Item 2.01. Completion of Acquisition or Disposition of Assets.
On June 3, 2021 (the “Closing Date”), COMSovereign Holding Corp. (“we,” “us,” or “our company”) completed the acquisition (the “Acquisition”) of Innovation Digital, LLC, a California limited liability company (“Innovation Digital”), pursuant to an Agreement and Plan of Merger and Reorganization dated as of June 3, 2021 (the “Merger Agreement”) among our company and our wholly-owned subsidiary, CHC Merger Sub V, LLC, Innovation Digital and Dr. Scott R. Velazquez (“Velazquez”).
In accordance with the terms of the Merger Agreement, on the Closing Date, we acquired all of the issued and outstanding membership units of Innovation Digital in exchange for (i) $1,000,000 in cash, (ii) 3,165,322 shares of our common stock, par value $0.0001 per share, and (iii) a convertible promissory note in the principal amount of $600,000 (the “Convertible Note”). The value of the shares of our common stock issued at closing, which for purposes of the Merger Agreement has been determined to be $2.35 per share, will be the maximum amount available for satisfying any post-closing indemnification claims of Velazquez, as the former sole member of Innovation Digital, under the Merger Agreement, which amount can be paid at the election of Velazquez in cash, as an offset against the Convertible Note or in shares of our common stock as so valued. We have agreed to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), to register the resale of the shares of common stock issued at closing within 90 days of the Closing Date.
The Convertible Note bears interest at the rate of 5% per annum, matures on June 3, 2022 and is convertible into shares of our common stock commencing on December 3, 2021 at an initial conversion price of $2.35 per share; provided, however, that on the maturity date, the holder may (i) demand payment of the entire outstanding principal balance and all unpaid accrued interest under Convertible Note or (ii) continue to hold the Convertible Note, in which case the Convertible Note shall thereafter accrue interest at the rate of 10% per annum, compounded annually, until such time as (x) the holder makes a demand of payment and the Convertible Note is repaid in full; or (y) the Convertible Note is converted in full. If the Note is converted into shares of our common stock after the maturity date of the Note, the conversion price will be the closing price of our common stock on the date the conversion notice is provided to us. Notwithstanding the foregoing, we have the right to prepay the Convertible Note at any time on and after December 3, 2021 and prior to the maturity date without notice and on 15 days prior notice on or after the maturity date.
Innovation Digital is a premier developer of "beyond state-of-the-art" mixed analog/digital signal processing solutions, intellectual property (IP) licensing, design and consulting services. Its signal processing techniques and intellectual property have significantly enhanced the bandwidth and accuracy of radio frequency (RF) transceiver systems and have provided enabling technologies in the fields of communications and RADAR systems, signals intelligence (SIGINT) and electronic warfare (EW), test and measurement systems, and semiconductor devices. Its customers include many large U.S. defense contractors, such as General Dynamics, Raytheon, L3Harris and various U.S. Department of Defense agencies, including The Naval Surface Warfare Center, the Missile Defense Agency, the Air Force Research Laboratory and the Defense Advanced Research Projects Agency (DARPA). We believe Innovation Digital’s valuable intellectual property and expertise will further advance the performance capabilities of our company's entire range of next-gen radio products, and that it will enable our radios to set a new standard for throughput and efficiency.
In connection with the closing of the Acquisition, on the Closing Date, we entered into an employment agreement with Dr. Velazquez, Innovation Digital’s chief executive officer, to serve as our Chief Research Officer. Pursuant to such employment agreement, we will pay Dr. Velazquez a base salary in the amount of $300,000. In addition, Dr. Velazquez is also eligible to receive an employee incentive stock option grant each year during the term, as determined by the Compensation Committee of our board of directors, with a strike price equal to that of the other corporate officers and directors under that current year’s approved option grants. Dr. Velazquez will be entitled to severance in the event we terminate his employment without Cause (as defined in the employment agreement) or he resigns from his employment for Good Reason (as defined in the employment agreement). The severance amount for Dr. Velazquez would be (i) his pro rata base salary through the date of termination, (ii) a severance amount equal to six months’ salary if such termination is effected within the first year and (iii) a severance amount equal to 12 months’ salary if such termination occurs thereafter.
1
The information provided under this Item 2.01 is a summary of certain portions of the Merger Agreement, the Convertible Note and the employment agreement of Dr. Velazquez and does not purport to be a complete description and is subject to, and qualified in its entirety by, the text of the Merger Agreement, the Convertible Note and the employment agreement of Dr. Velazquez, copies of which are attached as Exhibits 10.1, 10.2 and 10.3 to this Current Report on Form 8-K and are incorporated by reference thereto.
Item 3.02 Unregistered Sale of Equity Securities.
In connection with the transactions contemplated by the Merger Agreement, on the Closing Date, we issued an aggregate of 3,165,322 shares of our common stock and the Convertible Note to the former member of Innovation Digital. The information required to be reported under this Item with respect to such sale is incorporated by reference to Item 2.01 of this Current Report on Form 8-K.
The shares of common stock and the Convertible Note issued pursuant to the Exchange Agreement were issued in a transaction exempt from registration under the Securities Act in reliance on Section 4(a)(2) thereof and Rule 506 of Regulation D thereunder. The recipient of our shares of common stock and the Convertible Note has represented that he was an “accredited investor,” as defined in Regulation D, and was acquiring the securities described herein for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. Accordingly, such shares of common stock and the Convertible Note have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit
Number
Description
10.1*
Agreement and Plan of Merger and Reorganization, dated as of June 3, 2021, among the COMSovereign Holding Corp., CHC Merger Sub V, LLC, Innovation Digital, LLC and Scott R. Velazquez.
10.2
Convertible Promissory Note dated June 3, 2021 of COMSoverign Holding Corp. to Scott R Velazquez.
10.3
Employment Agreement dated as of June 3, 2021 between Scott R. Velazquez and COMSovereign Holding Corp.
* Schedules, exhibits and similar supporting attachments or agreements to the Merger Agreement are omitted pursuant to Item 601(b)(2) of Regulation S-K. We agree to furnish a supplemental copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
