARANTY.

 

4.1 Guaranty.

 

(a) Each Guarantor hereby guarantees to the Lender the full and prompt payment and performance of the Obligations, including, without limitation, any interest thereon (including, without limitation, interest as provided in this Agreement, accruing after the filing of a petition initiating any Insolvency Proceedings, whether or not such interest accrues or is recoverable against the Borrower after the filing of such petition for purposes of the Bankruptcy Code or is an allowed claim in such proceeding), plus reasonable attorneys’ fees and expensesif the obligations represented by this Guaranty are collected by law, through an attorney-at-law, or under advice therefrom.

 

(b) Regardless of whether any proposed guarantor or any other Person shall become in any other way responsible to the Lender for or in respect of the Obligations or any part thereof, and regardless of whether or not any Person now or hereafter is responsible to the Lender for the Obligations or any part thereof, whether under this Guaranty or otherwise, shall cease to be so liable, each Guarantor hereby declares and agrees that this Guaranty shall be a joint and several obligation of each Guarantor, shall be a continuing guaranty and shall be operative and binding until (i) the Obligations shall have been indefeasibly paid in full in cash and (ii) the Lender shall no longer have the right to make any future Advances hereunder.

 

(c) Each Guarantor absolutely, unconditionally and irrevocably waives any and all right to assert any defense (other than the defense of payment in cash in full, to the extent of its obligations hereunder, or a defense that such Guarantor’s liability is limited as provided in Section 3.1(g)), set-off, counterclaim or cross-claim of any nature whatsoever with respect to this Guaranty or the obligations of the Guarantors under this Guaranty or the obligations of any other Person or party (including, without limitation, the Borrower) relating to this Guaranty or the obligations of any of the Guarantors under this Guaranty or otherwise with respect to the Obligations in any action or proceeding brought by the Lender to collect the Obligations or any portion thereof, or to enforce the obligations of any of the Guarantors under this Guaranty.

 

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(d) The Lender may from time to time, without exonerating or releasing any Guarantor in any way under this Guaranty, (i) take such further or other security for the Obligations or any part thereof as they may deem proper, or (ii) fail to deal with any Guarantor of the Obligations or any security therefor or any part thereof now or hereafter held by the Lender. Without limiting the generality of the foregoing, or of Section 3.1(e), it is understood that the Lender may, without exonerating or releasing any Guarantor, give up, modify or abstain from perfecting or taking advantage of any security for the Obligations and accept or make any compositions or arrangements, and realize upon any security for the Obligations when, and in such manner, and with or without notice, all as such Person may deem expedient.

 

(e) Each Guarantor acknowledges and agrees that no change in the nature or terms of the Obligations or any of the Loan Documents, or other agreements, instruments or contracts evidencing, related to or attendant with the Obligations (including any novation), shall discharge all or any part of the liabilities and obligations of such Guarantor pursuant to this Guaranty; it being the purpose and intent of the Guarantors, the Lender that the covenants, agreements and all liabilities and obligations of each Guarantor hereunder are absolute, unconditional and irrevocable under any and all circumstances. Without limiting the generality of the foregoing, each Guarantor agrees that until each and every one of the covenants and agreements of this Guaranty is fully performed, and without possibility of recourse, whether by operation of law or otherwise, such Guarantor’s undertakings hereunder shall not be released, in whole or in part, by any action or thing which might, but for this paragraph of this Guaranty, be deemed a legal or equitable discharge of a surety or guarantor, or by reason of any waiver, omission of the Lender, or its failure to proceed promptly or otherwise, or by reason of any action taken or omitted by the Lender, whether or not such action or failure to act varies or increases the risk of, or affects the rights or remedies of, such Guarantor or by reason of any further dealings between the Borrower, on the one hand, and the Lender, on the other hand, or any other guarantor or surety, and such Guarantor hereby expressly waives and surrenders any defense to its liability hereunder, or any right of counterclaim or offset of any nature or description which it may have or may exist based upon, and shall be deemed to have consented to, any of the foregoing acts, omissions, things, agreements or waivers.

 

(f) The Lender may, without demand or notice of any kind upon or to any Guarantor, at any time or from time to time when any amount shall be due and payable hereunder by any Guarantor upon the occurrence and during the continuance of an Event of Default, if the Borrower shall not have timely paid any of the Obligations, set-off and appropriate and apply to any portion of the Obligations hereby Guaranteed, and in such order of application as the Lenders may from time to time elect in accordance with this Agreement, any deposits, property, balances, credit accounts or moneys of any Guarantor in the possession of the Lender or under its control for any purpose. If and to the extent that any Guarantor makes any payment to the Lender or any other Person pursuant to or in respect of this Guaranty, any claim which such Guarantor may have against the Borrower by reason thereof shall be subject and subordinate to the prior payment in full of the Obligations to the satisfaction of the Lender.

 

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(g) The creation or existence from time to time of Obligations in excess of the amount committed to or outstanding on the date of this Guaranty is hereby authorized, without notice to any Guarantor, and shall in no way impair or affect this Guaranty or the rights of the Lender herein. It is the intention of each Guarantor and the Lender that each Guarantor’s obligations hereunder shall be, but not in excess of, the Maximum Guaranteed Amount (as herein defined). The “Maximum Guaranteed Amount” with respect to any Guarantor, shall mean the maximum amount which could be paid by such Guarantor without rendering this Guaranty void or voidable as would otherwise be held or determined by a court of competent jurisdiction in any action or proceeding involving any state, provincial or Federal bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws relating to the insolvency of debtors.

 

(h) Upon the bankruptcy or winding up or other distribution of assets of the Borrower, or of any surety or guarantor (other than the applicable Guarantor) for any Obligations of the Borrower to the Lender, the rights of the Lender against any Guarantor shall not be affected or impaired by the omission of the Lender to prove its claim, or to prove the full claim, as appropriate, against the Borrower or any such other Guarantor or surety, and the Lender may prove such claims as they see fit and may refrain from proving any claim and in their discretion may value as they see fit or refrain from valuing any security held by them without in any way releasing, reducing or otherwise affecting the liability to the Lender of each of the Guarantors.

 

(i) Each Guarantor hereby absolutely, unconditionally and irrevocably expressly waives, except to the extent such waiver would be expressly prohibited by applicable law, the following: (i) notice of acceptance of this Guaranty, (ii) notice of the existence or creation of all or any of the Obligations, (iii) presentment, demand, notice of dishonor, protest and all other notices whatsoever (other than notices expressly required hereunder or under any other Loan Document to which any Guarantor is a party), (iv) all diligence in collection or protection of or realization upon the Obligations or any part thereof, any obligation hereunder, or any security for any of the foregoing, (v) all rights to enforce any remedy which the Lender may have against the Borrower, and (vi) until the Obligations shall have been paid in full in cash, all rights of subrogation, indemnification, contribution and reimbursement from the Borrower for amounts paid hereunder and any benefit of, or right to participate in, any collateral or security now or hereinafter held by the Lender in respect of the Obligations. If a claim is ever made upon the Lender for the repayment or recovery of any amount or amounts received by such Person in payment of any of the Obligations and such Person repays all or part of such amount by reason of (A) any judgment, decree or order of any court or administrative body having jurisdiction over such Person or any of its property, or (B) any settlement or compromise of any such claim effected by such Person with any such claimant, including the Borrower, then in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or the cancellation of any promissory note or other instrument evidencing any of the Obligations, and such Guarantor shall be and remain obligated to such Person hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by such Person.

 

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(j) This Guaranty is a continuing guaranty of the Obligations and all liabilities to which it applies or may apply under the terms hereof and shall be conclusively presumed to have been created in reliance hereon. No failure or delay by the Lender in the exercise of any right, power, privilege or remedy shall operate as a waiver thereof, and no single or partial exercise by the Lender of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy and no course of dealing between any Guarantor and the Lender shall operate as a waiver thereof. No action by the Lender permitted hereunder shall in any way impair or affect this Guaranty. For the purpose of this Guaranty, the Obligations shall include, without limitation, all Obligations of the Borrower to the Lender, notwithstanding any right or power of any third party, individually or in the name of the Borrower or the Lender to assert any claim or defense as to the invalidity or unenforceability of any such Obligation, and no such claim or defense shall impair or affect the obligations of any Guarantor hereunder.

 

(k) This is a guaranty of payment and performance and not of collection. In the event the Lender makes a demand upon any Guarantor in accordance with the terms of this Guaranty, such Guarantor shall be held and bound to the Lender directly as debtor in respect of the payment of the amounts hereby Guaranteed. All reasonable costs and expenses, including, without limitation, attorneys’ fees, and expenses, incurred by the Lender in obtaining performance of or collecting payments due under this Guaranty shall be deemed part of the Obligations Guaranteed hereby.

 

(l) Each Guarantor is a direct or indirect wholly owned Subsidiary of the Borrower. Each Guarantor expressly represents and acknowledges that any financial accommodations by the Lender to the Borrower, including, without limitation, the extension of credit, are and will be of direct interest, benefit, and advantage to such Guarantor.

 

(m) Each Guarantor shall be entitled to subrogation and contribution rights from and against the Borrower to the extent any Guarantor is required to pay to the Lender any amount in excess of the Term Loan advanced directly to, or other Obligations incurred directly by, such Guarantor or as otherwise available under applicable law; provided, however, that such subrogation and contribution rights are and shall be subject to the terms and conditions of this Section 3.1 and Section 14.3. The payment obligation of a Guarantor to any other Guarantor under any applicable law regarding contribution rights among co-obligors or otherwise shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Guaranty, and such Guarantor shall not exercise any right or remedy with respect to such rights until payment and satisfaction in full of all such obligations. Notwithstanding anything to the contrary contained in this Guaranty, no Guarantor shall exercise any rights of subrogation, contribution, indemnity, reimbursement or other similar rights against, nor shall proceed or seek recourse against or with respect to any property or asset of, the Borrower, any other Guarantor or any other guarantor (including after payment in full of the Obligations), if all or any portion of the Obligations have been satisfied in connection with an exercise of remedies in respect of the Equity Interests of the Borrower, any other Guarantor or any other guarantor whether pursuant to the a Loan Document, or otherwise.

 

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(n) Each Guarantor has independently, and without reliance on any information supplied by the Lender, taken, and will continue to take, whatever steps it deems necessary to evaluate the financial condition and affairs of the Borrower or any Collateral, and the Lender shall have no duty to advise the Guarantors of information at any time known to it regarding such financial condition or affairs or any Collateral.

 

5. SECURITY INTEREST.

 

5.1 Security Interest. Each Borrower Party shall grant and pledge to the Lender a continuing security interest in and lien on the Collateral, pursuant to and in accordance with the terms and conditions of the Pledge and Security Agreement, to secure prompt repayment of any and all Obligations and to secure prompt performance by each Borrower Party of each of its covenants and duties under the Loan Documents. Except for Permitted Liens, such security interests and liens constitute valid, first priority security interests in and liens on the presently existing Collateral, and will constitute valid, first priority security interests in and liens on later-acquired Collateral. Notwithstanding any termination of this Agreement or of any filings undertaken related to the Lender’s rights under the Code, the Lender’s Liens on the Collateral shall remain in effect for so long as any Obligations are outstanding.

 

5.2 Further Grant of Security Interest. To the extent that the Pledge and Security Agreement does not create a valid security interest in any of the Collateral in favor of the Lender, each Borrower Party hereby grants to the Lender a continuing security interest in and lien on the Collateral, including, without limitation, all Real Property, of any kind or nature, now or hereafter acquired by or on behalf of VNC or its Subsidiaries. Upon request by the Lender, VNC or its applicable Subsidiary shall execute and deliver to the Lender a Mortgage, in recordable form and in form and substance satisfactory to the Lender, with respect to any and all Collateral constituting or consisting of Real Property owned, held or leased by or on behalf of VNC or such Subsidiary, further granting to the Lender a first priority security interest therein and lien thereon.

 

5.3 Perfection of Security Interest. Each Borrower Party hereby authorizes the Lender to file at any time financing statements, continuation statements, and amendments thereto that (i) generally or specifically describe the Collateral, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether such Borrower Party is an organization, the type of organization and any organizational identification number issued to such Borrower Party, if applicable. Each Borrower Party hereby authorizes the Lender to record, in any and all courthouses or recording offices in all applicable jurisdictions, any Mortgages pertaining to Collateral constituting or consisting of Real Property of such Borrower Party, and any amendment or continuations thereto, as may be necessary or desirable to perfect the security interests and liens of the Lender in and on any such Collateral. Each Borrower Party shall, and hereby authorizes the Lender to, take such other actions as may be necessary or as the Lender reasonably requests to perfect its security interests granted under the Pledge and Security Agreement. Nothing set forth herein shall limit, in any way, any of the rights, powers or authority granted to the Lender in the Pledge and Security Agreement.

 

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5.4 Books and Records. Each Borrower Party shall (a) keep proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to its business and affairs in any material respect; (b) set up on its books accruals with respect to all material taxes, assessments, charges, levies and claims to the extent required by GAAP; and (c) on a reasonably current basis set up on its books, from its earnings, allowances against doubtful Accounts, advances and investments and all other proper accruals (including by reason of enumeration, accruals for premiums, if any, due on required payments and accruals for depreciation, obsolescence, or amortization of properties), which should be set aside from such earnings in connection with its business all in accordance with and to the extent required by GAAP. All determinations pursuant to this Section 5.4 shall be made in accordance with, or as required by, GAAP consistently applied by such Borrower Party.

 

5.5 Financial Disclosure. Each Borrower Party hereby irrevocably authorizes and directs all accountants and auditors employed by any Borrower Party at any time any Obligations are outstanding to exhibit and deliver to the Lender copies of such Borrower Party’s financial statements, trial balances or other accounting records of any sort in the accountant’s or auditor’s possession, and to disclose to the Lender any information such accountants may have concerning such Borrower Party’s financial status and business operations, in each case subject to the applicable confidentiality undertakings or agreements reasonably requested by any Borrower Party, but in any case not more often than every 30 days.

 

6. REPRESENTATIONS AND WARRANTIES.

 

Each Borrower Party represents and warrants as follows:

 

6.1 Due Organization and Qualification. Borrower is a corporation and duly existing under the laws of Nevada and qualified and licensed to do business in any state or country in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect. VNC is an entity organized and duly existing under the laws of Virginia and qualified and licensed to do business in any state or country in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect. Other than disclosed in Schedule 6.1, there are no (i) outstanding obligations, options, warrants, convertible or exchangeable securities or other rights, agreements or commitments (written, oral, contingent or otherwise) relating to the equity interests of VNC, or (ii) voting trusts, member agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of the equity interests of VNC.

 

6.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within each Borrower Party’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in any Borrower Party’s certificate of incorporation, articles of incorporation, bylaws, certificate of organization, articles of organization, operating agreement or other similar incorporation, organization or formation document or instrument, nor will they constitute an event of default under, a breach of or a violation of any material agreement by which any Borrower Party is bound. No Borrower Party is in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.

 

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6.3 Collateral. Each Borrower Party has rights in or the power to transfer the Collateral owned or held by such Borrower Party, and its title to such Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens.

 

6.4 Names; Locations of Chief Executive Offices. Except as disclosed in Schedule 6.4, no Borrower Party has done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth on the signature page hereof.

 

6.5 Litigation. Except as set forth in Schedule 6.5, (i) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, proceedings or investigations filed, or threatened to be filed, before any court, governmental entity, arbitration panel or mediator pending by or against any Borrower Party, their properties or other assets, or any of their officers or directors in their capacity as such and (ii) there are no actions or proceedings pending by or against any Borrower Party before any court or administrative agency in which a likely adverse decision would reasonably be expected to have a Material Adverse Effect.

 

6.6 No Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to each Borrower Party that have been delivered by the Borrower Parties to the Lender fairly present in all material respects the consolidated and consolidating financial condition of the Borrower Parties as of the date thereof and the consolidated and consolidating results of operations of the Borrower Parties for the period then ended. There has not been a material adverse change in the consolidated or in the consolidating financial condition of the Borrower Parties since the date of the most recent of such financial statements submitted to the Lender.

 

6.7 Solvency, Payment of Debts. After giving effect to the Initial Advance, the Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value of the Borrower’s assets (including goodwill minus disposition costs) exceed the fair value of its liabilities; and the Borrower is not left with unreasonably small capital. After giving effect to the Initial Advance, the Borrower Parties, collectively, are able to pay their collective debts (including trade debts) as they mature; the fair saleable value of the Borrower Parties’ combined assets (including good will minus disposition costs) exceed the fair value of their combined liabilities; and the Borrower Parties, collectively, are not left with unreasonably small capital.

 

6.8 Compliance with Laws and Regulations. Each Borrower Party has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from any Borrower Party’s failure to comply with ERISA that is reasonably likely to result in Borrower’s incurring any liability that could have a Material Adverse Effect. No Borrower Party is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. No Borrower Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). No Borrower Party has violated any statutes, laws, ordinances, or rules applicable to it, the violation of which would reasonably be expected to have a Material Adverse Effect.

 

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6.9 Government and Third Party Consents. Each Borrower Party has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities and other third parties that are necessary in order to consummate the transactions contemplated under this Agreement and for the continued operation of such Borrower Party’s business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.

 

6.10 Full Disclosure. No representation, warranty or other statement made by any Borrower Party in any certificate or written statement furnished to the Lender taken together with all such certificates and written statements furnished to the Lender contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading in light of the circumstances in which they were made, it being recognized by the Lender that the projections and forecasts provided by the Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.

 

6.11 Financial Statements. Unless otherwise publicly available via recent SEC filing made within the previous 30 days, the Borrower shall deliver within five (5) business days after Closing to the Lender true and complete copies of the Borrower’s most recent financial statements which were prepared in accordance with past practice.

 

6.12 Tax Matters. Except as set forth in Schedule 6.12, each Borrower Party has (a) filed all tax returns required to be filed by it, (b) paid in full all taxes shown to be due on such tax returns. Other than as set forth in the Schedule 6.12, no Borrower Party has received any written notice of any audit, claim, assessment, levy or administrative or judicial proceeding with respect to taxes of any Borrower Party which have not been fully paid or finally settled.

 

6.13 Labor Matters. Except as set forth in Schedule 6.13, (i) no Borrower Party is a party to any collective bargaining agreement or any other labor-related agreements with any labor union and (ii) there is no unfair labor practice charge or complaint filed against any Borrower Party.

 

6.14 Compliance with Environmental and Health and Safety Laws. Except as set forth on Schedule 6.14, each Borrower Party has at all times during the past three (3) years complied and is in compliance in all material respects with all applicable environmental, health and safety laws, rules and regulations. No Borrower Party has received any written or, to the knowledge of each of the Borrower Parties, oral notice or report regarding any actual or alleged material violation, non-compliance, liability or potential liability regarding hazardous substances or environmental, health and safety laws, rules or regulations with regard to the operations of the any Borrower Party or the ownership of any assets of any Borrower Party, or any other business for which any Borrower Party may have retained liability under any contract, in each case, the subject matter of which remains unresolved.

 

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6.15 Secured Indebtedness. Schedule 6.15 contains a complete list of all of the Indebtedness of each Borrower Party which is secured by a Lien granted to a third party with respect to any of the Collateral, and identifies the creditor or other Person to which such Indebtedness is owed, the outstanding amount of such Indebtedness owed to each such creditor or other Person as of the date of this Agreement and the Collateral subject to the Lien securing such Indebtedness.

 

6.16 Material Contracts. Schedule 6.16 identifies, as of the Closing Date, each Material Contract that requires consent to the granting of a Lien in favor of the Lender on the rights of any Borrower Party thereunder. VNC is not in default under or with respect to any Material Contract to which it is a party or by which it or any of its properties are bound which default gives rise to a right of termination by the non-defaulting party.

 

6.17 Material Tangible Personal Property. The Pledge and Security Agreement (including the schedules attached thereto) contains accurate and complete lists of all material tangible personal property and equipment owned, leased or otherwise controlled by any of Borrower’s Subsidiaries acquired in Borrower’s purchase of VNC, including, without limitation, any improvements to owned or leased real property.

 

6.18 Intellectual Property. Schedule 6.18 contains true and complete list of all U.S. and foreign (i) issued patents and pending applications for patents; (ii) registered trademarks and pending applications for trademarks; and (iii) registered copyrights and pending applications for copyrights, in each case, which are owned by VNC.

 

6.19 Bank Accounts. Within ten (10 business days Borrower will provide the Lender a true and complete list of all bank accounts (including any deposit accounts, securities accounts, and any sub-accounts) of VNC.

 

7. AFFIRMATIVE COVENANTS.

 

The Borrower Parties, as applicable to each, jointly and severally covenant that, until payment in full of all outstanding Obligations, and for so long as the Lender has any commitment to make an Advance hereunder:

 

7.1 Good Standing and Government Compliance. Each Borrower Party shall maintain its and each of its Subsidiaries’ corporate existence and good standing in the respective jurisdictions of formation, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify would reasonably be expected to have a Material Adverse Effect. Each Borrower Party shall meet, and shall cause each of its Subsidiaries to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Each Borrower Party shall comply, and shall cause each of its Subsidiaries to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject and to which its failure to comply would reasonably be expected to have a Material Adverse Effect, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.

 

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7.2 Financial Statements, Reports, Certificates. Unless otherwise publicly available via recent SEC filing made within the previous 30 days, the Borrower Parties shall deliver to the Lender with respect to each Borrower Party, as soon as practicable, but in any event within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows for such month, and an unaudited balance sheet and statement of stockholders’ or owners’ equity as of the end of such month, all prepared in accordance with GAAP (except that such financial statements may (a) be subject to normal year-end audit adjustments and (b) not contain all notes thereto that may be required in accordance with GAAP).

 

7.3 Taxes. Each Borrower Party shall make, and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to the Lender, on demand but not more than once every 30 days, proof satisfactory to the Lender indicating that each Borrower Party or Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that such Borrower Party or Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by such Borrower Party or such Subsidiary.

 

7.4 Creation/Acquisition of Subsidiaries. In the event VNC creates or acquires any Subsidiary, the Borrower shall promptly notify the Lender of such creation or acquisition, and the Borrower such Subsidiary formed or acquired by VNC after the date of this Agreement (each a “New Subsidiary”) shall take all actions reasonably requested by the Lender (i) to cause such New Subsidiary to become a guarantor with respect to the Obligations, including without limitation, by causing such New Subsidiary to execute and deliver to the Lender a Guaranty Supplement and (ii) to cause such New Subsidiary to grant the Lender a first priority Lien on all Collateral owned or held by such New Subsidiary, including, without limitation, by causing such New Subsidiary to execute and deliver to the Lender a Pledge Supplement to the Pledge and Security Agreement, and (iii) to cause 100% of the Equity Interests of such New Subsidiary to be pledged to the Lender pursuant to the Pledge and Security Agreement. Without limiting the foregoing, upon such creation or acquisition of a New Subsidiary, the Borrower and such New Subsidiary shall, promptly upon the request of the Lender, (i) provide to the Lender appropriate certificates of powers or UCC financing statements, pledging all direct or beneficial ownership interest in any such new Subsidiary, in form and substance satisfactory to the Lender, and (ii) provide to the Lender all other documentation, including one or more opinions of counsel satisfactory to the Lender, which in its opinion is appropriate with respect to such formation and the execution and delivery of the applicable documentation referred to above. Any document, agreement or instrument executed or issued pursuant to this Section 7.4 shall be a “Loan Document” for the purposes of this Agreement and the other Loan Documents.

 

7.5 Further Assurances. At any time and from time to time each Borrower Party shall execute and deliver such further instruments and take such further action as may reasonably be requested by the Lender to effect the purposes of this Agreement.

 

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7.6 Notice. Promptly after the date any Borrower Party has knowledge thereof, the Borrower shall provide the Lender with written notice of (i) the termination or potential termination of any consent, license, permit or contract which could have a Material Adverse Effect; (ii) any material loss, damage or destruction to or of any property or assets of any Borrower Party (regardless of whether the same is covered by insurance); (iii) the occurrence of an Event of Default (such notice to be accompanied by a certificate signed by an Authorized Officer setting forth the details of such Event of Default and the action which the Borrower Parties propose to take with respect thereto); and (vi) promptly after the commencement thereof, notice of all actions, suits, proceedings or investigations before or by any Governmental Body or any other Person against any Borrower Party and involving a claim or series of claims in excess of $1,000,000.00 during any fiscal year or which if adversely determined would have a Material Adverse Effect.

 

7.7 Real Property.

 

(a) Borrower Parties shall, within a reasonable time upon the request of the Lender, provide the Lender with a schedule setting forth all of the Real Property acquired in Borrower’s acquisition of VNC, the nature of such Real Property, the current Subsidiary of Borrower which is the owner or holder of such Real Property, the location of the real property to which such Real Property Interests pertain and an appropriate legal description of such real property. The Borrower shall keep such Real Property (other than Excluded Assets) free and clear of any Liens except for Permitted Liens and shall not sell, transfer or otherwise dispose of any such Real Property (other than Excluded Assets) except in compliance with the Loan Documents. Upon request, the Borrower and any relevant Subsidiary shall execute and deliver to the Lender a Mortgage covering all such Real Property (other than Excluded Assets) for recording, all in accordance with the provisions of Article V.

 

(b) At the time of the acquisition of any Real Property (other than Excluded Assets) by any of Borrower’s Subsidiaries relating to VNC after the date of this Agreement, whether by deed, by lease or otherwise, such Borrower Party shall (i) promptly give the Lender written notice of such acquisition of such Real Property, (ii) promptly upon the request of the Lender deliver to the Lender a copy of the instrument pursuant to which such Borrower Subsidiary acquired such Real Property, (iii) as soon as reasonably possible upon the request of the Lender execute and deliver to the Lender a Mortgage with respect to such Real Property, in recordable form and substance satisfactory to the Lender, which the Lender is hereby authorized to record in all applicable jurisdictions; and (iv) take such actions as may be necessary or reasonably requested by the Lender in order to grant the Lender a first priority security interest in and lien on such Real Property or to perfect such security interest in and lien on such Real Property.

 

7.8 Legal Fee Reserve. Should Borrower fail to pay in full this Term Loan on or before the Term Loan Maturity Date, the Borrower shall establish a legal reserve account, to be held in escrow with and administered by the Lender, which shall be maintained by the Borrower in the amount of $25,000 (the “Legal Reserve Account”). From time to time as long as any Obligations remain outstanding, the Lender shall have the right to apply funds in the Legal Reserve Account to pay the legal fees and expenses incurred by the Lender in connection with enforcing this Agreement, the Loan Documents and the Term Loan. The Borrower shall deposit into the Legal Reserve Account, from time to time, such amounts as may be necessary in order to maintain the balance of $25,000 at all times so long as any Obligations remain outstanding. Any balance in the Legal Reserve Account shall be returned to the Borrower as soon as practicable after the Borrower has indefeasibly paid in full all Obligations owing to the Lender. The Borrower shall not be entitled to receive and shall not receive any interest on funds in the Legal Reserve Account. The Borrower hereby grants to the Lender a continuing security interest in the Legal Reserve Account to secure prompt repayment of any and all Obligations and to secure prompt performance by the Borrower and the other Borrower Parties of each of its and their covenants and duties under the Loan Documents.

 

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8. NEGATIVE COVENANTS.

 

The Borrower Parties, jointly and severally, covenant and agree that, so long as any credit hereunder shall be available and until the outstanding Obligations are paid in full or for so long as the Lender has any commitment or to make any Advances hereunder:

 

8.1 Dispositions. VNC will not, without the Lender’s prior written consent, convey, sell, lease, license, transfer or otherwise dispose of (collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, including, without limitations, any Equity Interest of VNC or its Subsidiaries or in any Collateral owned or held by it, other than Permitted Transfers. In addition, Borrower will not, without the Lender’s prior written consent, Transfer, or permit any of its Subsidiaries to Transfer, any Equity Interest of VNC.

 

8.2 Indebtedness. No Borrower Party will do any of the following without the Lender’s prior written consent: (i) Issue or otherwise become obligated with respect to any new Indebtedness other than the Permitted Indebtedness.

 

8.3 Change in Name, Location or Executive Office; Change in Business; Change in Fiscal Year, Change in Operating Agreement or Certificate of Formation. No Borrower Party will do any of the following without the Lender’s prior written consent (which consent shall not be unreasonably withheld or delayed): (i) Change its name or the state of its formation or relocate its chief executive office without 10 days prior written notification to the Lender; (ii) replace or suffer the departure of its chief executive officer or chief financial officer without delivering written notification to the Lender within 10 days following the event; (iii) take action to liquidate, wind up, or otherwise cease to conduct business in the ordinary course; (iv) engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by such Borrower Party; (v) change its fiscal year end; or (vi) make any amendments, modifications or changes to (x) its operating agreement or bylaws, as applicable, in effect as of the date hereof, or (y) to its certificate of formation, articles of incorporation, articles of organization and other charter documents as existing on the date hereof.

 

8.4 Mergers.  VNC will not, without the Lender’s prior written consent (which consent shall not be unreasonably withheld or delayed), merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other Person (including, without limitation, mergers or consolidations of VNC or any of its Subsidiaries into another Borrower Subsidiary), unless the Obligations are repaid in full concurrently with the closing of such merger; provided, however, that neither VNC nor its Subsidiaries shall, without the Lender’s prior written consent, enter into any binding contractual arrangement with any Person to attempt to facilitate any merger expressly permitted above unless (i) no Event of Default exists when such agreement is entered into by VNC or its Subsidiaries, and (ii)  such agreement does not give any third party the right to claim any fee, payment or damages from any parties, other than from VNC or its applicable Subsidiaries or their respective investors, in connection with a sale of any Equity Interest or assets by VNC or its Subsidiaries pursuant to or resulting from an assignment for the benefit of creditors, an asset turnover to creditors (including, without limitation, the Lender), foreclosure, bankruptcy or similar liquidation, and (iii) VNC and its Subsidiaries notify the Lender in advance prior to entering into such an agreement (provided, the failure to give such notification shall not be deemed a material breach of this Agreement).

 

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8.5 Acquisitions and Creations of New Subsidiaries. VNC will not, without the prior written consent of the Lender, (i) create or cause or allow any of its Subsidiaries to create any New Subsidiary unless the requirements set forth in Section 7.4 shall have been timely satisfied or waived by the Lender, or (ii) acquire or cause or allow any of its Subsidiaries to acquire any New Subsidiary unless the requirements set forth in Section 7.4 shall have been timely satisfied or waived by the Lender.

 

8.6 Encumbrances. No Borrower Party will, without the Lender’s prior written consent, create, incur, assume or allow any Lien with respect to the Collateral, or assign or otherwise convey any right to receive income or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person (other than (i) the licensors of in-licensed property with respect to such property or (ii) the lessors of specific equipment or lenders financing specific equipment with respect to such leased or financed equipment) that any Borrower Party in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of the Collateral.

 

8.7 Transactions with Affiliates. Except as set forth in Schedule 8.7, no Borrower Party will, without the Lender’s prior written consent, directly or indirectly enter into or permit to exist any material transaction with the Borrower or any Borrower Subsidiary except for transactions that are in the ordinary course of such Borrower Party’s business, upon fair and reasonable terms that are no less favorable to any Borrower Party than would be obtained in an arm’s length transaction with a non-affiliated Person. Without limiting the foregoing, (i) no Borrower Party will, without the Lender’s prior written consent, make, pay, issue, grant or otherwise transfer any dividends, loans, distributions or other assets to the Borrower or any Borrower Subsidiary, except pursuant to a Permitted Transfer, and (ii) upon and during the continuance of any Event of Default, no Borrower Party will, without the Lender’s Prior written consent, make, pay, issue, grant or otherwise transfer any dividends, loans, distributions or other assets to any other Borrower Party, except pursuant to a Permitted Transfer.

 

8.8 Extraordinary Corporate Transactions. No Borrower Party will, without the Lender’s prior written consent, take any corporate or company action, enter into any agreement to take such action, or obligate itself to take any such action, if such action would:  (i) provide for the voluntary liquidation, dissolution or winding up of any Borrower Party or (ii) enter into any transaction that expressly prohibits or limits any Borrower Party’s right to perform its obligations under this Agreement.

 

8.9 No Investment Company; Margin Regulation. No Borrower Party will, without the Lender’s prior written consent, become or be controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of the Term Loan for such purpose.

 

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9. EVENTS OF DEFAULT.

 

Any one or more of the following events (each an “Event of Default” and, any one or more together, an “Events of Default”) shall constitute an Event of Default by the Borrower and the other Borrower Parties under this Agreement and the Pledge and Security Agreement:

 

9.1 Payment Default. If the Borrower fails to make any payment under this Agreement or any Note when due or the Borrower or any other Borrower Party otherwise fails to pay any of the Obligations when due; provided, however, that it shall not be an Event of Default hereunder if the Borrower pays any Obligations payments within two (2) Business Days after notice by Lender that such Obligations are past due.

 

9.2 Covenant Default. If any Borrower Party fails or neglects to perform or observe any term, provision, condition, agreement or covenant contained in this Agreement, in the Pledge and Security Agreement or in any of the other Loan Documents, or in any other present or future agreement between any Borrower Party and the Lender and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within thirty (30) days after the Borrower receives written notice thereof; provided, however, that if the default cannot by its nature be cured within the 30-day period or cannot after diligent attempts by the Borrower Parties be cured within such 30-day period, and such default is likely to be cured within a reasonable time, then the Borrower Parties shall have an additional reasonable period (which shall not in any case exceed 60 days) to attempt to cure such default; provided, further, however, if the nature of such default is such that it is not curable, then there shall be no applicable cure period with respect to such default.

 

9.3 Attachment. If any material portion of any Collateral is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within 30 days, or if any Borrower Party is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of any Collateral that is not removed, discharged or rescinded within 30 days, or if a notice of lien, levy, or assessment is filed of record with respect to any material portion of any Collateral by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not that is not removed, discharged or rescinded within 30 days after such Borrower Party receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by such Borrower Party (provided that no Advances will be made during such cure period).

 

9.4 Insolvency. If (i) an Insolvency Proceeding is commenced by or on behalf of any Borrower Party (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding), (ii) an Insolvency Proceeding is commenced against any Borrower Party and is not dismissed or stayed within 60 days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding), or (iii) any Borrower Party shall generally not pay its debts as such debts become due, shall admit in writing its inability to pay its debts generally, shall make a general assignment for the benefit of creditors, or shall cease doing business as a going concern.

 

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9.5 Material Adverse Effect. A Material Adverse Effect has occurred.

 

9.6 Material Change to Mortgaged Property. If there is a material change in the conditions of any of the Mortgaged Property in violation of the appropriate Mortgage beyond any applicable notice and cure period.

 

9.7 Judgments. If a final, uninsured judgment or judgments or order, decree or arbitration award for the payment of money in an amount, individually or in the aggregate, of at least $1,000,000 shall be rendered against any Borrower Party or one or more non-monetary judgments, orders, decrees or arbitration awards shall be rendered against any Borrower Party that could reasonably be excepted to result in a Material Adverse Effect, and in either case shall remain unsatisfied and unstayed for a period of 30 days (provided that no Advances will be made prior to the satisfaction or stay of the judgment).

 

9.8 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation of any Borrower Party or any officer, agent, employee or representative thereof set forth in this Agreement, in the Pledge and Security Agreement, in any other Loan Document or in any certificate delivered to the Lender by any Borrower Party pursuant to this Agreement or to induce the Lender to enter into this Agreement or any other Loan Document.

 

9.9 Change of Control. If any Change of Control should occur without the prior written consent of the Lender.

 

9.10 Unauthorized Dispositions. If any Borrower Party shall dispose of all of its assets or any material portion of its assets (other than Inventory in the ordinary course of business), pursuant to a Transfer or otherwise, other than pursuant to a Permitted Transfer, without the prior written consent of the Lender.

 

10. LENDER’S RIGHTS AND REMEDIES.

 

10.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, subject to Section 10.9 of this Agreement, the Lender may, at its election, without notice of their election and without demand, do any one or more of the following, all of which are authorized by each Borrower Party:

 

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable, provided that upon the occurrence of an Event of Default described in Section 9.4, all Obligations shall automatically become immediately due and payable;

 

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(b) Cease advancing money or extending credit to or for the benefit of the Borrower or any other Borrower Party under this Agreement or under any other agreement between any Borrower Party and the Lender;

 

(c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that the Lender reasonably considers advisable;

 

(d) Set off and apply to the Obligations any and all (i) balances and deposits of any Borrower Party held by the Lender, and (ii) indebtedness at any time owing to or for the credit or the account of any Borrower Party held by the Lender;

 

(e) Following the grace or cure period set forth herein or in any other related Loan Document, sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including any Borrower Party’s premises) as the Lender may determine is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order the Lender deems appropriate. The Lender may sell the Collateral without giving any warranties as to the Collateral. The Lender may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If the Lender sells any of the Collateral upon credit, the Borrower Parties will be credited only with payments actually made by the purchaser, received by the Lender, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, the Lender may resell the Collateral and the Borrower Parties shall be credited with the proceeds of the sale;

 

(f) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of any Borrower Party, any guarantor or any other Person liable for any of the Obligations; and

 

(g) Any deficiency that exists after disposition of the Collateral as provided above shall be paid immediately by the Borrower and the other Borrower Parties.

 

10.2 Power of Attorney. Each Borrower Party hereby irrevocably appoints the Lender (and any of Lender’s designated officers, or employees) as its true and lawful attorney, and effective only upon the occurrence and during the continuance of an Event of Default and following the grace or cure period set forth herein or in any other related Loan Document,, may, subject to Section 10.9 of this Agreement: (a) send requests for verification of Accounts or notify account debtors of Lender’s security interest in the Accounts; (b) endorse any Borrower Party’s name on any checks or other forms of payment or security that may come into Lender’s possession; (c) sign any Borrower Party’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower Party’s policies of insurance; (f) settle and adjust disputes and claims respecting the Accounts directly with account debtors, for amounts and upon terms which Lender determines to be reasonable; and (g) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral; provided, the Lender may exercise such power of attorney to sign the name of any Borrower Party on any of the documents described in clause (g) above, regardless of whether an Event of Default has occurred. The appointment of Lender as the Borrower Parties’ attorney in fact, and each and every one of Lender’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Lender’s obligation to provide advances hereunder is terminated.

 

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10.3 Accounts Collection. At any time after the occurrence and during the continuation of an Event of Default, subject to Section 10.9 of this Agreement, the Lender may notify any Person owing funds to VNC of Lender’s security interest in such funds and verify the amount of such Account. VNC shall collect all amounts owing to it for the Lender, receive in trust all payments as Lender’s trustee, and immediately deliver such payments to Lender in their original form as received from the account debtor, with proper endorsements for deposit.

 

10.4 Lender’s Expenses. If any Borrower Party fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then the Lender may, after reasonable notice to such Borrower Party, make payment of the same or any part thereof, and the amount of any such payment shall be added to the Obligations. Any payments made by the Lender shall not constitute an agreement by the Lender to make similar payments in the future or a waiver by the Lender of any Event of Default under this Agreement.

 

10.5 No Obligation to Pursue Others. The Lender has no obligation to attempt to satisfy the Obligations by collecting them from any other person, including, without limitation, the Guarantors, liable for them and the Lender may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting the Lender’s rights against any Borrower Party. Each Borrower Party waives any right it may have to require the Lender to pursue any other Person for any of the Obligations.

 

10.6 Remedies Cumulative. The Lender’s rights and remedies under this Agreement, the Pledge and Security Agreement and the other Loan Documents, and all other agreements shall be cumulative. The Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender of one right or remedy shall be deemed an election, and no waiver by the Lender of any Event of Default on any Borrower Party’s part shall be deemed a continuing waiver. No delay by the Lender shall constitute a waiver, election, or acquiescence by it. No waiver by the Lender shall be effective unless made in a written document signed on behalf of the Lender and then shall be effective only in the specific instance and for the specific purpose for which it was given. Each Borrower Party expressly agrees that this Section 10.6 may not be waived or modified by the Lender by course of performance, conduct, estoppel or otherwise.

 

10.7 Demand; Protest. Except as otherwise provided in this Agreement, each Borrower Party waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.

 

10.8 No Limitation on Rights, Remedies or Authority. Nothing set forth in this Article 10 shall in any way limit any of the rights, power or authority granted to the Lender under the Pledge and Security Agreement or any other Loan Document, including, without limitation, any authorization or appointment of the Lender as any Borrower Party’s power of attorney or attorney-in-fact thereunder, and nothing set forth in this Article 10 shall in any way limit any of the rights or remedies available to the Lender under the Pledge and Security Agreements or any of the other Loan Documents or otherwise available to the Lender at law, in equity or otherwise.

 

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10.9 Standstill.

 

(a) Notwithstanding anything to the contrary set forth herein or in any of the Loan Documents, and provided Borrower has not failed to make the mandatory prepayment pursuant to Section 2.2(e)(z) for a Restructuring Event, the Lender agrees that, so long as (i) no voluntary or involuntary Insolvency Proceeding has been commenced by, against or with respect to the Borrower or any Standstill Entity and (ii) no voluntary Insolvency Proceeding has been commenced by or with respect to any Subsidiary, during the period commencing on the occurrence of an Event of Default (other than a Transfer Default) and ending after 60 days have lapsed thereafter (the “Standstill Period”), the Lender will not enforce its Liens on the Standstill Equity Collateral, or exercise its rights related thereto, in connection with such Event of Default; provided, that nothing set forth in this Section 10.9 shall in any way limit or affect any of the rights or remedies of the Lender (i) prior to or after any Standstill Period, (ii) upon or after the commencement of any Insolvency Proceeding with respect to any Borrower Party or during the duration of any such Insolvency Proceeding or (iii) upon the occurrence of or in connection with any Transfer Default.

 

11. NOT USED

 

12. NOTICES.

 

12.1 Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (i) personal delivery to the party to be notified, (ii) when sent, if sent by confirmed electronic mail or by facsimile during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next Business Day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) Business Day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next Business Day delivery, with written verification of receipt. Notices shall be sent the parties at the applicable addresses set forth on Exhibit C attached hereto. The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

 

13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

 

13.1 Choice of Law and Venue; Jury Trial Waiver. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without regard to principles of conflicts of law. Jurisdiction shall lie in the State of New York. All disputes, controversies, claims, actions and similar proceedings arising with respect to any Borrower Party’s account or any related agreement or transaction may be brought in the courts of the State of New York or the United States District Court for the District of New York. THE LENDER AND EACH BORROWER PARTY EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF ANY OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY THE LENDER OR ANY BORROWER PARTY, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.

 

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14. GENERAL PROVISIONS.

 

14.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor, borrower or guarantor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by any Borrower Party without the Lender’s prior written consent, which consent may be granted or withheld in the Lender’s sole discretion. The Lender shall have the right without the consent of or notice to any Borrower Party to sell, assign, transfer, negotiate, or grant participation in all or any part of, or any interest in, the Lender’s obligations, rights and benefits hereunder.

 

14.2 Indemnification. Each Borrower Party shall defend, indemnify and hold harmless the Lender and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses in any way suffered, incurred, or paid by the Lender, its officers, employees and agents as a result of or in any way arising out of, following, or consequential to transactions between the Lender and any Borrower Party, whether under this Agreement or otherwise, (including without limitation reasonable attorneys’ fees and expenses), except for losses caused by the Lender’s gross negligence or willful misconduct.

 

14.3 Contribution.

 

(a) In the event any Borrower Party (a “Funding Borrower Party”) shall make any payment or payments under this Agreement or shall suffer any loss as a result of any realization upon any collateral granted by it to secure its obligations hereunder, such Funding Borrower Party shall have the right to seek contribution payments from each other Borrower Party (each, a “Contributing Borrower Party”) to the extent permitted by applicable law. Nothing in this Section 14.3 shall affect any Borrower Party’s joint and several liability to the Lender for the entire amount of its Obligations. Each Borrower Party covenants and agrees that (i) its right to receive any contribution hereunder from a Contributing Borrower Party shall be subordinate and junior in right of payment to all obligations of the Borrower Parties to the Lender hereunder and under the other Loan Documents and (ii) it shall not exercise any such contribution rights unless and until the Obligations shall have been paid in full.

 

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(b) Nothing in this Section 14.3 shall affect the Borrower Parties’ joint and several liability to the Lender for the entire amount of its Obligations. Each Borrower Party covenants and agrees that its right to receive any contribution hereunder from a Contributing Borrower Party shall be subordinate and junior in right of payment to all Obligations of the Borrower to the Lender hereunder and under the other Loan Documents. No Borrower Party will exercise any rights that it may acquire by way of subrogation hereunder or under any other Loan Document or at law by any payment made hereunder or otherwise, nor shall any Borrower Party seek or be entitled to seek any contribution or reimbursement from any other Borrower Party in respect of payments made by such Borrower Party hereunder or under any other Loan Document, until all amounts owing to the Lender on account of the Obligations are paid in full in cash. If any amounts shall be paid to any Borrower Party on account of such subrogation or contribution rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Borrower Party in trust for the Lenders segregated from other funds of such Borrower Party, and shall, forthwith upon receipt by such Borrower Party, be turned over to the Lender for the benefit of itself in the exact form received by such Borrower Party (duly endorsed by such Borrower Party to the Lender, if required), to be applied against the Obligations, whether matured or unmatured, as provided for herein.

 

14.4 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.

 

14.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

 

14.6 Amendments in Writing, Integration. All amendments to or terminations of this Agreement or the other Loan Documents must be in writing and signed by the Borrower and the Lender. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the Loan Documents.

 

14.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.  Executed copies of the signature pages of this Agreement sent by facsimile or transmitted electronically in Portable Document Format (“PDF”), or any similar format, shall be treated as originals, fully binding and with full legal force and effect, and the parties waive any rights they may have to object to such treatment.

 

14.8 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding or the Lender has any obligation to make any Advance to Borrower. The obligations of the Borrower Parties to indemnify the Lender with respect to the liabilities described in Section 14.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against the Lender have run.

 

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14.9 Confidentiality. In handling any confidential information, the Lender and the Borrower Parties and all employees and agents of such parties shall exercise the same degree of care that such party exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) in the case of the Lender, to the subsidiaries or Affiliates of the Lender or the Borrower Parties in connection with their present or prospective business relations with the Borrower Parties, (ii) in the case of the Lender, to prospective Lenders or purchasers of any interest in the Term Loan, provided that it has entered into a comparable confidentiality agreement in favor of the Borrower and have delivered a copy to the Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) in the case of the Lender, as may be required in connection with the examination, audit or similar investigation of the Lender, and (v) as the Lender may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of the receiving party when disclosed to such party, or becomes part of the public domain after disclosure to such receiving party through no fault of such receiving party; or (b) is disclosed to such receiving party by a third party, provided such receiving party does not have actual knowledge that such third party is prohibited from disclosing such information.

 

********

26

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

 

  LENDER:  
     
  DWX SERVICING AGENT, LLC,  
  an Ohio limited liability company  
       
  By: /s/ Charles A. Ebetino, Jr. (Seal)
  Name: Charles A. Ebetino, Jr.  
  Its: Manager  
       
  BORROWER:  
     
  COMSOVEREIGN HOLDING CORP.,  
  a Nevada Corporation  
       
  By: /s/ Daniel L. Hodges   (Seal)
  Name: Daniel L. Hodges  
  Its: Chief Executive Officer  
       
  INITIAL GUARANTOR:  
     
  VIRTUAL NETCOM, LLC,  
  a Virginia limited liability company  
       
  By: /s/ Daniel L. Hodges   (Seal)
  Name: Daniel L. Hodges  
  Its: Chief Executive Officer  

 

[Signature Page to Secured Loan Agreement]

 

 

 

 

EXHIBIT A

 

DEFINITIONS

 

Accounts” means all of the Guarantors’ accounts (as such term is defined by the UCC) and accounts receivables, and shall include, but not be limited to, all of the Guarantors’ rights to payment for goods sold or leased or services performed by the Guarantors or any other party, whether now in existence or arising from time to time hereafter, including, without limitation, rights evidenced by an account, note, instrument, contract, security agreement, chattel paper, or other evidence of indebtedness or security (including an account, note, instrument, contract, security agreement, chattel paper, or other evidence of indebtedness or security related to amounts owed by a Governmental Body, and further including, without limitation, all books, ledgers, print-outs, file materials, and other papers containing information generally relating to Accounts) together with (i) all security pledged, assigned, hypothecated or granted to, or held by, the Guarantors to secure the foregoing, (ii) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (iii) all powers of attorney for the execution of any evidence of indebtedness or security or other writings in connection therewith, and (iv) all evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto, notices to other creditors or secured parties, and certificates from filing or other registration officers.

 

Advance” or “Advances” means a cash advance or cash advances made the Lender to the Borrower under the Term Loan.

 

Affiliate” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and general partners. For the purposes hereof, the term “Affiliate” shall also include any limited partner of a Person, if such Person is a partnership.

 

Agreement” has the meaning assigned in the first paragraph of this Agreement.

 

Authorized Officer” means someone designated as such in the corporate resolution provided by Borrower to the Lender in which this Agreement and the transactions contemplated hereunder are authorized by Borrower’s board of directors. If Borrower provides subsequent corporate resolutions to the Lender after the Closing Date, the individual(s) designated as “Authorized Officer(s)” in the most recently provided resolution shall be the only “Authorized Officers” for purposes of this Agreement.

 

Borrower” has the meaning assigned in the first paragraph of this Agreement.

 

Borrower Parties” means, collectively, the Borrower and the Guarantors; and “Borrower Party” means any one of the foregoing Borrower Parties.

 

Borrower Party’s Books” means all of each Borrower Party’s books and records including: ledgers; records concerning Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

 

A-1

 

 

Business Day” means any day that is not a Saturday, Sunday, or other day on which banks in the State of New York are authorized or required to close.

 

Change of Control” means the occurrence of one or more of the following events: (a) any Person or two or more Persons (excluding any Person who is a holder of Equity Interests on the Agreement Date) acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the SEA) of fifty percent (50%) or more of the outstanding shares of the voting Equity Interests of the Borrower; (b) as of any date a majority of the board of directors of the Borrower consists (other than vacant seats) of individuals who were not either (i) directors of the Borrower as of the Agreement Date, (ii) selected or nominated to become directors by the board of directors of the Borrower of which a majority consisted of individuals described in clause (i), or (iii) selected or nominated to become directors by the board of directors of the Borrower of which a majority consisted of individuals described in clause (i) and individuals described in clause (ii), (c) except as specifically permitted hereunder, the Borrower ceases to Control or directly or indirectly own one hundred percent (100%) of the outstanding Equity Interests of the Guarantors, (d) the direct or indirect sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of a majority of the properties or assets of the Borrower or Guarantor taken as a whole to any Person, (e) the direct or indirect sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of a majority of the properties or assets of the Borrower and its Subsidiaries taken as a whole to any Person and (f) the adoption of a plan relating to the liquidation, winding-up or dissolution of the Borrower or any Guarantor without the prior written consent of the Lender.

 

Closing Date” means December 8, 2020.

 

Code” means the New York Uniform Commercial Code as amended or supplemented from time to time.

 

Collateral” means (i) all of the Equity Interests of the Guarantor now owned or held or hereafter owned, held or acquired by any Guarantor, (ii) any and all other personal property now owned, leased or held or hereafter owned, leased, held or acquired by Borrower in the transaction that it acquired VNC (other than Excluded Assets) , and (iii) any and all Real Property owned, leased or held or hereafter owned leased, held or acquired by Borrower in the transaction that it acquired VNC (other than Excluded Assets), in each case, including, without limitation, all proceeds and renewals thereof, accretions thereto and substitutions therefor.

 

Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have the meanings correlative thereto.

 

Credit Extension” means each Advance, or any other extension of credit, by the Lender to or for the benefit of Borrower hereunder.

 

Equipment” means all equipment (as defined in the UCC), of every kind and nature, wherever located, and in which any Guarantor may have any interest (to the extent of such interest). Equipment shall also include, but not be limited to, all modifications, alterations, repairs, substitutions, additions, and accessions thereto, all replacements and all parts therefor, and together with all substitutes for any of the foregoing.

 

A-2

 

 

Equity Interests” means, as applied to any Person, any capital stock, membership interests, partnership interests or other equity interests of such Person, regardless of class or designation, and all warrants, options, purchase rights, conversion or exchange rights, voting rights, calls or claims of any character with respect thereto.

 

ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

 

Event of Default” has the meaning assigned in Article 9.

 

Excluded Assets” means the “Excluded Property” as that term is defined in the Pledge and Security Agreement.

 

GAAP” means generally accepted accounting principles, consistently applied, as in effect from time to time in the United States.

 

Governmental Body” means any governmental body, authority or agency having jurisdiction over the Borrower or the property of the Borrower.

 

Guarantors” means, collectively, Virtual Netcom, LLC, (“VNC”) a Virginia limited liability company owned by Borrower, and any other Person that has executed a Guaranty Supplement or other document guaranteeing the Obligations; and “Guarantor” shall mean any one of the foregoing Guarantors.

 

Guaranty” or “Guaranteed,” as applied to an obligation (each a “primary obligation”), shall mean and include (a) any guaranty, direct or indirect, in any manner, of any part or all of such primary obligation, and (b) any agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of any part or all of such primary obligation, including, without limiting the foregoing, any reimbursement obligations as to amounts drawn down by beneficiaries of outstanding letters of credit, and any obligation of any Person, whether or not contingent, (i) to purchase any such primary obligation or any property or asset constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of such primary obligation or (B) to maintain working capital, equity capital or the net worth, cash flow, solvency or other balance sheet or income statement condition of any other Person, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner or holder of any primary obligation of the ability of the primary obligor with respect to such primary obligation to make payment thereof or (iv) otherwise to assure or hold harmless the owner or holder of such primary obligation against loss in respect thereof, but in all events excluding the endorsement of instruments for collection in the ordinary course of business. All references in this Agreement to “this Guaranty” shall be to the Guaranty provided for pursuant to the terms of Article IV.

 

Guaranty Supplement” means a valid and enforceable supplement to this Agreement, in form and substance satisfactory to the Lender in its sole reasonable discretion, pursuant to which any New Subsidiary shall join as a party hereto and be made a Guarantor and Borrower Party hereunder.

 

A-3

 

 

Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all contingent obligations.

 

Initial Advance” has the meaning assigned in Section 2.1(b)(i).

 

Insolvency Proceeding” means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

 

Inventory” means all of Guarantor’s inventory (as such term is defined by the UCC), wherever located, and whether now existing or hereafter acquired, including, without limitation, all raw materials, work in process, returned goods, finished goods, samples, consigned goods to the extent of the consignee’s interest therein, parts, materials and supplies of any kind or nature which are or might be used in connection with the manufacture, printing, publication, packing, shipping, advertising, selling or finishing of any such goods, and all other products, goods, materials and supplies.

 

Lender” has the meaning assigned in the first paragraph of this Agreement.

 

Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

 

Loan Documents” means, collectively, this Agreement, the Note, any other note or notes executed by Borrower in favor of the Lender, the Pledge and Security Agreement, the other Security Documents, each Guaranty Supplement, each Pledge Supplement executed in connection with the Pledge and Security Agreement, the other Security Agreements and any other document, instrument or agreement entered into in connection with this Agreement, all as amended, restated, supplemented, otherwise modified, entered into or extended from time to time.

 

Material Adverse Effect” means a material adverse effect on: (i) the operations, business or financial condition of the Borrower Parties taken as a whole; (ii) the ability of the Borrower Parties collectively to repay the Obligations or otherwise perform their obligations under the Loan Documents; or (iii) any Borrower Party’s interest in, or the value, perfection or priority of the Lender’s security interest in the Collateral.

 

Material Contracts” shall mean, collectively, (i) all contracts, leases, instruments, guaranties, licenses or other arrangements (other than the Loan Documents) to which any Guarantor is or becomes a party and as to which the breach, nonperformance, cancellation or failure to renew by any party thereto could have a Material Adverse Effect; (ii) all contracts and agreements that, at any time of determination, contributed more than $1,000,000 to the revenue or expenses of the Guarantors in the immediately preceding twelve months (or, if such agreement or contract was acquired or became effective within twelve months from such date, then the actual revenue contributed from such agreement or contract, on an annualized basis); and (iii) all contracts and agreements that, at any time of determination, is anticipated to contribute more than $1,000,000 to the revenue or expenses of the Guarantors on an annual basis in the future.

 

A-4

 

 

Mortgage” means a mortgage, deed of trust, assignment of leases and rents, leasehold mortgage or other security document granting a Lien on Real Property.

 

Mortgaged Real Property” means any Real Property subject to a Mortgage granted to the Lender by any Guarantor to secure the Obligations.

 

Note” means that certain promissory note dated the date hereof made by the Borrower pursuant to Section 2.1(c), as the same may be amended, restated, supplemented, extended, or otherwise modified from time to time.

 

Obligations” means all debt, principal, interest and other amounts owed to the Lender by the Borrower Parties pursuant to this Agreement and the other Loan Documents, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding.

 

OID” has the meaning assigned in the first Recital of this Agreement.

 

Payment Default” means an Event of Default for failure of payment by the Borrower or any Borrower Party as described in Section 9.1.

 

Permitted Liens” means the following:

 

(a) Any Liens created in favor of the Lender under any of the Loan Documents or otherwise granted to the Lender in order to secure the payment or performance of the Obligations;

 

(b) Any Liens of Borrower other than any lien against the Collateral

 

(c) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which the Borrower Parties maintain adequate reserves;

 

(d)  Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Sections 9.3 (attachment) or 9.7 (judgments).

 

Permitted Transfer” means any of the following conveyances, sales, leases, grants, transfers, trades or dispositions by Borrower or Guarantor to any Person (including any Subsidiary except as provided below):

 

(a) sales of Inventory in the ordinary course of business;

 

(b) grants of licenses and similar arrangements for the use of the property owned by any Guarantor in the ordinary course of business;

 

A-5

 

 

(c) sales, trades, or dispositions of worn-out, surplus, or obsolete Equipment in the ordinary course of business;

 

(d) grants of security interests and other Liens that constitute Permitted Liens; and

 

(e) Transfers of other assets of any Borrower Party that do not in the aggregate exceed $500,000 during any fiscal year, but only to the extent that such Transfer is not a Transfer of any asset to any Subsidiary by a Borrower Party outside of the ordinary course of business; provided, upon the occurrence and during the continuance of an Event of Default, no Transfer from a Borrower Party to any Subsidiary shall be a Permitted Transfer.

 

Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity, or governmental agency.

 

Pledge and Security Agreement” means that certain Pledge and Security Agreement, dated as of the date hereof, executed by the Borrower and each of the Guarantors, in favor of the Lender, as the same may be amended, restated, supplemented or otherwise modified from time to time.

 

Real Property” means all real property of any kind or nature owned, leased or held by any VNC now or in the future and all legal or equitable title, interests or estates, of any kind or nature, owned or held by any Subsidiary from Borrower’s purchase of VNC with respect to any real property of any kind or nature, now or in the future, including, without limitation, fee or other ownership interests in any land, surface or minerals, leaseholds, leasehold interests, leasehold estates, subleaseholds, subleasehold interests, subleasehold estates, licenses, easements, and other rights to use or occupy any land, buildings, structures, improvements, fixtures or appurtenances to any real property.

 

Security Documents” means, collectively, the Pledge and Security Agreement, any and all Mortgages creating Liens in favor of the Lender on Collateral constituting or consisting of Real Property, all documents executed in connection with the Federal Assignment of Claims Act of 1940 (if any), all UCC-1 financing statements, any Patent Security Agreement, Trademark Security Agreement, Copyright Security Agreement and any other document, instrument or agreement granting Collateral for the Obligations, in each case, as the same may be amended or modified from time to time.

 

Schedules” means the schedules of disclosures and exceptions attached hereto and approved by the Lender, if any; and each of the Schedules is referred to individually herein as a “Schedule.”

 

Standstill Entities” means VNC and the wholly owned subsidiaries of each of the foregoing; and “Standstill Entity” means any one of the foregoing Standstill Entities.

 

Standstill Equity Collateral” means the Equity Interests of the Standstill Entities owned by the Borrower or any Standstill Entity.

 

A-6

 

 

Subsidiary” means, with respect to any Person, any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than 50% of the stock, limited liability company interest or joint venture of which by the terms thereof ordinary voting power to elect the board of directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned or held by such Person, either directly or indirectly through an Affiliate(s).

 

Term Loan” means all amounts loaned under this Agreement.

 

Term Loan Maturity Date” means January 6, 2021, or such earlier date as payment of the Term Loan shall be due (whether by acceleration or otherwise).

 

Transfer” has the meaning assigned in Section 8.1.

 

Transfer Default” means any Event of Default in any way arising from or relating to a Transfer (including, without limitation, a disposition) of any cash, property or other asset of any Borrower Party to any Person (including, without limitation, another Borrower Party) in breach or violation of any covenant, agreement, term, condition or provision set forth in this Agreement or any of the other Loan Documents.

 

UCC” shall mean the Uniform Commercial Code as in effect from time to time under the laws of the State of New York.

 

A-7

 

 

EXHIBIT B

 

Form of the Note

 

See attached.

 

 

 

 

EXHIBIT C

 

Notice Addresses

 

If to the Lender:

 

DWX SERVICING AGENT, LLC

3694 Seaford Drive

Columbus, Ohio 43220

Attention: Charles A. Ebetino, Jr.

E-mail: cebetino@erpfuels.com

 

With a copy (which shall not constitute notice) to:

 

Jones & Associates

P O Box 198925327

Charleston, WV 25302

Attention: E. Forrest Jones, Esq.

Email: efjones@efjones.com

 

If to the Borrower:

 

COMSOVEREIGN HOLDING CORP

5000 Quorum Drive STE 400

Dallas, TX 75254

Attention: Daniel L. Hodges,

E-mail: dhodges@comsovereign.com

 

With a copy (which shall not constitute notice) to:

 

Pryor Cashman LLC

7 Times Square

New York, NY 10036

Attention: Eric M. Hellige, Esq.

Email: ehellige@pryorcashman.com

 

If to the Guarantor:

 

VIRTUAL NETCOM, LLC

5000 Quorum Drive STE 400

Dallas, TX 75254

Attention: Daniel L. Hodges,

E-mail: dhodges@comsovereign.com

 

 

 

 

Exhibit 10.44

 

PLEDGE AND SECURITY AGREEMENT

 

This PLEDGE AND SECURITY AGREEMENT, dated as of December 8, 2020 (as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof, this “Agreement”), is entered into by and among COMSOVEREIGN HOLDING CORP., a Nevada corporation (the “Borrower”), VIRTUAL NETCOM, LLC, a Virginia limited liability company (“VNC”), each of the guarantors party hereto from time to time, whether as an original signatory hereto or as an Additional Grantor (as herein defined) (each such subsidiary guarantor, together with the Borrower and VNC, each a “Grantor” and collectively the “Grantors”), and DWX SERVICING AGENT, LLC, and Ohio limited liability company (the “Lender”).

 

RECITALS:

 

WHEREAS, reference is made to that certain Secured Loan Agreement, dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), by and among the Borrower, VNC and the other guarantors named therein, and the Lender;

 

WHEREAS, each Grantor has agreed to secure such Grantor’s obligations under the Loan Agreement and any other Loan Documents (as defined in the Loan Agreement) as set forth herein.

 

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Grantor and the Lender agree as follows:

 

ARTICLE 1
DEFINITIONS; INTERPRETATION

 

1.1. General Definitions. In this Agreement, the following terms shall have the following meanings:

 

Additional Grantors” has the meaning assigned in Section 7.3.

 

Agreement” has the meaning set forth in the preamble to this Agreement.

 

Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy,” as now and hereinafter in effect, or any successor statute.

 

Borrower” has the meaning set forth in the preamble to this Agreement.

 

Borrower Party” means any of the Borrower, VNC and any VNC Grantor, and “Borrower Parties” refers to all such entities.

 

1

 

 

Business Day” means any day other than a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed.

 

Capitalized Lease Obligations” means that portion of any obligation of a Person as lessee under a lease which at the time would be required to be capitalized on the balance sheet of such lessee in accordance with GAAP.

 

Cash Proceeds” has the meaning assigned in Section 9.7(a).

 

Collateral” has the meaning assigned in Section 2.1.

 

Collateral Account” means any account established by the Secured Party to hold any Collateral.

 

Collateral Records” means books, records, ledger cards, files, correspondence, customer lists, supplier lists, blueprints, technical specifications, manuals, computer software and related documentation, computer printouts, tapes, disks and other electronic storage media and related data processing software and similar items that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon.

 

Collateral Support” means all property (real or personal) assigned, hypothecated or otherwise securing any Collateral and shall include any security agreement or other agreement granting a Lien on or security interest in such real or personal property.

 

Control” means: (i) with respect to any Deposit Accounts, control within the meaning of Section 9-104 of the UCC, (ii) with respect to any Securities Accounts, Security Entitlements, Commodity Contract or Commodity Account, control within the meaning of Section 9-106 of the UCC, (iii) with respect to any Uncertificated Securities, control within the meaning of Section 8-106(c) of the UCC, (iv) with respect to any Certificated Security, control within the meaning of Section 8-106(a) or (b) of the UCC, (v) with respect to any Electronic Chattel Paper, control within the meaning of Section 9-105 of the UCC, (vi) with respect to Letter-of-Credit Rights, control within the meaning of Section 9-107 of the UCC and (vii) with respect to any “transferable record” (as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the Uniform Electronic Transaction Act in effect in any relevant jurisdiction), control within the meaning of Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the Uniform Electronic Transaction Act in effect in the jurisdiction relevant to such transferable record.

 

Controlled Foreign Corporation” means “controlled foreign corporation” within the meaning of Section 957 of the Internal Revenue Code of 1986, as amended from time to time.

 

2

 

 

Copyright Licenses” means any written agreement, now or hereafter in effect, granting to any third party under any Copyright now or hereafter owned by any VNC Grantor or that any such VNC Grantor otherwise has the right to license, or granting any right to any VNC Grantor under any Copyright now or hereafter owned by any third party, and all rights of such VNC Grantor under any such agreement.

 

Copyrights” means all United States and foreign copyrights (including, without limitation, European Union Community designs) whether now owned by any VNC Grantor or hereafter acquired by or assigned to any VNC Grantor, including, but not limited to, copyrights in software and all rights in and to databases, and all Mask Works (as defined under 17 U.S.C. 901 of the U.S. Copyright Act), whether registered or unregistered and whether published or unpublished, protectable designs, moral rights, reversionary interests, termination rights, and, with respect to any and all of the foregoing: (i) all registrations and applications therefor, (ii) all extensions and renewals thereof, (iii) all rights to sue or otherwise recover for past, present and future infringements thereof, (iv) all Proceeds of the foregoing, including, without limitation, license fees, royalties, income, payments, claims, damages and proceeds of suit now or hereafter due and/or payable with respect thereto, and (v) all other rights of any kind accruing thereunder or pertaining thereto throughout the world.

 

Discharge Date” means the date on which all the Secured Obligations of each Borrower Party have been indefeasibly paid and discharged in full and no Borrower Party has any further obligations under the Loan Documents pursuant to which further Secured Obligations of any Grantor might arise.

 

Equity Interests” means, as applied to any Person, any capital stock, membership interests, partnership interests or other equity interests of or in such Person, regardless of class or designation, and all warrants, options, purchase rights, conversions or exchange rights, voting rights, calls or claims of any character with respect thereto.

 

Excluded Property” has the meaning assigned in Section 2.2.

 

Fair Market Value” means, with respect to any property, the value that would be paid for such property by a willing buyer to an unaffiliated willing seller in a transaction not involving distress or necessity of either party, as determined by a certified appraisal of such property to the extent that such property has been appraised by a certified appraiser in the six months prior to the date of this Agreement or, if such property has not been subject to a certified appraisal in such period, as reasonably determined in good faith by the Borrower.

 

Grantor” and “Grantors” has the meaning set forth in the preamble of this Agreement.

 

Insurance” means all insurance policies covering any or all Collateral (regardless of whether the Secured Party is the loss payee, additional insured or lender loss payee thereof).

 

Intellectual Property” means all of each VNC Grantor’s rights, title and interest, priorities and privileges relating to intellectual property, whether now owned or held or hereafter acquired by such VNC Grantor, whether arising under United States laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks, the Trademark Licenses and all trade secrets and all other confidential or proprietary information and know-how.

 

3

 

 

Inventory” shall mean all “inventory,” as such term is defined in the UCC, of each VNC Grantor, whether now existing or hereafter acquired, wherever located, and in any event including inventory, merchandise, goods and other personal property that are held by or on behalf of a VNC Grantor for sale or lease or are furnished or are to be furnished under a contract of service, goods that are leased by a VNC Grantor as lessor, or that constitute raw materials, samples, work-in-process, finished goods, returned goods, promotional materials or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in such VNC Grantor’s business or in the processing, production, packaging promotion, delivery or shipping of the same, including all supplies and embedded software.

 

Investment Accounts” means the Collateral Account, the Securities Accounts, Commodities Accounts and Deposit Accounts.

 

Investment Related Property” means, as applicable, (i) all “investment property” (as such term is defined in Article 9 of the UCC) and (ii) all of the following (regardless of whether classified as investment property under the UCC): all Pledged Equity Interests, Pledged Debt, Investment Accounts and certificates of deposit whether now owned or hereafter acquired by any Grantor.

 

Lender” has the meaning set forth in the preamble of this Agreement.

 

Lien” shall mean, with respect to any property, any mortgage, lien, pledge, negative pledge agreement, assignment for security purposes, charge, option, security interest, hypothecation, title retention agreement, levy, execution, seizure, attachment, garnishment, any documents, notice, instruments or other filings under the Federal Assignment of Claims Act of 1940 or other encumbrance of any kind in respect of such property, whether or not choate, vested or perfected.

 

Loan Agreement” has the meaning set forth in the recitals to this Agreement.

 

Material Intellectual Property” means any Intellectual Property included in the Collateral which is material to the business of any VNC Grantor or is otherwise of material value.

 

Obligations” means (a) all payment and performance obligations as existing from time to time of the Borrower Parties to the Secured Party or its Affiliates under the Loan Agreement, this Agreement or the other Loan Documents (including, without limitation, any interest, fees and expenses that, but for the provisions of the Bankruptcy Code or any other applicable law pertaining to bankruptcy, insolvency or the rights of debtors or creditors, would have accrued), or as a result of making the Loan, (b) the obligation to pay an amount equal to the amount of any and all damages which the Secured Party may suffer by reason of a breach by any Borrower Party of any obligation, covenant or undertaking with respect to the Loan Agreement, this Agreement or any other Loan Documents, and (c) all fees and expenses incurred by the Secured Party under the Loan Agreement, this Agreement and the other Loan Documents.

 

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Patent Licenses” means any written agreement, now or hereafter in effect, granting to any third party any right to import, make, have made, offer for sale, use or sell any invention or design on which a Patent, now or hereafter owned by any VNC Grantor or that any VNC Grantor otherwise has the right to license, is in existence, or granting to any VNC Grantor any such right with respect to any invention or design on which a Patent, now or hereafter owned by any third party, is in existence, and all rights of any VNC Grantor under any such agreement.

 

Patents” means all United States and foreign patents and certificates of invention, or similar industrial property rights (including, for certainty and without limitation, industrial designs) and applications for any of the foregoing with respect to any VNC Grantor now owned or hereafter acquired by any such VNC Grantor, including, but not limited to: (i) each patent and patent application (including, in both cases, industrial designs) required to be listed in Schedule 5.2(V) under the headings “Patents” (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof), (ii) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations thereof, (iii) all rights to sue or otherwise recover for past, present and future infringements thereof, (iv) all licenses, claims, damages and proceeds of suit arising therefrom, (v) all Proceeds of the foregoing, including, without limitation, license fees, royalties, income, payments, claims, damages and proceeds of suit now or hereafter due and/or payable with respect thereto, and (vi) all other rights of any kind accruing thereunder or pertaining thereto throughout the world.

 

Pledge Supplement” means a valid and enforceable supplement to this Agreement, in form and substance satisfactory to the Lender in its sole reasonable discretion, pursuant to which an additional Subsidiary of VNC formed or acquired by VNC after the date hereof shall join as a party hereto as an Additional Grantor and be made a Grantor hereunder.

 

Pledged Debt” means all indebtedness for borrowed money owed from time to time to any VNC Grantor and all such indebtedness owed to any such VNC Grantor in the future, whether or not evidenced by any Instrument, the instruments, if any, evidencing any of the foregoing, any other promissory note at any time issued to or held by any VNC Grantor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing.

 

Pledged Equity Interests” means all Pledged Stock, Pledged LLC Interests and Pledged Partnership Interests.

 

Pledged LLC Interests” means (i) all interests of VNC directly owned by Borrower on the date hereof and/or obtained in the future by Borrower, and (ii) all interests of any limited liability company owned by a VNC Grantor on the date hereof and/or obtained in the future by such VNC Grantor in any limited liability company and each series thereof; and the certificates, if any, representing such limited liability company interests and any interest of the applicable Grantor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests.

 

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Pledged Partnership Interests” means all interests directly owned by any VNC Grantor on the date hereof and/or obtained in the future by such VNC Grantor in any general partnership, limited partnership, limited liability partnership or other partnership, including, without limitation, all partnership interests listed on Schedule 5.2(I) under the heading “Pledged Partnership Interests” (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof) and the certificates, if any, representing such partnership interests and any interest of such VNC Grantor on the books and records of such partnership or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests.

 

Pledged Stock” means all shares of capital stock directly owned by any VNC Grantor on the date hereof and/or obtained in the future by any VNC Grantor; including, without limitation, all shares of capital stock described on Schedule 5.2(I) under the heading “Pledged Stock” (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof) and the certificates, if any, representing such shares and any direct interest of the applicable Grantor in the entries on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares.

 

Real Property Interests” means all real property of any kind or nature owned or held by any VNC Grantor now or in the future and all legal or equitable title, interests or estates, of any kind or nature, owned or held by any VNC Grantor with respect to any real property of any kind or nature, now or in the future, including, without limitation, fee or other ownership interests in any land, surface or minerals, leaseholds, leasehold interests, leasehold estates, subleaseholds, subleasehold interests, subleasehold estates, licenses, easements, and other rights to use or occupy any land, buildings, structures, improvements, fixtures or appurtenances to any real property.

 

Receivables” means all rights to payment, whether or not earned by performance, for goods or other property sold, leased, licensed, assigned or otherwise disposed of, or services rendered or to be rendered, including, without limitation, all such rights constituting or evidenced by any Account, Chattel Paper, Instrument, General Intangible or Investment Related Property, together with all of any VNC Grantor’s rights, if any, in any goods or other property giving rise to such right to payment and all Collateral Support and Supporting Obligations related thereto and all Receivables Records.

 

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Receivables Records” means (i) all original copies of all documents, instruments or other writings or electronic records or other Records, ledger sheets or cards, invoices and other papers relating to Receivables, including without limitation, all tapes, cards, computer tapes, computer discs, computer runs, record keeping systems and other papers and documents relating to the Receivables, whether in possession or under the control of any VNC Grantor or any computer bureau or agent from time to time acting for any VNC Grantor or otherwise, (iii) all evidences of the filing of financing statements and the registration of other instruments in connection therewith, and amendments, supplements or other modifications thereto, notices to other creditors, secured parties or agents thereof, and certificates, acknowledgments, or other writings, including, without limitation, lien search reports, from filing or other registration officers, (iv) all credit information reports and memoranda relating thereto and (v) all other written or non-written forms of information related in any way to any of the foregoing or any Receivable.

 

Secured Obligations” means, in the case of each Grantor, its Obligations, whether outstanding on the date of this Agreement or arising from time to time after the date of this Agreement.

 

Secured Party” means the Lender and any of its successors or assigns in respect of this Agreement and the Loan Agreement.

 

Securities” means any stock, shares, partnership interests, voting trusts certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire any of the foregoing.

 

Securities Act” means the Securities Act of 1933, as amended.

 

Security Documents” means, collectively, this Agreement and all financing statements, mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, fixture filings, Patent Security Agreements, Trademark Security Agreements, Copyright Security Agreements, and any other document, instrument or agreement granting the Secured Party a security interest in or Lien on the Collateral or any part thereof or perfecting or maintaining the perfection of such security interest or Lien, in each case, as the same may be amended or modified from time to time.

 

Trademark Licenses” means any written agreement, now or hereafter in effect, granting to any third party any right to use any Trademark now or hereafter owned by any VNC Grantor or that any VNC Grantor otherwise has the right to license, or granting to any VNC Grantor any right to use any Trademark now or hereafter owned by any third party, and all rights of any VNC Grantor under any such agreement (not including vendor or distribution agreements that allow incidental use of intellectual property rights in connection with the sale or distribution of such products or services).

 

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Trademarks” means all United States and foreign trademarks, trade names, trade dress, corporation names, company names, business names, fictitious business names, Internet domain names, service marks, certification marks, collective marks, logos, other source or business identifiers, designs and general intangibles of a like nature, whether or not registered, and whether now owned or hereafter acquired by any VNC Grantor, (ii) all extensions or renewals of any of the foregoing, (iii) all of the goodwill of the business connected with the use of and symbolized by any of the foregoing, (iv) the right to sue or otherwise recover for any past, present or future infringement, dilution or other violation of any of the foregoing or for any injury to goodwill, (v) all Proceeds of the foregoing, including, without limitation, license fees, royalties, income, payments, claims, damages and proceeds of suit now or hereafter due and/or payable with respect thereto, and (vi) all other rights of any kind accruing thereunder or pertaining thereto throughout the world.

 

UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the perfection (or similar concept) or priority of, or remedies with respect to, any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction within the United States other than the State of New York, the term “UCC” means the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for the purposes of the provisions hereof relating to such perfection (or similar concept), priority or remedies.

 

United States” means the United States of America.

 

VNC Grantors” means VNC and the Subsidiaries of VNC and the Additional Grantors; and “VNC Grantor” means any one of the foregoing VNC Grantors.

 

1.2. Other Capitalized Terms. Except as otherwise provided in this Agreement, all capitalized terms used herein (including the preamble and recitals hereto) and not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement; provided, that all capitalized terms which are defined in Article 9 of the UCC and which are used herein (including the preamble and recitals hereto) and not otherwise defined herein or in the Loan Agreement shall have the meanings ascribed thereto in the Article 9 of the UCC. The incorporation by reference of terms defined in the Loan Agreement shall survive any termination of the Loan Agreement until this Agreement is terminated as provided in Article 10 hereof.

 

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1.3. Interpretation. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. References herein to any Section, Appendix, Schedule or Exhibit shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may be, hereof unless otherwise specifically provided. Any references in this Agreement to “Articles” and/or “Sections” which make reference to any particular piece of legislation or statute, including, without limitation, the Bankruptcy Code and/or the UCC shall for greater certainty mean the equivalent section in the applicable piece of legislation to the extent that the context implies reference to such other similar or equivalent legislation as in effect from time to time in any other applicable jurisdiction, as applicable. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. The use herein of the word “include” or “including”, when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limiting language (such as “without limitation” or “but not limited to” or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. The terms lease and license shall include sub-lease and sub-license, as applicable. All references herein to provisions of the UCC shall include all successor provisions under any subsequent version or amendment to any Article of the UCC.

 

ARTICLE 2  

GRANT OF SECURITY

 

2.1. Grant of Security. Each Grantor hereby assigns to the Secured Party, and hereby grants to the Secured Party a security interest in and continuing first priority lien on all of such Grantor’s right, title and interest in, to and under all personal property and other assets of any kind or nature of such Grantor, subject to the limitations set forth in Section 2.2, including, but not limited to, the following, in each case, whether now owned or existing or hereafter acquired, created or arising and wherever located (all of which being hereinafter collectively referred to as the “Collateral”), as collateral security for the prompt and complete payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including, without limitation, the payment amounts what would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code (and any successor provisions thereof) or any other applicable law or regulation pertaining to bankruptcy, insolvency or the rights of debtors or creditors generally or otherwise, of such Grantor’s Secured Obligations:

 

(a) the personal property;

 

(b) Real Property Interests;

 

(c) Accounts;

 

(d) Chattel Paper;

 

(e) Documents;

 

(f)   Fixtures;

 

(g) General Intangibles;

 

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(h) Goods (including, without limitation, Inventory, Equipment and As-Extracted Collateral);

 

(i) Instruments;

 

(j) Insurance;

 

(k) Intellectual Property;

 

(l) Investment Related Property (including, without limitation, Deposit Accounts and the Pledged Equity Interests);

 

(m)   Letter-of-Credit Rights;

 

(n) Money;

 

(o) Receivables and Receivables Records;

 

(p) Commercial Tort Claims;

 

(q) to the extent not otherwise included above, all other personal property of any kind and all Collateral Records; Collateral Support and Supporting Obligations relating to any of the foregoing; and

 

(r) to the extent not otherwise included above, all Proceeds, products, accessions, rents and profits of or in respect of any of the foregoing and, without limitation, all renewals thereof, accretions thereto and substitutions therefor.

 

2.2. Certain Limited Exclusions. Notwithstanding anything herein to the contrary, in no event shall the Collateral include or the security interest granted under Section 2.1 hereof attach to any of the following (the “Excluded Property”):

 

(a) Any assets of Borrower other than (i) the Pledged Equity Interests and (ii) the assets of VNC;

 

(b) any lease, license, contract, property right or agreement to which any Grantor is a party, or by which any Grantor is bound or any right or interest of any Grantor under such lease, license, contract, property right or agreement, if and only for so long as the grant of a Lien under the Security Documents will constitute or result in a breach, termination or default under any such lease, license, contract, property right or agreement or require any consent thereunder (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity); provided, that such lease, license, contract, property right or agreement will be Excluded Property only to the extent and for so long as the consequences specified above will result and will cease to be Excluded Property and will become subject to the Lien granted under the Security Documents, immediately and automatically, at such time as such consequences will no longer result; provided, further, that the exclusions referred to in clause (a) of this Section 2.2 shall not include any Proceeds of any such lease, license, contract, property right or agreement;

 

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(c) any of the outstanding capital stock of a Controlled Foreign Corporation in excess of 66 ⅔% of the voting power of all classes of capital stock of such Controlled Foreign Corporation entitled to vote; provided, that immediately upon the amendment of the Internal Revenue Code of 1986, as amended from time to time, to allow the pledge of a greater percentage of the voting power of capital stock in a Controlled Foreign Corporation without adverse tax consequences, the Collateral shall include, and the security interest granted by each Grantor shall attach to, such greater percentage of capital stock of each Controlled Foreign Corporation;

 

(a) any “key man” life insurance policies;

 

(b) capital stock of joint ventures if and only for so long as the grant of a Lien under the Security Documents will constitute or result in a breach, termination or default under the organizational documents governing such joint venture;

 

(c) any application for a registration of a Trademark filed in the United States Patent and Trademark Office on an intent-to-use basis prior to the filing and acceptance of a “Statement of Use,” “Amendment of Alleged Use” or similar filing, but only to the extent that the grant of a security interest in any such Trademark application would adversely affect the validity or enforceability or result in a cancellation of such Trademark application under applicable law;

 

(d) acquired property subject to Liens existing at the time of acquisition of such property; provided, that such Liens were in existence prior to such acquisition and not incurred in contemplation of such acquisition, but only to the extent that the grant of a Lien under the Security Documents will constitute or result in a breach, termination or default under the agreements governing such acquired property;

 

(e) property subject to Liens securing Capitalized Lease Obligations, single-property mortgage financing, or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of design, construction, installation or improvement of such property, plant or equipment used in the business of any Grantor, in an aggregate principal amount (including all refinancing thereof expressly permitted under the Loan Documents (if any)) not to exceed [$1,000,000] at any time outstanding; but only to the extent the terms of the such debt secured by such Liens prohibit any other Lien on such property.

 

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ARTICLE 3  

GRANTORS REMAIN LIABLE

 

3.1. Continuing Liability Under Collateral. Notwithstanding anything herein to the contrary, (a) each Grantor shall remain liable for all obligations under the Collateral and nothing contained herein is intended or shall be a delegation of duties to the Secured Party, (b) each Grantor shall remain liable under each of the agreements included in the Collateral, including, without limitation, any agreements relating to Pledged Partnership Interests or Pledged LLC Interests, to perform all of the obligations undertaken by it thereunder all in accordance with and pursuant to the terms and provisions thereof, and the Secured Party shall not have any obligation or liability under any of such agreements by reason of or arising out of this Agreement or any other document related thereto nor shall the Secured Party have any obligation to make any inquiry as to the nature or sufficiency of any payment received by it or have any obligation to take any action to collect or enforce any rights under any agreement included in the Collateral, including, without limitation, any agreements relating to Pledged Partnership Interests or Pledged LLC Interests, and (iii) the exercise by the Secured Party of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral.

 

ARTICLE 4  

CERTAIN PERFECTION REQUIREMENTS

 

4.1. Delivery, Control and Intellectual Property Recording – Collateral Owned on the Agreement Date. With respect to any Collateral owned by a Grantor on the date hereof, each Grantor will use commercially reasonable efforts to take the following actions on or prior to the date hereof, and to the extent any actions cannot be taken by such time, each Grantor will use commercially reasonable efforts to take such actions promptly thereafter (but in any event no later than 45 days thereafter):

 

(a) With respect to any Certificated Securities included in the Collateral, each Grantor shall deliver to the Secured Party the Security Certificates evidencing such Certificated Securities duly indorsed by an effective indorsement (within the meaning of Section 8-107 of the UCC), or accompanied by share transfer powers or other instruments of transfer duly endorsed by such an effective endorsement, in each case, to the Secured Party or in blank. In addition, each Grantor shall cause any certificates, if any, evidencing any Pledged Equity Interests, including, without limitation, any Pledged Partnership Interests or Pledged LLC Interests, to be similarly delivered to the Secured Party regardless of whether such Pledged Equity Interests constitute Certificated Securities;

 

(b) With respect to any Instruments included in the Collateral, each Grantor shall deliver to the Secured Party all such Instruments duly indorsed in blank;

 

(c) With respect to any Tangible Chattel Paper included in the Collateral, each Grantor shall deliver to the Secured Party all such Tangible Chattel Paper duly indorsed in blank; provided, however, that such delivery requirement shall not apply to any Tangible Chattel Paper relating to accounts receivable payable by a Person that is not a Grantor that are due to a Grantor within 60 days of sale and that arise in the ordinary course of business pursuant to forms of sales documentation containing a grant or reservation of security interest clause in favor of a Grantor;

 

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(d) With respect to any Deposit Accounts, Securities Accounts, Security Entitlements, Commodity Accounts and Commodity Contracts included in the Collateral, each Grantor shall take any actions necessary to enable the Secured Party to have Control thereof; provided, however, that such Control requirement shall not apply to any accounts held outside of the United States. With respect to any Securities Accounts or Securities Entitlements, such Control shall be accomplished by the Grantor causing the Securities Intermediary maintaining such Securities Account or Security Entitlement to enter into a Blocked Account Agreement pursuant to which the Securities Intermediary shall agree to comply with the Secured Party’s Entitlement Orders without further consent by such Grantor; provided, further, the Secured Party agrees that the Secured Party shall not issue any Entitlement Order unless an Event of Default has occurred and is continuing. With respect to any Deposit Account, each Grantor shall cause the depositary institution maintaining such account to enter into a Blocked Account Agreement, pursuant to which the Bank shall agree to comply with the Secured Party’s instructions with respect to disposition of funds in the Deposit Account without further consent by such Grantor. With respect to any Commodity Accounts or Commodity Contracts each Grantor shall take such action necessary to enable the Secured Party to have Control thereof and as may otherwise be in a manner reasonably acceptable to the Secured Party;

 

(e) With respect to any Uncertificated Security included in the Collateral (other than any Uncertificated Securities credited to a Securities Account), each Grantor shall cause the issuer of such Uncertificated Security to either (i) so long as an Event of Default has occurred and is continuing, register the Secured Party as the registered owner thereof on the books and records of the issuer or (ii) upon the request of the Secured Party, execute an agreement in form and substance reasonably satisfactory to the Secured Party, pursuant to which such issuer agrees to, upon notice form the Secured Party that an Event of Default has occurred and is continuing, comply with the Secured Party’s instructions with respect to such Uncertificated Security, without further consent by such Grantor;

 

(f)   With respect to any Letter-of-Credit Rights included in the Collateral (other than any Letter-of-Credit Rights constituting a Supporting Obligation for a Receivable in which the Secured Party has a valid and perfected security interest), Grantor shall ensure that the Secured Party has Control thereof by obtaining the written consent of each issuer of each related letter of credit to the assignment of the proceeds of such letter of credit to the Secured Party in form and substance reasonably satisfactory to the Secured Party;

 

(g) With respect to any Electronic Chattel Paper or “transferable record” (as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the uniform Electronic Transactions Act as in effect in any relevant jurisdiction) included in the Collateral, each Grantor shall ensure that the Secured Party has Control thereof; provided, however, that such Control requirement shall not apply to any Electronic Chattel Paper or transferable record relating to accounts receivable payable by a Person that is not a Grantor that are due to a Grantor within 60 days of sale and that arise in the ordinary course of business pursuant to forms of sales documentation containing a grant or reservation of security interest clause in favor of a Grantor;

 

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(h) In the case of any Collateral (whether now owned or hereafter acquired or created) consisting of U.S. Patents, Grantor shall execute and deliver to the Secured Party a Patent Security Agreement in a form approved by Lender (or a supplement thereto) covering all such Patents in appropriate form for recordation with the U.S. Patent and Trademark Office with respect to the security interest of the Secured Party;

 

(i) In the case of any Collateral (whether now owned or hereafter acquired or created) consisting of U.S. Trademarks, Grantor shall execute and deliver to the Secured Party a Trademark Security Agreement in a form approved by Lender (or a supplement thereto) covering all such Trademarks in appropriate form for recordation with the U.S. Patent and Trademark Office with respect to the security interest of the Secured Party; and

 

(j) In the case of any Collateral (whether now owned or hereafter acquired or created) consisting of U.S. Copyrights, Grantor shall execute and deliver to the Secured Party a Copyright Security Agreement in a form approved by Lender (or a supplement thereto) covering all such Copyrights in appropriate form for recordation with the U.S. Copyright Office with respect to the security interest of the Secured Party.

 

With respect to Sections 4.1(b), (c), (d), (e), (f) and (g), to the extent after using commercially reasonable efforts a Grantor has not delivered to the Secured Party, ensured the Secured Party has Control, or otherwise satisfied the provisions of such sections with respect to any item of Collateral covered thereby, within 45 days of the date hereof, such Grantor agrees that it will not deliver or give Control over such item of Collateral to any other Person.

 

4.2. Delivery, Control and Intellectual Property Recording Requirements – Collateral Owned or Acquired after the Agreement Date. In the event that any Grantor acquires rights in Collateral (including, without limitation, by acquisition of a new Grantor and the opening of or entering into of any Deposit Account, Securities Account, Security Entitlement, Commodity Account and Commodity Contract) after the date hereof, such Grantor shall use commercially reasonable efforts to take the actions listed in Section 4.1 on the date of acquisition and to the extent any actions cannot be taken by the date of acquisition, such Grantor will use commercially reasonable efforts to take such actions promptly following the date of acquisition, but in any event no later than the tenth (10th) Business Day immediately following the end of the fiscal quarter of the Borrower in which the creation or acquisition occurred.

 

In the event that any Grantor determines, after the date hereof, that any issued or applied for Patent, registered or applied for Trademark or registered or applied for Copyright that was previously anticipated to be abandoned, cancelled or permitted to lapse by such Grantor will not actually be abandoned, cancelled or permitted to lapse, such Grantor agrees that with respect to such issued or applied for Patent, registered or applied for Trademark or registered or applied for Copyrights, as applicable, it shall use commercially reasonable efforts to take the actions listed in Sections 4.1(h), (i) and (j) promptly, but, in any event, no later than the tenth (10th) Business Day immediately following the end of the fiscal quarter of the Borrower in which the creation or acquisition occurred.

 

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4.3. Other Actions with Respect to Certain Pledged Equity Interests. With respect to any Pledged Partnership Interests and Pledged LLC Interests included in the Collateral, if the Grantors own less than 100% of the equity interests in any issuer of such Pledged Partnership Interests or Pledged LLC Interests, Grantors shall use their commercially reasonable efforts to obtain the consent of each other holder of partnership interests or limited liability company interests in such issuer to the security interest of the Secured Party hereunder and, following an Event of Default, the transfer of such Pledged Partnership Interests and Pledged LLC Interest to the Secured Party or its designee (if so requested by the Secured Party), and to the substitution of the Secured Party or its designee as a partner or member with all the rights and powers related thereto (if so requested by the Secured Party); provided, that nothing herein shall obligate the Secured Party to take title to such Pledged Partnership Interests and Pledged LLC Interests or to permit the registration of such items in the Secured Party’s name. Each Grantor consents to the grant by each other Grantor of a Lien in all Investment Related Property to the Secured Party pursuant hereto and, without limiting the generality of the foregoing, consents to the transfer of any Pledged Partnership Interest and any Pledged LLC Interest to the Secured Party or its designee if an Event of Default has occurred and is continuing and to the substitution of the Secured Party or its designee as a partner in any partnership or as a member in any limited liability company with all the rights and powers related thereto if an Event of Default has occurred and is continuing.

 

ARTICLE 5  

REPRESENTATIONS AND WARRANTIES

 

Each Grantor hereby represents and warrants, on the date hereof and on the date of each Advance of the Loan or any portion thereof, that:

 

5.1. Grantor Information and Status.

 

(a) Schedule 5.1 sets forth any location at which any Grantor maintains tangible personal property constituting Collateral;

 

(b) Borrower is a corporation and duly existing under the laws of Nevada and qualified and licensed to do business in any state or country in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect. VNC is an entity organized and duly existing under the laws of Virginia and qualified and licensed to do business in any state or country in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect. Each Grantor has not filed any certificates of dissolution or liquidation, any certificates of domestication, transfer or continuance in any other jurisdiction;

 

(c) the execution, delivery and performance by such Grantor of this Agreement are within such Grantor’s corporate or other powers, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) violate the terms of such Grantor’s organizational documents, (b) violate or result in any breach of, or the creation of any Lien under (other than Liens created by this Agreement and other Permitted Liens), or require any payment to be made under (i) any contractual obligation to which such Grantor is a party or which is binding upon such Grantor or the properties of such Grantor or any of its Subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Body or any arbitral award to which such Grantor or its property is subject; or (c) violate any law; except with respect to any violation or breach (but not creation of Liens) referred to in clause (b) and (c) above, to the extent that such violation or breach could not reasonably be expected to have a Material Adverse Effect; and

 

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(d) this Agreement has been duly executed and delivered by such Grantor, and constitutes a legal, valid and binding obligation of such Grantor, enforceable against such Grantor in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.

 

5.2. Collateral Identification; Special Collateral.

 

(a) Schedule 5.2 (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof) sets forth under the appropriate headings:

 

(i) all of each Grantor’s Pledged Equity Interests;

 

(ii)    all of each VNC Grantor’s (1) Pledged Debt, (2) Securities Accounts, (3) Deposit Accounts, (4) Commodity Contracts and Commodity Accounts, (5) Commercial Tort Claims, (6) Letter-of-Credit Rights (other than any Letter-of-Credit Rights constituting a Supporting Obligation for a Receivable in which the Secured Party has a valid and perfected security interest) for letters of credit, and (7) the name and address of any warehouseman, or bailee in possession of any Inventory, Equipment and other tangible personal property; and

 

(iii) all United States and Canadian registrations of and applications for Patents, Trademarks, and Copyrights owned by each Grantor;

 

(b) none of the Collateral constitutes, or is the Proceeds of, (1) Farm Products, (2) As-Extracted Collateral, (3) Manufactured Homes, (4) Health-Care-Insurance Receivables; (5) timber to be cut, or (6) aircraft, aircraft engines, satellites, ships or railroad rolling stock; and

 

(c) all written information supplied by any Grantor with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects.

 

5.3. Ownership of Collateral and Absence of Other Liens.

 

(a) Such Grantor owns the Collateral purported to be owned by it or otherwise has the rights it purports to have in each item of Collateral and, as to all Collateral whether now existing or hereafter acquired (including by way of lease or license), will continue to own or have such rights in each item of the Collateral (except as otherwise permitted by the Loan Documents), in each case free and clear of any and all Liens, rights or claims of all other Persons, other than (i) any Permitted Liens and (ii) the Liens granted to the Secured Party pursuant to this Agreement; and

 

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(b) other than any financing statements, fixture filings and other perfection instruments filed in favor of the Secured Party, no effective financing statement, fixture filing or other instrument similar in effect under any applicable law covering all or any part of the Collateral is on file in any filing or recording office except for (x) financing statements for which duly authorized proper termination statements have been either delivered to the Secured Party for filing by counsel to the Secured Party or filed by the applicable Grantor and (y) financing statements, fixture filings or similar instruments filed or recorded in connection with Permitted Liens. After the date of execution of the Loan Agreement, other than the Secured Party and any automatic control in favor of a Bank, Securities Intermediary or commodity intermediary maintaining a Deposit Account, Securities Account or Commodity Contract, no Person will be in Control of any Collateral.

 

5.4. Status of Security Interest.

 

(a) Upon the filing of financing statements naming each Grantor as “debtor” and the Secured Party as “secured party” and describing the Collateral in the filing offices set forth opposite such Grantor’s name on Schedule 5.4 hereof (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof), the security interest of the Secured Party in all Collateral in the United States that can be perfected by the filing of a financing statement under the UCC as in effect in the relevant jurisdiction will constitute a valid, perfected, first priority Lien subject in the case of priority only to Permitted Liens with respect to such Collateral;

 

(b) to the extent perfection or priority of the security interest therein is not subject to Article 9 of the UCC, upon recordation of mortgages, deeds of trust, leasehold mortgage, leasehold deeds of trust or other similar recordable instruments (as applicable) naming each applicable Grantor as “debtor” and the Secured Party as “secured party” (as applicable) in the applicable courthouse or recording office in the jurisdictions in which such Collateral is located, the security interests granted hereunder in all Real Property Interests constituting Collateral in the United States that can be perfected by the recordation of such mortgage, deed of trust, leasehold mortgage, assignments of rents and leases or other similar recordable instruments under applicable law as in effect in the relevant jurisdiction will constitute a valid, perfected, first priority Lien subject in the case of priority only to Permitted Liens with respect to such Collateral;

 

(c) to the extent perfection or priority of the security interest therein is not subject to Article 9 of the UCC, upon recordation of the security interests granted hereunder in U.S. Patents, U.S. Trademarks and U.S. Copyrights in the United States Patent and Trademark Office and the United States Copyright Office, such security interests granted to the Secured Party hereunder, for the ratable benefit of the Secured Parties, shall constitute valid, perfected, first priority Liens (subject, in the case of priority only, to any Permitted Liens); and

 

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(d) no authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other Person in the United States is required for either (i) the pledge or grant by any Grantor of the Liens purported to be created in favor of the Secured Party hereunder or (ii) the exercise by the Secured Party of any rights or remedies in respect of any Collateral located in the United States whether specifically granted or created hereunder or created or provided for by applicable law), except (A) for the filings contemplated by clauses (a) and (b) above or otherwise required to perfect Liens on the Collateral, (B) as may be required, in connection with the disposition of any Investment Related Property, by laws generally affecting the offering and sale of Securities and (C) as have already been obtained, submitted or taken prior to the date hereof.

 

5.5. Goods and Receivables.

 

(a) The Receivables that constitute Collateral, taken as a whole, (i) are the legal, valid and binding obligation of the Account Debtor in respect thereof, representing unsatisfied obligations of such Account Debtor, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, (ii) are enforceable in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, (iii) are not subject to any credits, rights of recoupment, setoffs, defenses, taxes, counterclaims (except with respect to refunds, returns and allowances in the ordinary course of business with respect to damaged merchandise) and (iv) are in compliance with all material applicable laws, whether federal, state, provincial, local or foreign in all material respects; and

 

(b) any Goods produced by any Grantor included in the Collateral have been produced in compliance with the requirements of the Fair Labor Standards Act, as amended, and the rules and regulations promulgated thereunder, in all material respects.

 

5.6. Pledged Equity Interests, Investment Related Property. There are no outstanding warrants, options or other rights to purchase, or shareholder, voting trust or similar agreements outstanding with respect to, or property that is convertible into, or that requires the issuance or sale of, any Pledged Equity Interests). All of the Pledged Equity Interests as to which any Grantor is the issuer have been duly and validly issued and are fully paid and nonassessable.

 

5.7. Intellectual Property.

 

(a) Such Grantor is the sole and exclusive owner of the entire right, title, and interest in and to all Intellectual Property listed with respect to such Grantor on Schedule 5.2 (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof), and owns or has the valid right to use and, where Grantor does so, sublicense others to use, all other Intellectual Property used in or necessary to conduct its business, free and clear of all Liens, claims, encumbrances and licenses, except for any Permitted Liens;

 

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(b) all Intellectual Property is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, nor, in the case of Patents, is any of the Intellectual Property the subject of a reexamination proceeding, and each Grantor has performed all acts and has paid all renewal, maintenance, and other fees and taxes required to maintain each and every registration and application of Copyrights, Patents and Trademarks, which are in full force and effect;

 

(c) to the Grantor’s actual knowledge, all of its Intellectual Property is valid and enforceable; no holding, decision, ruling, or judgment has been rendered in any action or proceeding before any court or administrative authority challenging the validity or scope of, such Grantor’s right to register, or such Grantor’s rights to own or use, any Intellectual Property and no such action or proceeding is pending or, to such Grantor’s knowledge, threatened;

 

(d) each Grantor has taken commercially reasonable steps to protect the confidentiality of its trade secrets; each Grantor uses adequate standards of quality in the manufacture, distribution, and sale of all products sold and in the provision of all services rendered under or in connection with all Trademarks and has taken all action necessary to insure that all licensees of the Trademarks owned by such Grantor use such adequate standards of quality, in each case, to the extent constituting Material Intellectual Property;

 

(e) no claim, action, suit, investigation, litigation or proceeding has been asserted in writing or is pending or, to such Grantor’s knowledge, threatened against such Grantor (i) based upon or challenging or seeking to deny or restrict the Grantor’s rights in or use of any of the Intellectual Property owned by such Grantor, (ii) alleging that the Grantor’s rights in or use of the Intellectual Property owned by such Grantor or that any services provided by, processes used by, or products manufactured or sold by, such Grantor infringe, misappropriate, dilute, misuse or otherwise violate any Patent, Trademark, Copyright or any other proprietary right of any third party in any material respect, or (iii) alleging that any Intellectual Property is being licensed or sublicensed in material violation or contravention of the terms of any license or other agreement. To such Grantor’s knowledge, no Person is engaging in any activity that infringes, misappropriates, dilutes, misuses or otherwise violates any Intellectual Property owned by such Grantor or the Grantor’s rights in or use thereof in any material respect. Such Grantor has not granted any license, release, covenant not to sue, non-assertion assurance, or other right to any Person with respect to any part of the Intellectual Property that is Collateral that restricts such Grantor’s business in any material respect. The consummation of the transactions contemplated by the Loan Documents will not result in the termination or impairment of any of the Intellectual Property that is Collateral.

 

5.8. Company Structure. No Person other than the Persons that are party to this Agreement as Grantors owns or holds any Equity Interests in any of the other Borrower Parties (other than the Equity Interest of VNC held by the Borrower), and the Pledged Equity Interests constitute 100% of the Equity Interests in VNC. Every Subsidiary of each VNC Grantor is a party to this Agreement as a Grantor to the extent required hereunder or required under the Loan Agreement.

 

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ARTICLE 6  

COVENANTS AND AGREEMENTS

 

Each Grantor hereby covenants and agrees that:

 

6.1. Grantor Information and Status. Without limiting any prohibitions or restrictions on mergers or other transactions set forth in the Loan Documents, it shall not change such Grantor’s name, identity, corporate structure (e.g., by merger, consolidation, change in corporate form or otherwise), principal place of business (if any), chief executive office, type of organization, jurisdiction of organization, unless, in each case, it shall have (a) notified the Secured Party in writing at least thirty (30) days prior to any such change or establishment, identifying such new proposed name, identity, corporate structure, principal place of business (if any), chief executive office or jurisdiction of organization or Collateral location and providing such other information in connection therewith as the Secured Party may reasonably request and (b) taken in advance of such change or establishment all actions necessary or, in the Secured Party’s reasonable judgment, advisable to maintain the continuous validity, perfection and the same or better priority of the Secured Party’s security interest in the Collateral granted or intended to be granted and agreed to hereby, which shall include, without limitation, executing and delivering to the Secured Party a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, confirming the grant of the security interest hereunder.

 

6.2. Collateral Identification; Special Collateral.

 

(a) In the event that it hereafter acquires any Collateral of a type described in Section 5.2(b) hereof, it shall promptly notify the Secured Party thereof in writing and take such actions and, subject to Section 4.2, execute such documents and make such filings all at Grantor’s expense as necessary or as the Secured Party may reasonably request in order to ensure that the Secured Party has a valid, perfected, first priority security interest in such Collateral, subject in the case of priority only, to any Permitted Liens. Notwithstanding the foregoing, no Grantor shall be required to notify the Secured Party or take any such action unless such Collateral is of a material value or is material to such Grantor’s business.

 

(b) In the event that it hereafter acquires or has any Commercial Tort Claim, subject to Section 4.2, it shall deliver to the Secured Party a completed Pledge Supplement, in the form approved by Lender, together with all Supplements to Schedules thereto, identifying such new Commercial Tort Claims.

 

6.3. Ownership of Collateral and Absence of Other Liens.

 

(a) Except for the security interest created by this Agreement or otherwise in favor of the Secured Party, it shall not create or suffer to exist any Lien upon or with respect to any of the Collateral, other than Permitted Liens, and such Grantor shall use commercially reasonable efforts to defend the Collateral against all Persons, other than Persons with Permitted Liens on Collateral, at any time claiming any interest therein;

 

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(b) upon such Grantor or any officer of such Grantor obtaining actual knowledge thereof, it shall promptly notify the Secured Party in writing of any event that would be reasonably expected to have a Material Adverse Effect on the value of the Collateral taken as a whole or any material portion thereof, the ability of any Grantor or the Secured Party to dispose of the Collateral taken as a whole or any material portion thereof, or the rights and remedies of the Secured Party in relation thereto, including, without limitation, the levy of any legal process against the Collateral or any material portion thereof; and

 

(c) it shall not sell, transfer or assign (by operation of law or otherwise) or exclusively license to another Person any Collateral except as otherwise permitted or not prohibited by the Loan Documents.

 

6.4. Status of Security Interests. Each Grantor shall maintain the security interests of the Secured Party hereunder in all Collateral in the United States and Canada as valid, perfected, first priority Liens (subject, in the case of priority only, to any Permitted Liens).

 

6.5. Goods and Receivables.

 

(a) If any Equipment or Inventory is in possession or control of any warehouseman, bailee or other third party (other than a Consignee under a Consignment for which such Grantor is the Consignor and other than Equipment or Inventory located at a leased premises or at a customer location), each Grantor shall use commercially reasonable efforts to notify the third party of the Secured Party’s security interest and obtain a written acknowledgment from the third party that it is holding the Equipment and Inventory for the benefit of the Secured Party and will permit the Secured Party to have access to Equipment or Inventory for purposes of inspecting such Collateral or, following the occurrence and during the continuance of an Event of Default, to remove same from such premises if the Secured Party so elects; and with respect to any Goods subject to a Consignment for which such Grantor is the Consignor, Grantor shall file appropriate financing statements against the Consignee and take such other action as may be reasonably necessary to ensure that the Grantor has a first priority perfected security interest in such Goods (subject, in the case of priority only, to any Permitted Liens); and

 

(b) at any time following the occurrence and during the continuation of an Event of Default, the Secured Party may, but shall not be obligated to: (1) direct the Account Debtors under any Receivables included in the Collateral to make payment of all amounts due or to become due to such Grantor thereunder directly to the Secured Party; (2) notify, or require any Grantor to notify, each Person maintaining a lockbox or similar arrangement to which Account Debtors under any Receivables included in the Collateral have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to the Secured Party; and (3) enforce, at the expense of such Grantor, collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. If the Secured Party notifies any Grantor that it has elected to collect the Receivables included in the Collateral in accordance with the preceding sentence, any payments of such Receivables received by such Grantor shall be promptly deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Secured Party if required, in the Collateral Account maintained under the sole dominion and control of the Secured Party, and until so turned over, all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of such Receivables, any Supporting Obligation or Collateral Support shall be received in trust for the benefit of the Secured Party hereunder and shall be segregated from other funds of such Grantor and such Grantor shall not adjust, settle or compromise the amount or payment of any such Receivable, or release wholly or partly any Account Debtor or obligor thereof, or allow any credit or discount thereon.

 

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6.6. Pledged Equity Interests, Investment Related Property.

 

(a) Except as provided in the next sentence in the event such Grantor receives any dividends, interest or distributions on any Pledged Equity Interest or other Investment Related Property, upon the merger, consolidation, liquidation or dissolution of any issuer of any Pledged Equity Interest or Investment Related Property (other than a merger or consolidation with, or a liquidation or dissolution in compliance with the Loan Agreement, the proceeds of which are distributed to another Grantor), then (a) such dividends, interest or distributions and securities or other property shall be included in the definition of Collateral without further action and (b) such Grantor shall immediately take all steps, if any, that are necessary or, in the Secured Party’s reasonable judgment, advisable to ensure the validity, perfection, priority and, if applicable, control of the Secured Party over such Investment Related Property (including, without limitation, delivery thereof to the Secured Party) and pending any such action such Grantor shall be deemed to hold such dividends, interest, distributions, securities or other property in trust for the benefit of the Secured Party and shall segregate such dividends, distributions, Securities or other property from all other property of such Grantor. Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, the Secured Party authorizes each Grantor to retain all ordinary cash dividends and distributions paid in the normal course of the business of the issuer and consistent with the past practice of the issuer and all scheduled payments of principal and interest;

 

(b) so long as no Event of Default shall have occurred and be continuing, each Grantor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Investment Related Property or any part thereof for any purpose.

 

(c) upon the occurrence and during the continuation of an Event of Default and upon written notice from the Secured Party to such Grantor of the Secured Party’s intention to exercise such rights:

 

(i) all rights of each Grantor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant thereto shall cease and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; and

 

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(ii)    in order to permit the Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder: (A) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Secured Party all proxies, dividend payment orders and other instruments as the Secured Party may from time to time reasonably request and (B) each Grantor acknowledges that the Secured Party may utilize the power of attorney set forth in Section 8.1; and

 

(d) except as expressly permitted by the Loan Documents, without the prior written consent of the Secured Party, it shall not vote to enable or take any other action to: cause any issuer of any Pledged Partnership Interests or Pledged LLC Interests which are not securities (for purposes of the UCC) on the date hereof to elect or otherwise take any action to cause such Pledged Partnership Interests or Pledged LLC Interests to be treated as securities for purposes of the UCC; provided, however, notwithstanding the foregoing, if any issuer of any Pledged Partnership Interests or Pledged LLC Interests takes any such action in violation of the foregoing, such Grantor shall promptly notify the Secured Party in writing of any such election or action and, in such event, shall take all steps necessary or, in the Secured Party’s reasonable judgment, advisable to establish the Secured Party’s “Control” thereof.

 

6.7. Intellectual Property.

 

(a) With respect to its Intellectual Property, each Grantor (i) agrees to take, at its expense, all commercially reasonable steps, including, without limitation, in the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Canadian Intellectual Property Office and any other governmental authority, to (A) maintain the validity and enforceability of such Intellectual Property that is Collateral and maintain such Intellectual Property that is Collateral in full force and effect (in accordance with the exercise of such Grantor’s reasonable business discretion), and (B) pursue the registration and maintenance (in accordance with the exercise of such Grantor’s reasonable business discretion) of each Patent, Trademark, or Copyright registration or application, now or hereafter included in such Intellectual Property that is Collateral of such Grantor, including, without limitation, the payment of required fees and taxes, the filing of responses to office actions issued by the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Canadian Intellectual Property Office, or other governmental authorities, the filing of applications for renewal or extension, the filing of affidavits under Sections 8 and 15 of the U.S. Trademark Act, the filing of divisional, continuation, continuation-in-part, reissue and renewal applications or extensions, the payment of maintenance fees and the participation in interference, reexamination, opposition, cancellation, infringement and misappropriation proceedings, and (ii) shall not without the written consent of the Secured Party, discontinue use of or otherwise abandon any Intellectual Property that is Collateral, or abandon any right to file an application for Patent, Trademark, or Copyright, unless such Grantor shall have previously determined in such Grantor’s reasonable business judgment that such use or the pursuit or maintenance of such Intellectual Property that is Collateral is no longer desirable in the conduct of such Grantor’s business and that the loss or abandonment thereof would not be reasonably likely to have a Material Adverse Effect;

 

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(b) no later than the tenth (10th) Business Day immediately following the end of any fiscal quarter of the Borrower, each Grantor agrees to notify the Secured Party in writing if such Grantor becomes aware of (i) the fact that any registered item of the Material Intellectual Property owned by such Grantor may have become abandoned, placed in the public domain, invalid or unenforceable (other than as a result of the expiration of the statutory term for such Intellectual Property that is Collateral), or of any materially adverse determination regarding such Grantor’s ownership of any of the Intellectual Property that is Collateral or its right to register the same or to keep and maintain and enforce the same, or (ii) any materially adverse determination regarding any item of the Intellectual Property that is Collateral, in each case occurring during such fiscal quarter;

 

(c) in the event that any Material Intellectual Property owned by or exclusively licensed to any Grantor is infringed or misappropriated by a third party and Grantor becomes aware of such infringement or misappropriation, such Grantor shall take such actions in its commercially reasonable judgment to stop such infringement or misappropriation and protect its rights in such Material Intellectual Property including, but not limited to, the initiation of a suit for infringement or misappropriation and for an injunction against such infringement or misappropriation; and

 

(d) subject to such Grantor’s reasonable business judgment, it shall take commercially reasonable steps, consistent with industry standards, to protect the secrecy of all trade secrets, including, without limitation, entering into confidentiality agreements with employees and consultants, non-disclosure agreements with third parties and labeling and restricting access to such trade secrets.

 

6.8. Real Property Interests. The Grantors shall, within a reasonable time upon the request of the Secured Party, provide the Secured Party with a schedule setting forth all of the Real Property Interests of each VNC Grantor, the nature of such Real Property Interests, the VNC Grantor which is the owner or holder of such Real Property Interests, the location of the real property to which such Real Property Interests pertain and an appropriate legal description of such real property. The VNC Grantors shall keep such Real Property Interests free and clear of any Liens except for Permitted Liens and shall not sell, transfer or otherwise dispose of any such Real Property Interests except in compliance with the Loan Documents.

 

6.9. Change in Equity Interests; Creation of New Subsidiaries; Change of Control. During the period beginning on the date hereof and ending on the Discharge Date, the Grantors shall not:

 

(a) cause or allow any Grantor to create, authorize, issue, sell or cause to exist any additional Equity Interests in or of any VNC Grantor without the prior written consent of the Secured Party;

 

(b) cause or allow any additional Subsidiary of any VNC Grantor to be incorporated, organized, formed or otherwise created, without the prior written consent of the Secured Party (which consent shall not be unreasonably withheld so long as any such additional Subsidiary becomes a Guarantor under the Loan Agreement and an Additional Grantor under this Agreement pursuant to Section 7.3);

 

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(c) cause or allow any Pledged Equity Interests to be sold or transferred in an manner (including, without limitation from one Grantor to another Grantor), attempted to be so sold or transferred in any manner or in any way cease to be valid Equity Interests of the applicable Borrower Party, in each case, without the prior written consent of the Secured Party; or

 

(d) cause or allow any Change of Control to occur, without the prior written consent of the Secured Party.

 

6.10.    Disposition of Collateral. During the period beginning on the date hereof and ending on the Discharge Date, the Grantors shall not, without the prior written consent of the Secured Party, case or allow the sale, transfer or other disposition of: (a) any of the Pledged Equity Interest by any Grantor; (b) any of the VNC Grantor personal property; (c) all or substantially all of the Collateral held by any Grantor; (d) any portion of the Collateral by one or more of the Grantors to the extent that such sale, transfer or other disposition could reasonably be expected to cause or give rise to a Material Adverse Effect; (e) any portion of the Collateral by any one or more of the Grantors other than in the ordinary course of business of such Grantors, to the extent that such portion of Collateral is material to the business of such Grantors; or (f) any portion of the Collateral by any one or more of the Grantors, other than Inventory sold in the ordinary course of business.

 

ARTICLE 7  

RIGHT OF INSPECTION AND FURTHER ASSURANCES; ADDITIONAL GRANTORS

 

7.1. Right of Inspection. Each Grantor shall permit the Secured Party and its representatives, no more than once every 30 days, to (a) visit and inspect the properties of the Grantors during normal business hours, (b) inspect and make extracts from and copies of the Grantors’ books and records, (c) conduct appraisals, filed examinations and audits of Inventory and other real and personal property of the Grantors (whether or not such property constitutes Collateral hereunder), and (d) discuss with the Grantors’ respective principal officers and management team the Grantors’ businesses, assets, liabilities, financial positions, results of operations, and business prospects relating to the Grantors.

 

7.2. Further Assurances.

 

(a) Each Grantor agrees that from time to time, at the expense of such Grantor, it shall promptly execute and deliver all further instruments and documents (including preparing and making all necessary filings to perfect the security interest granted to the Secured Party herein), and take all further action, that may be reasonably necessary, or that the Secured Party may reasonably request, in order to create and/or maintain the validity, perfection or priority of and protect any security interest and lien granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor shall:

 

(i) file such financing, financing change or continuation statements, or amendments thereto and record security interests in Intellectual Property, and execute, deliver, file and record such other agreements, instruments, endorsements, powers of attorney or notices, as may be necessary, or as the Secured Party may reasonably request, in order to effect, reflect, perfect and preserve the security interests granted or purported to be granted therein hereby;

 

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(ii)    upon the request of the Secured Party, record mortgages, deeds of trusts, leasehold mortgages, leasehold deeds of trust or similar instruments covering the Real Property Interests constituting Collateral, as may be necessary in order to effect, reflect, perfect and preserve the security interest granted or purported to be granted in such Real Property Interests hereby;

 

(iii) take all actions necessary to ensure the recordation of appropriate evidence of the Liens and security interest granted hereunder in the Intellectual Property with any intellectual property registry in the United States in which said Intellectual Property is registered or issued or in which an application for registration or issuance is pending including, without limitation, the United States Patent and Trademark Office, the United States Copyright Office and the various Secretaries of State;

 

(iv)   at the Secured Party’s reasonable request, appear in and defend any action or proceeding that would reasonably be expected to materially affect such Grantor’s title to or the Secured Party’s security interest in all or any material part of the Collateral; and

 

(v) furnish the Secured Party with such information regarding the Collateral, including, without limitation, the location thereof, as the Secured Party may reasonably request from time to time.

 

(b) Each Grantor hereby authorizes the Secured Party to file a Record or Records, including, without limitation, financing, financing change or continuation statements, intellectual property security agreements and amendments to any of the foregoing, in any jurisdictions and with any courthouses and filing offices as the Secured Party may reasonably determine are necessary to perfect the security interest granted to the Secured Party herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Secured Party may reasonably determine is necessary to ensure the perfection of the security interest in the Collateral granted to the Secured Party herein, including, without limitation, describing such property as “all assets, whether now owned or hereafter acquired” or words of similar effect. Each Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail. Notwithstanding these grants of authority to the Secured Party, each Grantor agrees to file or cause to be filed all filings, financing statements, continuation statements and any other documents or instruments in order to perfect and maintain the perfection of the Secured Party’s interest in the Collateral, and the Secured Party shall have no duty to make any such filings or recordings.

 

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(c) As the Secured Party may reasonably request from time to time, each Grantor shall update, to the extent necessary, Schedule 5.2 (as such schedule may be amended or supplemented from time to time in accordance with the terms hereof) to include reference to any right, title or interest in any existing Intellectual Property or any Intellectual Property acquired or developed by such Grantor after the date hereof or to delete any reference to any right, title or interest in any Intellectual Property in which such Grantor no longer has or claims any right, title or interest.

 

7.3. Additional Grantors. From time to time subsequent to the date hereof, additional Persons may, in accordance with the Loan Agreement, become parties hereto as additional Grantors (each, an “Additional Grantor”), by executing a Pledge Supplement. Upon delivery of any such Pledge Supplement to the Secured Party, notice of which is hereby waived by Grantors, each Additional Grantor shall be a Grantor and shall be as fully a party hereto as if the Additional Grantor were an original signatory hereto. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of the Secured Party not to cause any Subsidiary or Affiliate of any Grantor to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder.

 

ARTICLE 8  

SECURED PARTY APPOINTED ATTORNEY-IN-FACT

 

8.1. Power of Attorney. Until the Discharge Date, each Grantor hereby irrevocably appoints the Secured Party (such appointment being coupled with an interest) as such Grantor’s attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, the Secured Party or otherwise, from time to time to take any action and to execute related instruments reasonably necessary to accomplish the purposes of this Agreement, including, without limitation, the following:

 

(a) upon the occurrence and during the continuance of any Event of Default, to obtain and adjust insurance required to be maintained by such Grantor or paid to the Secured Party pursuant to the Loan Documents;

 

(b) upon the occurrence and during the continuance of any Event of Default, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral;

 

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(c) upon the occurrence and during the continuance of any Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above;

 

(d) upon the occurrence and during the continuance of any Event of Default, to file related claims or take related action or institute any proceedings that the Secured Party may deem reasonably necessary for the collection of any of the Collateral or otherwise to enforce the rights of the Secured Party or any other Secured Party with respect to any of the Collateral;

 

(e) to prepare, sign, and file for recordation in any intellectual property registry, appropriate evidence of the Lien and security interest granted herein in the Intellectual Property in the name of such Grantor as debtor;

 

(f)   upon occurrence and during the continuance of an Event of Default, to take or cause to be taken all actions necessary to perform or comply or cause performance or compliance with the terms of this Agreement, including, without limitation, access to pay or discharge taxes or Liens (other than Permitted Liens) levied or placed upon or threatened against the Collateral, and which the applicable Grantor has not paid or discharged when required hereunder or the validity thereof is being contested in good faith by appropriate proceedings, the legality or validity thereof and the amounts necessary to discharge the same to be determined by the Secured Party in its reasonable discretion, any such payments made by the Secured Party to become obligations of such Grantor to the Secured Party, due and payable immediately without demand; and

 

(g) upon occurrence and during the continuance of an Event of Default, generally to sell, transfer, lease, license, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Secured Party’s option and such Grantor’s expense, at any time or from time to time, all acts and things reasonably necessary to protect, preserve or realize upon the Collateral and the Secured Party’s security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

 

8.2. No Duty on the Part of the Secured Party. The powers conferred on the Secured Party hereunder are solely to protect the interests of the Secured Party in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct as determined by a final non-appealable judgment of a court of competent jurisdiction.

 

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ARTICLE 9  

REMEDIES

 

9.1. Generally.

 

(a) If any Event of Default shall have occurred and be continuing, the Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it at law or in equity, all the rights and remedies of the Secured Party on default under the UCC (whether or not the UCC applies to the security interest and lien granted herein or the affected Collateral) to collect, enforce or satisfy any Secured Obligations then owing, whether by acceleration or otherwise, and also may, without limiting the generality of the foregoing, pursue any of the following separately, successively or simultaneously, in each case without demand of performance or any other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived):

 

(i) require any Grantor to, and each Grantor hereby agrees that it shall at its expense and promptly upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place to be designated by the Secured Party that is reasonably convenient to the Secured Party;

 

(ii) enter onto the property during normal business hours where any Collateral is located and take possession thereof with or without judicial process;

 

(iii) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent the Secured Party reasonably deems appropriate; and

 

(iv) without notice except as specified below or under the UCC, collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or sell, assign, lease, license (on an exclusive or nonexclusive basis) or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Secured Party’s offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable.

 

(b) References to the “Secured Party” in this Article 9 of this Agreement include, where the context permits, any receiver so appointed and the officers, employees, servants or agents of such receiver.

 

(c) The Secured Party may be the purchaser of any or all of the Collateral at any public or private (to the extent the portion of the Collateral being privately sold is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations) sale in accordance with the UCC (or other applicable law), and the Secured Party shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such sale made in accordance with the UCC (or other applicable law), to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by the Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.

 

29

 

 

(d) Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days’ notice to such Grantor (or such greater minimum amount if prescribed by applicable law) of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, however the failure to deliver such notice shall not impact any right of the Secured Party hereunder. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor agrees that it would not be commercially unreasonable for the Secured Party to dispose of the Collateral or any portion thereof by using Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets. Each Grantor hereby waives any claims against the Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be liable for the deficiency and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. Each Grantor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to the Secured Party, that the Secured Party has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section shall in any way limit the rights of the Secured Party hereunder.

 

(e) The Secured Party may sell the Collateral without giving any warranties as to the Collateral. The Secured Party may specifically disclaim or modify any warranties of title or the like. This procedure will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

 

(f)   The Secured Party shall have no obligation to marshal any of the Collateral.

 

9.2. Application of Proceeds. All proceeds received by the Secured Party in respect of any sale, any collection from, or other realization upon all or any part of the Collateral shall be applied in full or in part by the Secured Party in whatever manner or order the Secured Party deems appropriate. It is understood and agreed that the Grantors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral and the aggregate amount of the Secured Obligations.

 

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9.3. Sales on Credit. If the Secured Party sells any of the Collateral upon credit, Grantors will be credited only with payments actually made by the purchaser thereof and received by the Secured Party and applied to indebtedness of such purchaser. In the event that such purchaser fails to pay for the Collateral, the Secured Party may resell the Collateral, and Grantors shall be credited with the proceeds of the sale.

 

9.4. Investment Related Property. Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state or foreign securities laws, the Secured Party may be compelled, with respect to any sale of all or any part of the Investment Related Property conducted without prior registration or qualification of such Investment Related Property under the Securities Act and/or such state or foreign securities laws, to limit purchasers to those who will agree, among other things, to acquire the Investment Related Property for their own account, for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges that any such private sale may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, each Grantor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Investment Related Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state or foreign securities laws, even if such issuer would, or should, agree to so register it. If the Secured Party determines to exercise the its right to sell any or all of the Investment Related Property, upon written request, each Grantor shall and shall cause each issuer of any Pledged Stock to be sold hereunder, each partnership and each limited liability company from time to time to furnish to the Secured Party all such information as the Secured Party may request in order to determine the number and nature of interest, shares or other instruments included in the Investment Related Property which may be sold by the Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, or equivalent provisions of any applicable foreign securities laws or exchanges as the same are from time to time in effect.

 

9.5. Intellectual Property. Anything contained herein to the contrary notwithstanding, in addition to the other rights and remedies provided herein, upon the occurrence and during the continuation of an Event of Default:

 

(a) upon written demand from the Secured Party, each VNC Grantor shall grant, assign, convey or otherwise transfer to the Secured Party or the Secured Party’s designee all of such VNC Grantor’s right, title and interest in and to the Intellectual Property and shall execute and deliver to the Secured Party such documents as are reasonably necessary to carry out the intent and purposes of this Agreement;

 

31

 

 

(b) within 5 days after written notice from the Secured Party, each VNC Grantor shall make available to the Secured Parties, to the extent within such VNC Grantor’s power and authority, such personnel in such VNC Grantor’s employ on the date of such Event of Default as the Secured Party may reasonably designate, by name, title or job responsibility, to permit such VNC Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such VNC Grantor under or in connection with the Trademarks, such persons to be available to perform their prior functions on the Secured Party’s behalf and to be compensated by the Secured Party at such VNC Grantor’s expense on a per diem, pro rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default; and

 

(c) the Secured Party shall have the right to notify, or require each VNC Grantor to notify, any obligors with respect to amounts due or to become due to such VNC Grantor in respect of the Intellectual Property, of the existence of the security interest created herein, to direct such obligors to make payment of all such amounts directly to the Secured Party, and, upon such notification and at the expense of such VNC Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such VNC Grantor might have done;

 

(d) other than in the ordinary course of business as was generally conducted by it on or prior to the date hereof, such Grantor shall not (x) adjust, settle or compromise the amount or payment of any such amount, (y) release wholly or partly any obligor with respect thereto or (z) allow any credit or discount thereon; and

 

(e) all amounts and proceeds (including checks and other instruments) received by any Grantor in respect of amounts due to such Grantor in respect of the Intellectual Property or any portion thereof shall be received in trust for the benefit of the Secured Party hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over or delivered to the Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 9.7 hereof.

 

3.2. Cash Proceeds; Deposit Accounts.

 

(a) If any Event of Default shall have occurred and be continuing, in addition to the rights of the Secured Party specified in Section 6.5 with respect to payments of Receivables, all proceeds of any Collateral received by any Grantor consisting of cash, checks and other near-cash items (collectively, “Cash Proceeds”) shall be held by such Grantor in trust for the Secured Party, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Secured Party in the exact form received by such Grantor (duly indorsed by such Grantor to the Secured Party, if required) and held by the Secured Party in the Collateral Account. Any Cash Proceeds received by the Secured Party (whether from a Grantor or otherwise) may (A) be held by the Secured Party for the ratable benefit of the Secured Party, as collateral security for the Secured Obligations (whether matured or unmatured) and/or (B) then or at any time thereafter may be applied by the Secured Party against the Secured Obligations then due and owing.

 

32

 

 

(b) If any Event of Default shall have occurred and be continuing, the Secured Party may, but shall not be obligated to, apply the balance from any Collateral Account or instruct the bank at which such account is maintained to pay the balance of any such account to or for the benefit of the Secured Party.

 

ARTICLE 4  

CONTINUING SECURITY INTEREST

 

4.1. Continuing Security Interest. This Agreement shall create a continuing security interest in and lien on the Collateral and shall remain in full force and effect until the Discharge Date, be binding upon each Grantor, its successors and assigns, and inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Secured Party and its successors, transferees and assigns. At such time as the Discharge Date has occurred, this Agreement and all obligations of the Secured Party and the Grantors hereunder (other than those expressly stated herein and the other Loan Documents which survive such termination) shall terminate, the Liens granted herein with respect to the Collateral shall be deemed to be automatically released and terminated hereunder and of record and such property shall automatically revert to the Grantors with no further action on the part of any Person. Upon such termination, the Secured Party shall, upon the Grantors’ request and at the Grantors’ sole expense, execute and deliver or otherwise authorize the filing of such documents as Grantors shall reasonably request and provide, in form and substance reasonably satisfactory to the Secured Party, including financing statement amendments prepared by such Grantor or as otherwise approved by the Secured Party to evidence such termination.

 

4.2. Effect of Permitted Sale or Transfer of Collateral. If any of the Collateral shall be sold, transferred, released or otherwise disposed of by any Grantor in a transaction expressly permitted pursuant to the Loan Documents, the Liens granted herein with respect to such Collateral sold, transferred, released or otherwise disposed of shall be deemed to be automatically released and terminated hereunder and of record and such property shall automatically revert to the applicable Grantor with no further action on the part of any Person. The Secured Party shall, upon the applicable Grantor’s request and at the applicable Grantor’s expense, execute and deliver or otherwise authorize the filing of such documents as such Grantor shall reasonably request and provide, in form and substance reasonably satisfactory to the Secured Party, including financing statement amendments to evidence such release. Notwithstanding the foregoing, in no event shall the Secured Party be required to execute and deliver or otherwise authorize the filing of any documents requested by a Grantor to evidence the release of the Liens granted with respect to any Collateral prior to the Discharge Date unless the Borrower has delivered a certificate executed by an Authorized Signatory of the Borrower to the Secured Party on or prior to the date any such action is requested to be taken by the Secured Party under this Section 10.2 in respect of a sale, transfer, release or other disposition described in this Section 10.2 certifying that the applicable sale, transfer, release or other disposition is permitted under the Loan Documents.

 

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ARTICLE 5  

STANDARD OF CARE; SECURED PARTY MAY PERFORM

 

5.1. Standard of Care. The powers conferred on the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession. Neither the Secured Party nor any of its directors, officers, employees, shareholders or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or otherwise. The Secured Party shall not be liable or responsible in any way for the safekeeping of the Collateral or for any loss or damage thereto (and specifically disclaims any liability or responsibility with respect thereto) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency or other Person whomsoever, but the same shall be at the Grantors’ sole risk.

 

5.2. Secured Party May Perform. If any Grantor fails to perform any agreement contained herein, the Secured Party may (but without an obligation to do so) itself perform, or cause the performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by each Grantor. Each Grantor agrees, jointly and severally, to reimburse the Secured Party promptly therefor with interest accruing thereon daily at the Default Rate provided in the Loan Agreement. All sums so paid or incurred by the Secured Party for any of the foregoing and all costs and expenses (including, without limitation, attorneys’ fees, legal expenses and court costs) which the Secured Party may incur in enforcing or protecting the Lien on or rights and interest in the Collateral or any part thereof or any of its rights or remedies under any of the Loan Documents or under any other agreement between the parties hereto or in respect of any of the transactions contemplated thereby until paid by Grantors to the Secured Party with interest at the Default Rate, shall be considered Obligations owing by the Borrower and other Grantors to the Secured Party under the Loan Documents. Such Obligations shall be secured by all Collateral hereunder and by any and all other collateral, security, assets, reserves or funds of the Borrower Parties in or coming into the hands or inuring to the benefit of the Secured Party.

 

ARTICLE 6  

MISCELLANEOUS

 

6.1. Additional Grants of Security Interests. Notwithstanding anything to the contrary herein, in the event that the Loan Documents provide for the grant of a security interest or pledge over the assets of any Grantor and such assets do not otherwise constitute Collateral under this Agreement or any other Loan Document, such Grantor shall (i) promptly upon the request of the Secured Party grant a security interest in or pledge such assets to secure the Secured Obligations, including, without limitation, pursuant to a mortgage, deed of trust, leasehold mortgage, leasehold deed of trust or similar instrument in form and substance satisfactory to the Secured Party, (ii) promptly upon the request of the Secured Party take any and all actions necessary to perfect such security interest or pledge to the extent set forth in any such instrument or the Loan Documents, and (iii) take all other steps reasonably requested by the Secured Party in connection with the foregoing.

 

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6.2. Notice. Any notice required or permitted to be given under this Agreement shall be given in accordance with Section [•] of the Loan Agreement.

 

6.3. Modification. Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Secured Party and the Grantor or Grantors with respect to which such waiver, amendment or modification is to apply.

 

6.4. Non-Waiver; Remedies Cumulative. No failure or delay on the part of the Secured Party in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement, the Loan Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available at law, in equity or otherwise.

 

6.5. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.

 

6.6. Entire Agreement; Counterparts; Electronic Signatures. This Agreement, the Loan Agreement and the other Loan Documents embody the entire agreement and understanding between Grantors and the Collateral Agent and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. There are no unwritten oral agreements between the parties. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. Delivery of an executed signature page to this Agreement by facsimile, .pdf file or other electronic transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

 

6.7. Governing Law. Except as otherwise expressly set forth herein, this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without regard to principles of conflicts of law.

 

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6.8. Jurisdiction and Venue; Waiver of Jury Trial. Jurisdiction shall lie in the State of New York. All disputes, controversies, claims, actions and similar proceedings arising with respect to this Agreement or any related agreement or transaction may be brought in the courts of the State of New York or the United States District Court for the District of New York. THE SECURED PARTY AND THE GRANTORS EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF ANY OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY THE SECURED PARTY OR THE GRANTORS, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.

 

[The remainder of this page is left blank; signature pages follow.]

 

36

 

 

IN WITNESS WHEREOF, each Grantor and the Secured Party have caused this Agreement to be duly executed as of the date first above written:

 

  GRANTORS:
     
  COMSOVEREIGN HOLDING CORP., as
the Borrower
     
  By: /s/ Daniel L. Hodges
  Name: Daniel L. Hodges
  Title: Chief Executive Office
     
  VIRTUAL NETCOM, LLC., as Grantor and Guarantor
     
  By: /s/ Daniel L. Hodges
  Name: Daniel L. Hodges
  Title: Chief Executive Office
     
  SECURED PARTY:
     
  DWX SERVICING AGENT, LLC
  as Lender and Secured Party
     
  By: /s/ Charles A. Ebetino, Jr.
  Name: Charles A. Ebetino, Jr.
  Title: Manager

 

[Signature Page to Pledge and Security Agreement]

 

 

 

 

SCHEDULE 5.1

TO PLEDGE AND SECURITY AGREEMENT

 

GENERAL INFORMATION

 

Locations at which any Grantor maintains tangible personal property:

 

Grantor

  Tangible Personal Property Location
Virtual Netcom, LLC   Virginia
     
     
     
     
     
     

  

SCHEDULE 5.1-1

 

 

SCHEDULE 5.2

TO PLEDGE AND SECURITY AGREEMENT

 

COLLATERAL IDENTIFICATION

 

I. INVESTMENT RELATED PROPERTY

 

(A) Pledged Stock Interests:

 

 

Grantor

  Stock Issuer   Class of
Stock
  Certificated
(Y/N)
  Stock
Certificate
No.
  Par
Value
  No. of
Pledged
Stock
  Percentage
of
Outstanding
Stock of the
Issuer
                             
                             
                             

 

(B) Pledged LLC Interests:

 

 

Grantor

  Limited
Liability
Company
  Certificated
(Y/N)
  Certificate
No. (if any)
  No. of
Pledged
Units/% of
Pledged
Membership
Interests
  Percentage of
Outstanding
Membership Interests
of the Limited Liability
Company
ComSovereign Holding Corp.   Virtual Netcom, LLC               100%
                     
                     
                     
                     

 

(C) Pledged Partnership Interests:

 

None

 

(D) Pledged Debt:

 

None

 

SCHEDULE 5.2-1

 

 

(E) Securities Accounts:

 

None

 

(F) Deposit Accounts:

 

None

 

(G) Commodity Contracts and Commodities Accounts:

 

None

 

II. COMMERCIAL TORT CLAIMS

 

None

 

III. LETTER-OF-CREDIT RIGHTS

 

None

 

IV. WAREHOUSEMAN, BAILEES AND OTHER THIRD PARTIES IN POSSESSION OF COLLATERAL

 

None

 

V. INTELLECTUAL PROPERTY

 

(A) Copyrights:

 

None

 

(B) Patents:

 

  1. United States Patent No. 9,706,431 B1 dated July 11, 2017

 

  2. United States Patent No. 9,807,643 B1 dated October 31, 2017

 

(C) Trademarks:

 

None

 

SCHEDULE 5.2-2

 

 

SCHEDULE 5.4

TO PLEDGE AND SECURITY AGREEMENT

 

FINANCING STATEMENTS

 

Grantor

  Filing Jurisdiction(s)
ComSovereign Holding Corp.     Nevada
Virtual Netcom, LLC   Virginia
     

 

 

SCHEDULE 5.4

 

Exhibit 10.45

 

COMSOVEREIGN HOLDING CORP.

Non-Negotiable, Secured Promissory Note

 

Principal Amount: US1,100,000.00 Date: December 8, 2020

 

FOR VALUE RECEIVED, the undersigned, COMSOVEREIGN HOLDING CORP, a Nevada corporation, with a principal business address located at 6600 N Eagle Drive, Tucson, AZ 85750 (“COMS”) and its wholly owned subsidiary, VIRTUAL NETCOM, LLC, a Virginia limited liability company, with the same business address (“VNC”, and together with COMS, and each individually, hereinafter “Obligor”), hereby unconditionally promise to pay to the order of DWX SERVICING AGENT, LLC, an Ohio limited liability company (the “Holder”), the sum of ONE MILLION ONE HUNDRED THOUSAND UNITED STATES DOLLARS (US$1,100,000.00) plus interest, fees and other charges due under the Secured Loan Agreement, as defined below (the “Loan Amount”). The Loan Amount includes $100,000.00 which is being withheld as an original issue discount and to cover Holder’s legal and other associated expenses.

 

The loan evidenced by this Non-Negotiable, Secured Promissory Note (the “Note”) shall accrue interest and repay principal and other fees and expenses in the manner and in the amounts required by that certain Secured Loan Agreement effective as of the same date hereof, as the same may be amended, restated or amended and restated from time to time (the “Secured Loan Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Secured Loan Agreement unless the context shall otherwise require.

 

The Loan Amount is payable in accordance with the terms hereof by the Obligors in United States Dollars at the Holder’s offices located at 3694 Seaford Drive, Columbus, Ohio 43220. Obligors may prepay all or any part of the principal amount evidenced by this Note without prepayment penalty or premium and without any notice to Holder.

 

If at any time Holder receives, from Obligors or otherwise, any amount applicable to this Note which is less than all amounts due and payable at such time, Holder may apply that payment to amounts then due and payable under this Note in any manner and in any order determined by Holder, in Holder’s discretion. Obligors agree that neither Holder’s acceptance of a payment from Obligors in an amount that is less than all amounts then due and payable nor Holder’s application of such payment shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction.

 

To secure Obligor’s obligations hereunder, Obligors hereby additionally grant unto Holder a lien on and first priority security interest in the equity interests of VNC and all of VNC’s assets, including, but not limited to, all real and personal property and other tangible and intangible assets, the equity interests of VNC subsidiaries and the following specific patents listed below:

 

1. United States Patent No. 9,706,431 B1 dated July 11, 2017
     
2. United States Patent No. 9,807,643 B1 dated October 31, 2017

 

(all the foregoing the “Collateral”).

 

1

 

 

In conjunction with this Note, Obligor shall cause liens to be filed in accordance with the Uniform Commercial Code (“UCC”) in Nevada and Virginia against the Obligor for the Loan Amount. Further, Obligor shall, from time to time, upon Holder’s request, execute and deliver such mortgages, deeds of trust, pledge agreements, security agreements, and UCC filings and other agreements and documents as Holder reasonably requests in order to perfect such liens and security interests.

 

If an Event of Default has occurred and is continuing, and has extended beyond any grace or cure period as provided for in the Secured Loan Agreement, the entire unpaid principal balance, any accrued interest, and all other amounts payable under this Note shall at once become due and payable, at the option of Holder, in accordance with the Secured Loan Agreement.

 

The following shall constitute events of default (each, an “Event of Default”):

 

· Obligor fails to pay any amount when due hereunder, whether at stated maturity, by acceleration, or otherwise fails to perform or breaches a covenant in this Note, the Secured Loan Agreement or any other Loan Document;
     
· If, pursuant to or within the meaning of the United States Bankruptcy Code or any other federal, state or provincial laws of the United States relating to insolvency or relief of debtors (a Bankruptcy Law”), Obligor shall:
     
(i) commence a voluntary case or proceeding;
     
(ii) consent to the entry of an order for relief against it in an involuntary case;
     
(iii) consent to the appointment of a trustee, receiver, assignee, liquidator, or similar official;
     
(iv) make an assignment for the benefit of its creditors; or
     
(v) admit in writing its inability to pay its debts as they become due; or
     
· If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Obligor in an involuntary case or (ii) appoints a trustee, receiver, assignee, liquidator, or similar official for Obligor or substantially all of Obligor’s assets or properties.

 

Obligor hereby waives demand for payment, presentment, protest, notice of protest and non-payment, or other notice of default, notice of acceleration and intention to accelerate, and agrees that the Obligor’s liability under this Note shall not be affected by any renewal or extension in time of payment hereof, or in any indulgences, or by any release or change in any security for the payment of this Note, and Obligor hereby consents to any and all renewals, extensions, indulgences, release or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes.

 

No waiver by Holder of any of its rights or remedies hereunder or under any other document evidencing or securing this Note or otherwise shall be considered a waiver of any other subsequent right or remedy of Holder; no delay or omission in the exercise or enforcement by Holder of any rights or remedies shall ever be construed as a waiver of any right or remedy of Holder; and no exercise or enforcement of any such rights or remedies shall ever be held to exhaust any right or remedy of Holder.

 

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Obligor hereby agrees to indemnify and hold harmless the Holder and its agents and employees from and against any and all losses, claims, damages, liabilities and expenses including, without limitation, reasonable attorneys’ fees and costs and disbursements, which may be imposed or incurred by any of them in connection with this Note, including, without limitation, those asserted by Obligor or any other third party, except that no such party will be indemnified for any losses, claims, damages, liabilities or expenses arising out of the willful misconduct or gross negligence of such party.

 

This Note is being executed and delivered, and is intended to be performed, in the State of New York. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of New York shall govern the validity, construction, enforcement and interpretation of this Note. This Note is being fully guaranteed, plus reasonable collection costs, by VNC, who will directly or indirectly benefit from the funding provided by the Holder.

 

This Note is secured. All obligations of any party under this Note shall be joint and several. This means that each party signing below is responsible for all obligations in this Note. Where any one or more of the parties is a corporation, partnership, limited liability company or similar entity, it is not necessary to inquire into the powers of any of the officers, directors, partners, members, or other agents acting or purporting to act on the entity’s behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Note.

 

Holder hereby agrees that this Note is a non-negotiable instrument and may not be sold, conveyed, assigned, or transferred. If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings at law or in equity or in bankruptcy, receivership or other court proceedings, Obligor promises to pay the reasonable costs and expenses of collection including, but not limited to, court costs and the reasonable attorneys’ fees of the Holder.

 

IN WITNESS WHEREOF, the undersigned Obligor has executed and delivered to Holder this Note as of the date first written above.

 

OBLIGORS:      
       
COMSOVEREIGN HOLDING CORP   VIRTUAL NETCOM, LLC
         
By: /s/ Daniel L. Hodges   By: /s/ Daniel L. Hodges
         
Its:   Chief Executive Officer   Its:   Chief Executive Officer

 

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GUARANTEE

 

The undersigned, VIRTUAL NETCOM, LLC, (“Guarantor”), hereby unconditionally guarantees to Holder and its successors, endorsees and assigns the prompt and full payment when due, whether by acceleration or otherwise, with such interest as may accrue thereon after any default or maturity thereof, and such prepayment premiums and other charges as may be due in connection therewith, of the Note. Guarantor does hereby further unconditionally guarantees to Holder the full and prompt payment and performance of any and all obligations whatsoever of Obligor under the terms of any of the Note, the Secured Loan Agreement, any related security agreement and any other documents to or of which Obligor is a party or beneficiary now or hereafter evidencing, securing or otherwise relating to the Note, the Secured Loan Agreement or any related security agreement (collectively, the “Note Documents”), whether such obligations now exist or arise hereafter.

 

Guarantor does hereby agree that if the Note is not paid by Obligors in accordance with its terms for any reason whatsoever, or if any and all sums which are now or may hereafter become due from Obligor to Holder under the Note Documents are not paid by Obligor in accordance with their terms for any reason whatsoever, Guarantor will immediately make such payments. Guarantor further agrees to pay Holder all expenses actually paid or incurred by Holder in endeavoring to collect all or any portion of the indebtedness evidenced by the Note, to enforce any other obligations guaranteed hereby, or to enforce this Guaranty (including, without limitation, all reasonable attorneys’ fees and legal expenses actually incurred at ordinary hourly rates). The provisions of this Guaranty shall extend and be applicable to all renewals, replacements, amendments, extensions, consolidations and modifications of the Note and the other Note Documents, and any and all references herein to the Note and the other Note Documents or any of them shall be deemed to include any such renewals, replacements, amendments, extensions, consolidations or modifications thereof.

 

This is a guaranty of payment and not of collection. The liability of Guarantor under this Guaranty shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against Obligors or any other person (including, without limitation, other guarantors, if any), nor against the Collateral. Guarantor waives any right to require that an action be brought against Obligor or any other person or to require that resort be had to any Collateral.

 

IN WITNESS WHEREOF, the undersigned Guarantor has executed and delivered this agreement as of the 8th day of December 2020.

 

  GUARANTOR:
   
  VIRTUAL NETCOM, LLC
     
  By: /s/ Daniel L. Hodges
     
  Its:   Chief Executive Officer

 

 

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Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the use in this Amendment No. 3 to the Registration Statement on Form S-1 of ComSovereign Holding Corp. (the “Company”) of our report dated July 5, 2020, relating to our audit of the Company’s consolidated financial statements as of December 31, 2019 and for the period from January 10, 2019 (inception) through December 31, 2019. Our report contains an explanatory paragraph that states the Company has experienced losses, negative cash flows from operations, has limited capital resources, and an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We also consent to the reference to our Firm under the heading “Experts” in this Amendment No. 3 to the Registration Statement on Form S-1.

 

  /s/ HASKELL & WHITE LLP

 

San Diego, California

December 17, 2020