COMSovereign Holding Corp. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

or

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

For the transition period from ______________ to ______________

Commission File No. 333-150332

COMSOVEREIGN HOLDING CORP.

(Exact name of registrant as specified in its charter)

(904) 834-4400

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

As of May 17, 2021, there were 68,365,748 shares of registrant’s common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended March 31, 2021 and 2020

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(Unaudited)

For the Three Months Ended March 31, 2021 and 2020

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

COMSOVEREIGN HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

COMSovereign Holding Corp. (“the “Company”), formerly known as Drone Aviation Holding Corp., 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 portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid rollout of the 5G and “next-Generation” (“nG”) networks of the future. The Company focuses on novel 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.

Corporate History of the Company

The Company was incorporated under the laws of the State of Nevada on April 17, 2014. In November of 2019, the Company entered into an Agreement and Plan of Merger with COMSovereign Corp., a Delaware corporation (“COMSovereign”). As a result, COMSovereign became the surviving corporation and a directly wholly-owned subsidiary of the Company.

On January 31, 2019, COMSovereign acquired the capital stock of VEO, a California corporation (“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.

On January 31, 2019, COMSovereign acquired 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.

On March 4, 2019, COMSovereign acquired 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.

On April 1, 2019, COMSovereign acquired 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 wave point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide.

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.

On July 6, 2020, the Company completed its acquisition of Virtual Network Communications Inc., a Virginia corporation (“VNC”). VNC is an edge compute focused 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.

On January 29, 2021, the Company completed the acquisition of Skyline Partners Technology LLC, a Colorado limited liability company that does business under the name Fastback Networks (“Fastback”). Fastback, is a manufacturer of intelligent backhaul radio (IBR) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight (NLOS) limitations. See Note 15 – Business Acquisitions for further discussion.

On February 25, 2021, the Company completed the acquisition of Sky Sapience Ltd., a company organized under the laws of the State of Israel (“SKS”). SKS is an Israeli-based manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications. See Note 15 – Business Acquisitions for further discussion.

On April 1, 2021, the Company completed the acquisition of RVision, Inc., a California corporation (“RVision”). RVision is a developer of technologically-advanced video and communications products and physical security solutions designed for government and private sector commercial industries. See Note 22 – Subsequent Events for further discussion.

During 2021, the Company, utilizing its wholly-owned subsidiary, AZCOMS LLC (“AZCOMS”), completed the acquisition of a 140,000-square-foot building in Tucson, Arizona, and will hold and service the related debt as described in Note 15 – Debt Agreements.

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

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. Historical information is not necessarily indicative of the Company’s future results of operations, financial position or cash flows.

As described in Note 17 – Stockholders’ Equity, effective January 21, 2021, the Company enacted a 1-for-3 reverse stock split (the “Split”) of the Company’s common stock. The Condensed Consolidated financial statements and accompanying notes give effect to the Split as if it occurred at the beginning of the first period presented. 

The results for the three months ended March 31, 2021 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 notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Principles of Consolidation

The unaudited Condensed Consolidated Financial Statements as of, and for the three months ended, March 31, 2021 and 2020 include the accounts of the Company and its subsidiaries: Drone AFS Corp., Lighter Than Air Systems Corp., DragonWave, Lextrum, Silver Bullet, VEO, InduraPower, Sovereign Plastics, VNC, Fastback, SKS and AZCOMS. All intercompany transactions and accounts have been eliminated.

Reclassifications

Certain immaterial March 31, 2020 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 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

There have been no material changes in the Company’s significant accounting policies as of and for the three months ended March 31, 2021, 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, 2020.

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 the Condensed Consolidated Financial Statements.

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 has performed an evaluation of and will continue to evaluate, through December 31, 2022, the impact of this ASU. This ASU does not currently and is not expected to have in the future, a material effect on the 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 the 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 Condensed Consolidated Financial Statements and notes have been prepared assuming the Company will continue as a going concern. For the three months ended March 31, 2021, the Company generated negative cash flows from operations of $14,206,969 and had an accumulated deficit of $80,833,148.

Management anticipates that the Company will be dependent, for the near future, on additional debt facilities or 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, including but not limited to, securing a line or lines of credit, the issuance of debt, and/or accessing the equity markets.

The Company’s fiscal operating results and accumulated deficit, among other factors, raise substantial doubt about the Company’s ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability. 

4. REVENUE

The following table is a summary of the Company’s timing of revenue recognition for the three months ended March 31, 2021 and 2020:

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

Revenue by source consisted of the following for the three months ended March 31, 2021 and 2020:

Revenue by geographic destination consisted of the following for the three months ended March 31, 2021 and 2020:

Contract Balances

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of March 31, 2021 and December 31, 2020, the Company did not have a material contract assets balance.

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

The increase in contract liabilities during the three months ended March 31, 2021 was primarily due to invoiced amounts that did not yet meet the revenue recognition criteria and are partially offset by the revenue recognition criteria being met for previously deferred revenue. The amount of revenue recognized in the three months ended March 31, 2021 that was included in the prior period contract liability balance was $352,211. This revenue consisted of services provided and products delivered 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: 

Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss 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 as of March 31, 2021 and 2020, respectively: stock options of 3,380,181 and 7,695,000, unvested restricted stock units of 323,701 and 1,900,000, and warrants of 6,298,692 and 503,523.

As described in Note 22 – Subsequent Events, subsequent to March 31, 2021, the Company completed one acquisition resulting in the issuance of 2,000,000 shares of common stock as partial consideration. The Company also issued 7,571 shares as compensation to a vendor that were classified as unissued shares at March 31, 2021 and 50,000 shares of common stock for the exercise of options. Additionally, the Board of Directors has approved the issuance of options to purchase 4,237,000 shares of common stock.

6. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

Cash, cash equivalents, and restricted cash 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 March 31, 2021 and December 31, 2020. Restricted cash consists of funds that were withheld from the loan amount as an interest reserve as described in Note 15 – Debt Agreements related to the secured loan agreement entered into by AZCOMS. These funds are legally restricted to service the interest on the related debt agreement and are relieved on a monthly basis.

Cash and cash equivalents consisted of the following as of March 31, 2021 and December 31, 2020:

7. ACCOUNTS RECEIVABLE, NET

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.

Accounts receivable consisted of the following as of March 31, 2021 and December 31, 2020:

Bad debt (recovery)/expense totaled ($2,142) and $245,168 for the three months ended March 31, 2021 and 2020, respectively.

8. INVENTORY

Inventory is valued at the lower of cost or 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, when necessary, based on factors including its estimated forecast of product demand, the stage of the product life cycle and production requirements for the units in question. Indirect manufacturing costs and direct labor expenses are allocated systematically to the total production inventory.

Inventory consisted of the following as of March 31, 2021 and December 31, 2020:

9. PREPAID EXPENSES

Prepaid expenses consisted of the following as of March 31, 2021 and December 31, 2020:

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:

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.

Property and equipment, net consisted of the following as of March 31, 2021 and December 31, 2020:

For the three months ended March 31, 2021, the Company invested $6,798,994 in capital expenditures. There were no capital expenditures for the three months ended March 31, 2020.

The Company recognized $362,120 and $223,982 of depreciation expense for the three months ended March 31, 2021 and 2020, respectively.

11. LEASES 

Operating Leases

The Company determines, at contract inception, whether or not an arrangement contains a lease and evaluates the contract for classification as an operating or finance lease. For all leases, ROU assets and lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. If the Company’s lease does not provide an implicit rate in the contract, the Company uses 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. Any renewal periods are considered in the analysis of each lease to the extent that the Company considers them to be reasonably certain of being exercised.

Costs associated with operating leases are recorded as a single lease cost on a straight-line basis over the life of the lease. The single lease cost includes the cost of amortizing the operating lease ROU asset and accretion expense related to the operating lease liability and is included in general and administrative expenses on the Condensed Consolidated Statement of Operations. Costs associated with finance leases are recorded by amortizing the finance lease ROU asset, which is recorded as amortization on the Condensed Consolidated Statement of Operations, and the accretion of the finance lease liability, recognized as interest expense on the Condensed Consolidated Statement of Operations.

For all leases with a term of 12 months or less, the Company has elected the practical expedient to not recognize ROU assets and lease liabilities.

The Company has operating leases for office, manufacturing and warehouse space, office equipment, and vehicles. Amounts recognized as of March 31, 2021 and December 31, 2020 for operating leases were as follows:

As part of the SKS business acquisition on February 25, 2021, the Company assumed a lease of flexible office space with a remaining term of approximately 28 months that will expire on July 1, 2023. A right-of-use asset and lease liability for $429,033 was recorded on February 25, 2021. Monthly payments are Israeli New Shekel (ILS) 53,735 during the remaining 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 renewal periods, if any, 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.

As part of the SKS business acquisition on February 25, 2021, the Company assumed vehicle leases with a remaining weighted average term of approximately 11 months. A total right-of-use asset and lease liability for $28,419 was recorded on February 25, 2021, excluding a deposit of $10,683 to be applied to future lease payments. Monthly average payments are ILS 5,970 during the remaining life of the leases. The leases included an implicit rate of return and no renewal options.

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

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s operating leases as of March 31, 2021 and December 31, 2020, respectively:

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 March 31, 2021:

Finance Leases

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

The following table presents the weighted-average remaining lease term and weighted average discount rates related to the Company’s finance leases as of March 31, 2021 and December 31, 2020, respectively:

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the finance lease liabilities recorded on the Condensed Consolidated Balance Sheet as of March 31, 2021:

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

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

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

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

The Company utilizes fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized. As of March 31, 2021, the Company had not recorded any impairment related to such assets and had no other material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.

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

13. BUSINESS ACQUISITIONS 

Skyline Partners Technology LLC

On January 29, 2021, the Company completed the acquisition of Skyline Partners Technology LLC, a Colorado limited liability company that does business under the name Fastback Networks (“Fastback”), for cash consideration paid of $1,315,000 and the issuance of $1,500,000 aggregate principal amount of term notes and $11,150,000 aggregate principal amount of convertible notes that are convertible into common stock at a conversion price of $5.22 per share, subject to adjustment. See Note 15 – Debt Agreements for further discussion of the notes. The Company incurred acquisition-related costs of $78,966, of which $17,954 were expensed in the three months ended March 31, 2021 and $61,012 were expensed in fiscal year 2020, as included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.

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 excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. 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 March 31, 2021:

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.

Sky Sapience Ltd.

On February 25, 2021, the Company completed the acquisition of Sky Sapience Ltd., a company organized under the laws of the State of Israel (“SKS”). The total preliminary purchase price consideration amounted to $12,331,831, subject to working capital and other post-closing adjustments, representing (i) cash paid on the closing date of $2,710,839, (ii) 2,555,209 shares of the Company’s common stock with a fair value of $9,070,992 or $3.55 per share, of which an aggregate of 1,151,461 shares is being held in an escrow fund for purposes of satisfying any post-closing indemnification claims of the sellers under the Share Purchase Agreement, and (iii) settlement of a pre-existing relationship in the amount of $550,000. The Company incurred acquisition-related costs of $163,808, of which $71,239 were expensed in the three months ended March 31, 2021 and $92,569 were expensed in fiscal year 2020, as included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.

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 excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. 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 March 31, 2021:

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. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth quarter of 2020, the Company adopted ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The adoption of this standard had no material impact on the Condensed Consolidated Financial Statements. During the three months ended March 31, 2021 and 2020, the Company recorded no impairments.

The Company accounts for software costs in accordance with the provisions of ASC 985-20 – Costs of Software to be Sold, Leased, or Marketed. ASC 985-20 provides guidance on costs for software that is internally developed or purchased, including software to be either sold as a separate product or as part of a product or process. Costs incurred to establish technological feasibility of the software should be expensed as research and development when incurred, regardless of whether it is internally developed or purchased. Once technological feasibility has been achieved, the remaining costs incurred to develop the software should be capitalized. These costs should continue to be capitalized until the product is ready to be sold or marketed to customers, at which time, amortization of the capitalized costs begin.

The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2021:

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of March 31, 2021 and December 31, 2020:

Amortization expense of intangible assets was $3,292,806 and $2,607,670 for the three months ended March 31, 2021 and 2020, respectively. The Company’s amortization is generally based on no residual value using the straight-line amortization method as it best represents the benefit of the intangible assets. However, capitalized software is amortized using greater of the (1) the net realizable value test, which is based on the proportion of current gross revenues to the total of current and estimated future gross revenues for the project or (2) straight-line amortization. The following table sets forth the weighted-average amortization period, in total and by major intangible asset class:

As of March 31 2021, 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:

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 first allocates the value of the proceeds received from a convertible debt transaction between the convertible debt instrument and any other detachable instruments included in the transaction (such as warrants) on a relative fair value basis. A BCF is then measured as the intrinsic value of the conversion option at the commitment date, representing the difference between the effective conversion price and the Company’s stock price on the commitment date multiplied by the number of shares into which the debt instrument is convertible. The allocated value of the BCF and warrants are recorded as a debt discount and accreted over the expected term of the convertible debt as interest expense. If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible debt instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible debt instrument. 

Debt Discounts

The Company records debt discounts as a deduction from the carrying amount of the related indebtedness on its Condensed Consolidated Balance Sheet with the respective debt discount amortized in interest expense on its Condensed 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 Condensed 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 Condensed 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 Condensed Consolidated Statement of Operations. 

Long-term debt consisted of the following as of March 31, 2021 and December 31, 2020:

Secured Notes Payable

In August 2016, InduraPower entered into a promissory note not to exceed the principal amount of $550,000 that bore 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. This promissory note was secured by substantially all of the assets of InduraPower. As of December 31, 2020, an aggregate principal amount of $788,709 was outstanding under this note. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal 2021.

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. As of March 31, 2021 and December 31, 2020, an aggregate principal amount of $125,516 and $150,710, respectively, 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 fulfill 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 March 31, 2021. 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. As of March 31, 2021 and December 31, 2020, an aggregate principal amount of $7,987 and $10,790, respectively, 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 bore interest at the rate of 9.0% per annum and was scheduled to mature on November 26, 2021. Upon an event of default, the interest rate would automatically increase to 15% per annum on any unpaid principal and interest, compounded monthly, and all unpaid principal and accrued interest would become due on-demand. A late charge of 5% was to be charged for any balance overdue by more than 10 days. Accrued interest was calculated on a compound basis and is payable semi-annually in May and November of each year. Principal was scheduled to be due in full at maturity but can be prepaid in full or in part without penalty. The loan was secured by all of the assets of DragonWave and was guaranteed by COMSovereign. The debt issuance costs were the result of the issuance of 350,000 shares of common stock and a cash payment of $80,000. The Company defaulted on this loan during fiscal 2020, which caused the interest rate to increase to a monthly compounded rate of 15% per annum, a late charge of 5% was incurred, and the loan and accrued interest became due on-demand. Amounts recorded as debt discounts and issuance costs were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations during the 2020 fiscal year, as a result of the loan becoming due on-demand from the default event. As of December 31, 2020, an aggregate principal amount of $2,000,000 was outstanding under this loan. On January 26, 2021, $1,000,000 of the principal amount of this loan and all accrued interest with a combined total of $1,227,043, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 295,674 shares of common stock, along with warrants to purchase up to 295,674 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026. As of March 31, 2021, there were no debt discounts and issuance costs remaining and an aggregate principal amount of $1,000,000 was outstanding under this loan. 

On February 26, 2020, the Company entered into a $600,000 secured business loan that bore interest at 78.99% per annum which matured on December 26, 2020. Principal and interest payments of $19,429 were due weekly. The loan was secured by the assets of the Company. As of December 31, 2020, an aggregate principal amount of $75,219 was outstanding and past due under this loan. The aggregate principal amount of this loan was fully repaid during the first quarter of fiscal 2021.

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 that bore interest at 5% per annum, 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 was secured by certain assets of Sovereign Plastics. This loan was subjected to covenants, whereby Sovereign Plastics was required to meet certain financial and non-financial covenants at the end of each fiscal year. As of December 31, 2020, an aggregate principal amount of $855,120 was outstanding and past due under this loan. The aggregate principal amount of this loan was fully repaid during the first quarter of fiscal 2021.

On March 19, 2020, the Company entered into a secured loan agreement in the amount of $2,007,971 that bore 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 automatically increased to 18% per annum, and a late charge of 5% was charged for any balance overdue by more than 10 days. Interest payments of $8,428 were due monthly, with the full principal amount due at maturity. The loan was secured by certain intellectual property assets of the Company. As of December 31, 2020, an aggregate principal amount of $2,007,971 was outstanding and past due under this loan. On January 26, 2021, the aggregate principal amount of this loan and accrued interest with a combined total of $2,250,255, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, plus a 10,000 unit conversion bonus, resulting in the issuance of 552,231 shares of common stock, along with warrants to purchase up to 552,231 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

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

On December 8, 2020, the Company entered into a secured loan agreement in the aggregate principal amount of $1,100,000 with an original issue discount of $100,000, that bore interest at the rate of 10% per annum and matured on January 6, 2021. Upon an event of default, the interest rate would automatically increase to 36% per annum on any unpaid principal, or the maximum amount permitted by applicable law, compounded monthly, and all unpaid principal and accrued interest would become due on-demand. Accrued interest and principal were due in full on the maturity date. A late charge of 10% would have been charged for any balance not paid when due. The loan was guaranteed by VNC and was secured by the Company’s equity interest in VNC, all of the assets of VNC and certain intellectual property assets of the Company. Daniel L. Hodges, the Company’s Chief Executive Officer, transferred a total of 23,334 shares of his personally owned, issued and outstanding common stock to the lender and brokers, as part of this transaction. The shares had a total fair value of $142,800. The Company accounted for this as a contribution from Mr. Hodges, with $102,000 assigned as debt discounts for additional consideration to the lender, and $40,800 assigned as debt issuance costs to the brokers. The Company incurred debt issuance costs to the placement agent of this transaction in the amount of $50,000. For the three months ended March 31, 2021, $60,579 of the debt discounts and issuance costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of December 31, 2020, an aggregate principal amount of $1,100,000 was outstanding under this loan. On January 26, 2021, $350,000 of the principal amount of this loan and accrued interest with a combined total of $495,584, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 119,418 shares of common stock, along with warrants to purchase up to 119,418 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026. The remaining $750,000 principal amount of this loan was fully repaid during the first quarter of 2021.

On January 15, 2021, in connection with its acquisition of the new manufacturing facility in Tucson, Arizona, AZCOMS entered into a secured loan agreement pursuant to which it received a loan in the amount of up to $5,355,000 that bears interest on the outstanding loan balance at the greater of (i) 8% per annum or (ii) 6.75% per annum in excess of the 1-month LIBOR rate, and matures on January 15, 2022. At the closing of the loan, the lender withheld $513,000 of the loan amount as an interest reserve. In addition, $875,000 of the loan amount was withheld and may be disbursed at later dates to pay for lender-approved improvements to the property secured by the loan. Interest is payable monthly. The loan is due in full at maturity. Upon an event of default, the interest rate on the loan will increase by an additional 5.00% per annum, and the outstanding principal amount of the loan, accrued interest thereon and fees may become due on-demand. Upon the maturity date or earlier date upon which the unpaid balance of the loan may become immediately payable due to acceleration, and on any prepayments of the loan, AZCOMS will owe an exit fee equal to the greater of (a) $53,850, or (b) 1.00% of the unpaid loan balance and all unpaid accrued interest and fees. Subject to certain terms and conditions and upon payment of a fee, AZCOMS may request a six-month extension of the maturity date. The loan is secured by the land, building and certain other assets of AZCOMS and is guaranteed by the Company and Daniel L. Hodges, the Company’s Chief Executive Officer. In addition, all rights to leases and rent related to the land and building assets have been assigned to the lender for potential non-performance by AZCOMS of its obligations under the loan. This loan is subject to certain financial and non-financial covenants on the part of AZCOMS at the end of each fiscal quarter and fiscal year. The Company incurred debt issuance costs for transaction in the amount of $89,787 and paid a cash discount totaling $65,567. For the three months ended March 31, 2021, $26,999 of the debt discounts and issuance costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of March 31, 2021, an aggregate principal amount of $4,480,000 was outstanding under this loan.

In connection with its acquisition of Fastback on January 29, 2021, COMSovereign assumed the obligations of the sellers on a secured loan in the principal amount of $210,000 that bears interest on the outstanding loan balance at the greater of (i) 5.75% per annum in excess of the Prime Rate or (ii) $4,000 per month, with a maturity date of April 30, 2021. Interest is payable monthly. Upon an event of default, the interest rate on the loan will increase by an additional 5.00% per annum, and the outstanding principal amount of the loan, accrued interest thereon and fees may become due on-demand. The loan is secured by the assets of Fastback. The balance of this loan is preliminary and based on the Company’s best estimate using information obtained as of the filing date of this Form 10-Q. See Note 13 – Business Acquisitions for further discussion of the Fastback business acquisition. As of March 31, 2021, an aggregate principal amount of $177,597 was outstanding under this loan and is currently past due as of the filing date of this Form 10-Q.

Notes Payable

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 that bore 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. On April 21, 2020, all unpaid accrued interest from October 1, 2019 through December 31, 2019 was converted into 4,832 shares of common stock. Accrued interest and the full principal balance were due at maturity. Upon maturity, the interest rate increased to 15% per annum for any balance overdue by more than 5 days. As of December 31, 2020, an aggregate principal amount of $500,000 was outstanding and past due under this note. On January 26, 2021, the aggregate principal amount of this note and accrued interest with a combined total of $561,592, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 135,324 shares of common stock, along with warrants to purchase up to 135,324 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

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 changed 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, valued at $44,000. Accrued interest and principal were due and payable at maturity. Upon maturity, the interest rate increased to 15% per annum for any balance overdue by more than 5 days. As of December 31, 2020, an aggregate principal amount of $175,000 was outstanding and past due. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal 2021.

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 were 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 33,334 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 333,334 shares of common stock with a fair value of $4.53 per share. As of December 31, 2020, an aggregate principal amount of $3,500,000 was outstanding under this note. On January 26, 2021, the aggregate principal amount of this note and accrued interest with a combined total of $4,211,069, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 1,014,716 shares of common stock, along with warrants to purchase up to 1,014,716 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

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 had been past due and the Company was 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 2020. 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 41,093 shares of common stock with a fair value of $4.53 per share. As of December 31, 2020, the aggregate principal amount of $66,700 was outstanding and past due under these notes. The aggregate principal amount of these notes was fully repaid during the first quarter of fiscal 2021.

On March 5, 2020, the Company sold a promissory note in the principal amount of $500,000 that matured on November 30, 2020 for a purchase price of $446,000. Additionally, in lieu of interest, the Company issued to the lender 16,667 shares of its common stock with a fair value of $57,000, which was recognized as a debt discount and amortized to interest expense over the term of the note. Any principal balance remaining unpaid past the maturity date accrued interest at a rate of 15% per annum. As of December 31, 2020, an aggregate principal amount of $500,000 was outstanding and past due under this note. On January 26, 2021, the aggregate principal amount of this note and accrued interest with a combined total of $511,712, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 123,305 shares of common stock, along with warrants to purchase up to 123,305 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

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

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. As of December 31, 2020, an aggregate principal amount of $290,000 was outstanding and past due under this note. On January 26, 2021, the aggregate principal amount of this note, a 10% principal bonus, and accrued interest with a combined total of $330,250, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 79,579 shares of common stock, along with warrants to purchase up to 79,579 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

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 were between $50,000 and $200,000. The notes had maturity dates between October 13, 2020 and November 30, 2020 that bore interest at a rate of 15% per annum, with interest accrued 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 96,634 shares of his personally owned, issued and outstanding common stock 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. The amounts recorded as debt discounts and issuance costs were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations during the 2020 fiscal year. As of December 31, 2020, an aggregate principal amount of $1,200,000 was outstanding and past due under these notes. On January 26, 2021, $750,000 of the aggregate principal amount of these notes, a 10% principal bonus, and accrued interest with a combined total of $885,995, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 213,496 shares of common stock, along with warrants to purchase up to 213,496 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026. The remaining $450,000 aggregate principal amount of these notes was fully repaid during the first quarter of fiscal 2021.

Between November 4, 2020 and November 24, 2020, the Company 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 were between $50,000 and $100,000. The notes had maturity dates between January 31, 2021 and February 23, 2021 that bore interest at a rate of 15% per annum, with interest accrued 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 38,334 shares of his personally owned, issued and outstanding common stock to the accredited investors, as part of this transaction. The Company accounted for this as a contribution from Mr. Hodges, with the total fair value of the shares of $259,600 assigned as debt discounts for additional consideration to the accredited investors. The Company defaulted on these notes during the 2020 fiscal year, causing the interest rate to increase to an annually compounded rate of 18% per annum, and the note and accrued interest to become due on-demand. The amounts recorded as debt discounts were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations during the 2020 fiscal year, as a result of the notes becoming due on-demand from the default event. As of December 31, 2020, an aggregate principal amount of $550,000 was outstanding under these notes. On January 26, 2021, $500,000 of the aggregate principal amount of these notes, a 10% principal bonus, and accrued interest with a combined total of $565,740, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Shareholders’ Equity, resulting in the issuance of 136,324 shares of common stock, along with warrants to purchase up to 136,324 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026. The remaining $50,000 aggregate principal amount of these notes was fully repaid during the first quarter of fiscal 2021.

In connection with its acquisition of Fastback on January 29, 2021, the Company issued to the sellers $1,500,000 aggregate principal amount of term promissory notes. The individual principal amounts of the notes ranged from $1,500 to $393,484. These notes bear interest at the rate of 10% per annum and mature on the earlier of (i) January 1, 2022, (ii) the date on which an aggregate of $6,000,000 worth of products and services are sold following the acquisition date by (A) Fastback or (B) the Company and its subsidiaries (other than Fastback) to certain specified Fastback customers, or (iii) the date on which the Company issues and sells shares of its common stock or debt securities to investors in a bona-fide arms-length financing transaction for aggregate consideration of at least $12,000,000. Interest is payable in cash semi-annually in arrears on each June 1 and December 1, commencing on June 1, 2021, and on the maturity date. Upon an event of default, the interest rate will automatically increase to 15% per annum compounded semi-annually, and all unpaid principal and accrued interest may become due on-demand. Principal and any unpaid accrued interest are due on the maturity date. Upon maturity, the interest rate will automatically increase to 15% per annum compounded semi-annually on any unpaid principal. These notes matured on February 10, 2021 upon the Company’s closing of a public offering, as disclosed in Note 17- Shareholders’ Equity. However, the representative of the Fastback sellers has requested that the Company withhold payment of principal and interest on these notes until a dispute among such sellers can be resolved. As payment was withheld at the request of the sellers’ representative, no event of default has occurred and interest has been accrued only through the maturity date.

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 March 31, 2021 and December 31, 2020, an aggregate amount of principal of $455,184 was outstanding under these loans. In May 2021, the two of the Company’s subsidiaries were notified that the entire principal amount of their outstanding loans in the aggregate amount of $74,591, along with all accrued interest, was forgiven under the terms of the PPP.

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 March 31, 2021 and December 31, 2020, an aggregate amount of principal amount of $24,028 was outstanding under this loan. On May 7, 2021, the Company was notified that the entire principal amount of its outstanding loan in the amount of $24,028, along with all accrued interest, was forgiven under the terms of the PPP.

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 March 31, 2021 and December 31, 2020, an aggregate principal amount 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) $24.00 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. During fiscal 2020, these debentures became past due and interest accrued at a rate of 15% per annum. As of December 31, 2020, an aggregate principal amount of $84,000 was outstanding under these debentures. The aggregate principal amount of this debenture was fully repaid during the first quarter of fiscal 2021.

Convertible Notes Payable

On July 7, 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 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. Terms and maturities are similar to the April 29, 2020 note, as disclosed in the Company’s annual 10-K, 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 by July 28, 2020. 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. As of December 31, 2020, there was an aggregate principal amount of $374,137 was outstanding and past due under this note. On January 22, 2021, the note holder converted the full principal of $374,137 and all accrued interest of $44,398 into 155,013 shares of common stock.

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 bore interest at a rate of 5.0% per annum and matured on November 20, 2020. Accrued interest and principal are due on the maturity date. Upon maturity, the interest rate automatically increased to the lesser of 18% per annum or the maximum amount permitted by applicable law on any unpaid principal and accrued interest. Upon a default event, a penalty would be incurred of 130% of the outstanding principal and accrued interest balance on the default date, the interest rate would increase to 24% per annum, and the note and accrued interest would become due on-demand. Following the maturity date, the note was 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, which the Company recognized as a BCF of $160,000. As additional consideration for the loan, the Company issued to the lender 133,334 shares of common stock at a fair value of $10.05 per share. Warrants to purchase up to 17,857 shares of common stock that are exercisable for a purchase price of $8.40 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 $231,149, which were all recorded as debt discounts. As of December 31, 2020, an aggregate principal amount of $2,238,239 was outstanding and past due under this note. On November 21, 2020, the Company defaulted on this note by not repaying the principal and accrued interest by the maturity date, which resulted in the aggregate principal balance increasing by $538,239, which was composed of an $516,517 penalty payment-in-kind and a $21,722 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. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal 2021.

In connection with its acquisition of Fastback on January 29, 2021, the Company issued to the sellers $11,150,000 aggregate principal amount of convertible promissory notes. The individual principal amounts of the notes ranged from $5,575 to $5,575,000. These notes initially bear interest at the rate of 1.01% per annum, which is to be adjusted to the prime rate as published by the Wall Street Journal on each annual anniversary of the issuance date, and mature on January 29, 2026. Interest is payable in cash annually in arrears on each January 1. Commencing on January 29, 2022, the outstanding principal and accrued interest on these notes may be converted in full to shares of the Company’s common stock at a conversion price of $5.22 per share, subject to adjustment. Upon an event of default, the interest rate will automatically increase to 15% per annum compounded annually, and all unpaid principal and accrued interest may become due on-demand. Principal and any unpaid accrued interest are due on the maturity date. Upon maturity, the interest rate will automatically increase to 15% per annum compounded annually on any unpaid principal. As of March 31, 2021, an aggregate principal amount of $11,150,000 was outstanding.

Senior Convertible Debentures

On September 24, 2019, COMSovereign sold $250,000 aggregate principal amount of 10% Senior Convertible Debentures that bore interest at a rate of 10% per annum and were scheduled to 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) $7.50 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 2,234 shares of common stock. Also on April 21, 2020, all the outstanding warrants were exercised at $0.03 per share into 94,510 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 $7.50 per share to $2.268 per share. The Company defaulted on these debentures during the current fiscal year, causing the interest rate to increase to 15% per annum, and the debentures and accrued interest to become due on-demand. Amounts recorded as debt discounts were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations during the 2020 fiscal year, as a result of the debentures becoming due on-demand from the default event. As of December 31, 2020, an aggregate principal amount of $250,000 was outstanding and past due under these debentures. On January 26, 2021, the holder of these debentures converted the full principal of $250,000 and all accrued interest of $33,921 into 125,186 shares of common stock.

On July 2, 2020, the Company sold $1,000,000 aggregate principal amount of 9% Senior Convertible Debentures to an accredited investor that bore interest at a rate of 9% per annum and a maturity date of September 30, 2020. During the third quarter of the 2020 fiscal year, the maturity date of these debentures was extended to November 30, 2020. Accrued interest and principal were 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 $3.00 per share. Upon an event of default, the interest rate would automatically increase to 15% per annum. The debentures were convertible into shares of the Company’s common stock at a conversion price of $3.00 per share. The Company 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 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. Amounts recorded as debt discounts were fully amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations during the 2020 fiscal year, as a result of the debentures becoming due on-demand from the default event. As of December 31, 2020, an aggregate principal amount of $1,000,000 was outstanding and past due under these debentures. On January 26, 2021, the holder of these debentures converted the principal amount of $900,000 into 300,000 shares of common stock. The remaining principal amount $100,000 and accrued interest with a combined total of $160,568, was fully extinguished on January 26, 2021 at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of, along with warrants to purchase up to 38,713 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026. 

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.

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

See Note 22 – Subsequent Events for details regarding additional debt incurred after March 31, 2021.

16. RELATED PARTY TRANSACTIONS 

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 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.

Accrued Liabilities – Related Party

As of March 31, 2020 and December 31, 2020, the accrued liabilities – related party balance was $60,000 and $30,000, respectively, which represented amounts owed to various contractors, officers and employees of the Company as described below.

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. As of March 31, 2021 and December 31, 2020, GSIS was owed $60,000 and $30,000, respectively, for normal monthly retainers and expenses incurred and these amounts were recorded in accrued liabilities – related party.

Notes Payable – Related Party

On August 5, 2019,Daniel L. Hodges, the Company’s Chairman and Chief Executive Officer, and his wife, loaned DragonWave $200,000 at an interest rate of 5.0% per annum and an 18.0% default interest rate with a maturity date of December 31, 2020. Interest was payable monthly while the full principal balance was due at maturity. During fiscal 2020, this loan became past due and was accruing interest at an increased default rate of 18.0% per annum. As of December 31, 2020, $200,000 was outstanding and past due under the loan. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal year 2021.

On July 1, 2020, Brent Davies, a member of 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 was due at maturity. During fiscal 2020, this loan became past due and was accruing interest at an increased default rate of 18.0% per annum. As of December 31, 2020, $50,000 was outstanding and past due under the loan. The aggregate principal amount of this note was fully repaid during the first quarter of fiscal year 2021.

Between October 15, 2020 and December 28, 2020, the Company borrowed an aggregate of $600,000 from Dr. Dustin McIntire, the Company’s Chief Technology Officer, and issued promissory notes evidencing such loans. The principal amounts of the notes were between $100,000 and $350,000, and such notes bore interest at 10% per annum and were due between January 14, 2021 and March 28, 2021. As of December 31, 2020, $600,000 was outstanding under these notes. The aggregate principal amount of these notes was fully repaid during the first quarter of fiscal year 2021.

Between November 13, 2020 and December 24, 2020, the Company borrowed an aggregate of $160,000 from Richard J. Berman, a member of the Company’s Board of Directors, and issued promissory notes evidencing such loans. The principal amounts of the notes were between $40,000 and $120,000, and such notes bore interest at 8% per annum and were due between February 12, 2021 and March 23, 2021. As of December 31, 2020, $160,000 was outstanding under these notes. On January 26, 2021, the aggregate principal amount of this note, a 10% principal bonus, and all accrued interest with a combined total of $177,517, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- Stockholders’ Equity, resulting in the issuance of 42,776 shares of common stock, along with warrants to purchase up to 42,776 shares of common stock that are exercisable for a purchase price of $4.50 per share at any time on or prior to January 26, 2026.

17. STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2021

As of March 31, 2021, 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 66,308,177 shares of common stock issued and outstanding.

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 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 Split. On December 16, 2020, the Company’s board of directors approved a ratio for the Split of 1-for-3, which was effected on January 21, 2021. The Condensed Consolidated Financial Statements and accompanying notes give effect to this Split as if it occurred at the beginning of the first period presented. 

Public Offerings

On January 26, 2021 (the “First Offering Closing Date”), the Company sold an aggregate of 3,855,422 units at a price to the public of $4.15 per unit (the “First Offering”), each unit consisting of one share of the Company’s common stock, and a warrant to purchase one share of common stock at an exercise price of $4.50 per share (the “First Offering Warrants”), pursuant to an Underwriting Agreement, dated as of January 21, 2021 (the “First Offering Underwriting Agreement”), between the Company and the representative (the “Representative”) of the several underwriters named in the Underwriting Agreement. In addition, pursuant to the First Offering Underwriting Agreement, the Company granted the Representative a 45-day option to purchase up to 578,312 additional shares of common stock, and/or 578,312 additional First Offering Warrants, to cover over-allotments in connection with the First Offering, which the Representative partially exercised to purchase 578,312 Warrants on the First Offering Closing Date. For additional information on these First Offering Warrants, see Note 18 – Share-Based Compensation.

The common stock and the warrants of the First Offering were offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-248490), filed by the Company with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), on August 28, 2020, as amended, and which became effective on January 21, 2021.

On the First Offering Closing Date, the Company received gross proceeds of approximately $16,000,000, before deducting underwriting discounts and commissions of eight percent (8%) of the gross proceeds and estimated offering expenses.

On January 27, 2021, the Representative exercised its over-allotment option for the First Offering to purchase 329,815 additional shares of common stock, which closed on January 29, 2021. The Company received gross proceeds of approximately $1,365,000 before deducting underwriting discounts and commissions of eight percent (8%) of the gross proceeds.

Pursuant to the First Offering Underwriting Agreement, the Company also agreed to issue to the Representative warrants (the “Representative’s First Offering Warrants”) to purchase up to a total of 154,216 shares of common stock (4% of the shares of common stock sold in the First Offering). See Note 18 – Share-Based Compensation.

The total expenses of the First Offering were approximately $2.7 million, which included the underwriting discounts and commissions and the Representative’s reimbursable expenses relating to the First Offering. As part of this offering, the Company also issued 100,000 warrants to purchase the Company’s common stock at $4.15 per share to compensate a vendor for certain offering costs. See Note 18 – Share-Based Compensation.

On February 10, 2021 (the “Second Offering Closing Date”), the Company sold an aggregate of 5,647,059 shares of the Company’s common stock, at a price to the public of $4.25 per share (the “Second Offering”), pursuant to an Underwriting Agreement, dated as of February 10, 2021 (the “Second Offering Underwriting Agreement”), between the Company the Representative of the several underwriters named in the Second Offering Underwriting Agreement. In addition, pursuant to the Second Offering Underwriting Agreement, the Company granted the Representative a 45-day option to purchase up to 847,058 additional shares of common stock to cover over-allotments in connection with the Second Offering, which the Representative exercised in full on February 11, 2021.

The common stock was offered and sold to the public pursuant to the Company’s registration statement on Form S-1 (File No. 333-252780), filed by the Company with the SEC under the Securities Act, on February 5, 2021, and the Company’s registration statement on Form S-1 (File No. 333-252974), filed by the Company with the SEC under Rule 462(b) of the Securities Act on February 10, 2021, each of which became effective on February 10, 2021.

The Company received gross proceeds of approximately $27,600,000, before deducting underwriting discounts and commissions of eight percent (8%) of the gross proceeds and estimated offering expenses.

Pursuant to the Second Offering Underwriting Agreement, the Company also issued to the Representative warrants (the “Representative’s Second Offering Warrants”) to purchase up to a total of 225,882 shares of common stock (4% of the shares of common stock sold in the Second Offering), of which warrants to purchase 198,776 shares of common stock were registered under the Securities Act and warrants to purchase 27,106 shares of common stock were issued in a private placement to the Representative. See Note 18 – Share-Based Compensation.

The total expenses of the Second Offering were approximately $2.6 million, which included the underwriting discounts and commissions and the Representative’s reimbursable expenses relating to the Second Offering.

Consulting Agreements and Settlements with Vendors

On January 31, 2020, the Company entered into an agreement with a consultant to replace 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 based on an agreed upon conversion calculation. Any difference between the amount due and the actual fair value of the shares issued in payment is recorded as general and administrative expense in the Company’s Condensed Consolidated Financial Statements. Common stock to be issued to the consultant will be paid on a quarterly basis. On March 12, 2020, the Company issued 55,032 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 55,032 shares of common stock was $193,160. As of March 31, 2021, 7,571 shares of common stock, with a fair value of $20,215, are recorded as unissued shares, as discussed below, for services rendered for the first quarter of the 2021 fiscal year.

On December 9, 2020, the Company entered into an agreement with a consultant that required the payment of 5,000 shares of its common stock with a fair value of $30,750 at the inception of the contract with the obligation to perform services in the future. These shares of common stock were issued on December 14, 2020. As of December 31, 2020, 2,125 of these shares of common stock had vested and expense totaling $13,069 has been recognized, through satisfaction of the performance obligation. During the first quarter of the fiscal 2021 year, the remaining shares totaling 2,875 vested and $17,681 of additional expense was recognized.

Unissued Shares

As of March 31, 2021, 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 March 31, 2021, no change in EPS would have been noted. Unissued shares as of March 31, 2021 totaled approximately 7,571 shares and were issued subsequent to that date.

Dividends

The Company did not pay dividends to holders of its common stock during the three months ended March 31, 2021. 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 costs in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires companies to measure the cost of awards of equity instruments, including stock options and restricted stock awards, based on the grant-date fair value of the award and to recognize it as compensation expense over the employee’s requisite service period or the non-employee’s vesting period. An employee’s requisite service period is the period of time over which an employee must provide service in exchange for an award under a share-based payment arrangement and generally is presumed to be the vesting period.

For employee awards, the Company elected to utilize the simplified method of estimating the expected life of options as allowed by SEC Staff Accounting Bulletin (“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.

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

As described in Note 17 – Stockholders’ Equity, effective January 21, 2021, the Company enacted the Split of the Company’s common stock. As a result, the Company has given effect to the Split as if it occurred at the beginning of the first period presented for all share-based compensation. 

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 3,333,334 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 March 31, 2021, 908,505 options have been issued under the 2020 Plan, of which 33,334 were forfeited, 3,333 have been exercised, and 2,458,163 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.

Restricted Stock Awards

On December 2, 2019, the Company’s Board of Directors granted an aggregate of 633,336 RSAs to nine officers and directors (“Participant”) at a grant date fair value of $2.46 per share. The original vesting period for these RSAs is as follows: 283,339 were to vest on the one-year anniversary of the grant date; 283,331 were to vest on the two-year anniversary of the original grant date; and 66,666 were scheduled to vest on the three-year anniversary of the original grant date. As of December 31, 2020, 283,339 RSAs had vested. In the first quarter of fiscal 2021, the Company modified the RSA awards for two individuals to accelerate the final vesting of their awards in consideration of the individuals’ separation and/or retirement. This modification resulted in the vesting of an additional 50,000 RSAs. An incremental compensation expense was recognized for the modification totaling $166,920 during the three months ended March 31, 2021. As of March 31, 2021, the remaining unvested RSAs from these awards, totaling 299,997, are scheduled to vest as follows: 233,331 are scheduled to vest on the two-year anniversary of the original grant date; and 66,666 were scheduled to vest on the three-year anniversary of the original grant date.

On January 26, 2021, the Company’s Board of Directors granted an aggregate of 66,667 RSAs to one director at a grant date fair value of $4.50 per share. The vesting period for these RSAs is as follows: 33,334 vest on the one-year anniversary of the grant date and 33,333 vest on the two-year anniversary of the original grant date.

For all RSAs that are currently outstanding, if the Participant’s employment with, engagement by, or service to the Company terminates for any reason (other than due to disability, retirement or death, or termination by employee for “Good Cause” as defined pursuant to a written employment contract) prior to the vesting of all or any portion of the RSAs granted, such RSAs shall immediately be cancelled. If the Participant’s employment with, engagement by, or service to the Company terminates due to the Participant’s death, disability or retirement, or by termination by such employee for “Good Cause” as defined pursuant to a written employment contract, the Participant shall become 100% vested in the RSAs granted as of the date of any such termination. There were no RSAs that were forfeited in the three months ended March 31, 2021. For the three months ended March 31, 2021, the Company recognized $349,080 of compensation expense related to RSAs and had unrecognized compensation cost for RSAs totaling $821,706. There was neither any share-based compensation expense related to RSAs nor unrecognized compensation cost for RSAs for the three months ended March 31, 2020.

Stock Options

No options were granted during the three months ended March 31, 2021 and 2020.

The following tables represent stock option activity for the three months ended March 31, 2021 and March 31, 2020:

The Company recognized $7,374 of share-based compensation expense related to options for the three months ended March 31, 2021. There was no share-based compensation expense related to options for the three months ended March 31, 2020. Compensation expense related to stock options is recorded in general and administrative in the Condensed Consolidated Statement of Operations. For the three months ended March 31, 2021, the Company has $9,836 of unrecognized compensation expense related to options. There was no unrecognized compensation expense related to options for the three months ended March 31, 2020.

Warrants

On January 26, 2021, the Company issued warrants to purchase an aggregate of 2,751,556 shares of the Company’s common stock as partial consideration for the debt extinguishments disclosed in Note 15 – Debt Agreements and Note 16 – Related Party Transactions. The warrants have an exercise price of $4.50 per share and an expiration date of January 26, 2026. The issuance date fair value of these warrants, using the Black-Scholes Option-Pricing model, was estimated to be $1.597 per share for a total of $4,394,235. None of these warrants were exercised during the three months ended March 31, 2021.

On January 26, 2021, the Company issued warrants to purchase an aggregate of 4,433,734 shares of the Company’s common stock as portion of the Units offered in the Company’s First offering as disclosed in Note 17 – Stockholders’ Equity. The warrants have an exercise price of $4.50 per share and an expiration date of January 26, 2026. The issuance date fair value of these warrants, using the Black-Scholes Option-Pricing model, was estimated to be $1.597 per share for a total of $7,080,673. None of these warrants were exercised during the three months ended March 31, 2021.

On January 26, 2021, the Company issued warrants to purchase an aggregate of 100,000 shares of the Company’s common stock as consideration for certain costs related to the First Offering as disclosed in Note 17 – Stockholders’ Equity. The Representative’s First Offering Warrants are subject to a lock-up for 180 days from the commencement of sales in the First Offering, including a mandatory lock-up period in accordance with FINRA Rule 5110(e), and will be non-exercisable for six (6) months after January 21, 2021. The warrants have an exercise price of $4.15 per share and an expiration date of January 21, 2026. The issuance date fair value of these warrants, using the Black-Scholes Option-Pricing model, was estimated to be $1.703 per share for a total of $170,300. None of these warrants were exercised during the three months ended March 31, 2021.

On January 26, 2021, the Company issued warrants to purchase an aggregate of 154,216 shares of the Company’s common stock as the Representative’s First Offering Warrants as discussed in Note 17 – Stockholders’ Equity. The warrants have an exercise price of $5.1875 per share and an expiration date of January 21, 2026. The issuance date fair value of these warrants, using the Black-Scholes Option-Pricing model, was estimated to be $1.376 per share for a total of $212,201. None of these warrants were exercised during the three months ended March 31, 2021.

On February 12, 2021, the Company issued warrants to purchase an aggregate of 225,882 shares of the Company’s common stock as the Representative’s Second Offering Warrants as discussed in Note 17 – Stockholders’ Equity. The Representative’s Second Offering Warrants are subject to a lock-up for 180 days from the commencement of sales in the Second Offering, including a mandatory lock-up period in accordance with FINRA Rule 5110(e), and will be non-exercisable for six (6) months after February 10, 2021. The warrants have an exercise price of $5.3125 per share and an expiration date of February 10, 2026. The issuance date fair value of these warrants, using the Black-Scholes Option-Pricing model, was estimated to be $1.918 per share for a total of $433,242. None of these warrants were exercised during the three months ended March 31, 2021.

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 three months ended March 31, 2021, was $1.60 per share.

The following table summarizes the assumptions used to estimate the fair value of warrants granted during the three months ended March 31, 2021:

The following tables represents warrant activity for the three months ended March 31, 2021 and 2020: