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NOTES PAYABLE

6 Months Ended

Jun. 30, 2020

17. NOTES PAYABLE

Notes Payable at June 30, 2020 and December 31, 2019, are comprised of the following:

	June 30,	December 31,
	2020	2019
Esousa Purchased promissory notes	$ 2,828,323	$ 2,828,323
June '20 short-term promissory notes	800,000	—
12% short-term promissory note	585,919	—
Other short-term notes payable	1,537,760	1,050,339
12% May '20 promissory note	354,781	—
Esousa short-term promissory notes	875,000	—
Notes payable to Wells Fargo	197,362	290,560
Note payable to Dept. of Economic and Community Development	212,968	229,096
Paycheck Protection Program Loans	1,162,302	—
SBA Economic Injury Disaster Loan	150,000	—
Short term bank credit	1,484,193	1,622,337
Total notes payable	10,188,608	6,020,655
Less:
Unamortized debt discounts	(804,856)	(29,348)
Unamortized financing cost	—	(3,668)
Total notes payable, net of financing cost	$ 9,383,752	$ 5,987,639
Less: current portion	(9,014,567)	(5,505,015)
Notes payable – long-term portion	$ 369,185	$ 482,624

Master Exchange Agreement

On February 10, 2020, the Company entered into a master exchange agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa” or the “Creditor”) which acquired $4,163,481 in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously issued by us to Dominion (the “Dominion Short-Term Promissory Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Short-Term Promissory Note” and with the Dominion Short-Term Promissory Note, the “Esousa Purchased Notes”) in separate transactions. The Creditor also agreed to purchase additional notes up to an additional principal amount, plus accrued but unpaid interest, of $3.5 million (the “Additional Notes” and collectively, with the Esousa Purchased Notes, the “Notes”). Pursuant to the Master Exchange Agreement, the Creditor has the unilateral right to acquire shares of the Company’s common stock (the “Exchange Shares”) in exchange for the Notes.

The first exchange occurred on the date of the Master Exchange Agreement upon which the Creditor may exchange, in whole or in part, the Esousa Purchased Notes for the Exchange Shares (the “Initial Exchange”) and the second exchange (the “Second Exchange” and together with the Initial Exchange, the “Exchange”) shall occur if the Company receives stockholder approval at a special meeting thereof for the Exchange of the Additional Notes for the Company’s common stock, and subsequently, authorization from the NYSE American (together, the “Required Approvals”).

The Exchange Agreement provides for two pricing periods, the first of which shall commence after the date on which the Creditor receives the Exchange Shares pursuant to the Initial Exchange and ending on the date that is 90 days after receipt thereof, subject to extension as provided for in the Exchange Agreement, and the second of which shall commence on the date on which the Creditor receives the Exchange Shares pursuant to the Second Exchange and ending on the date that is 90 days after receipt thereof, in either case, unless earlier terminated by the Creditor by written notice.

The number of shares to be issued upon each Exchange will be equal to (x) the principal and accrued but unpaid interest due on the Notes being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on each date of an exchange notice, provided, however, that the Company shall theretofore have obtained the Required Approvals (the “Exchange Price”). The total number of shares of the Company’s common stock to be issued to Creditor in connection with the applicable Exchange shall be adjusted on the Business Day immediately following the Pricing Period based upon the volume weighted average price (“VWAP”) of the Company’s common stock over the applicable Pricing Period (the “VWAP Shares”). VWAP Shares means the number of shares determined by dividing (x) the Exchange Amount of the applicable Exchange, multiplied by 1.1, by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable Pricing Period, or (II) $0.30 per share.

Pursuant to the Master Exchange Agreement, the Company issued warrants to purchase an aggregate of 1,832,597 shares of common stock at an average exercise price equal to $1.43 per share of common stock. The warrants shall be exercisable commencing on the date upon which the Company receives the Required Approvals therefor. In connection therewith, the Company has agreed to file a registration statement to register the sale of the shares of common stock underlying the exercise of the warrants by the Creditor pursuant to the Master Exchange Agreement. In the event that the Creditor does not purchase all of the Additional Notes, the Company shall have the option to acquire a portion of the warrants from the Creditor for an aggregate price of $1.00. Consequently, at June 30, 2020, since the Creditor had not purchased all of the Additional Notes, the option represented the right to acquire 1,562,399 of the warrants from the Creditor. Therefore, only 270,198 options are deemed outstanding at June 30, 2020.

The Company computed the fair value of the 270,198 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded a loss on extinguishment in the amount of $232,177 based on the estimated fair value of the warrants. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.38% was derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor of 86.31% was determined based on historical stock prices of similar technology companies. The Company, however, is prohibited from issuing the shares of common stock issuable upon exercise of the warrants unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE American listing rules. On July 8, 2020, the Company received stockholder approval of such share issuances.

During the six months ended June 30, 2020, the Company issued to the investor an aggregate of 861,580 shares of the Company’s common stock upon the exchange of interest in the amount of $836,845. A loss on extinguishment of $222,232 was recognized on the issuances of common stock based on the fair value of the Company’s common stock at the date of the exchanges.

June '20 short-term promissory notes

On June 26, 2020, the Company issued to several institutional investors unsecured 12% short-term promissory notes in the aggregate principal amount of $800,000 and seventeen month warrants to purchase an aggregate of 361,991 shares of the Company’s common stock at an exercise price of $2.43 per share of common stock. These notes have a term of three months. The Warrants are immediately exercisable once the Company obtains approval thereof by the NYSE American. The Warrants may be exercised via cashless exercise at the option of the Investor. These warrants to purchase common stock do not qualify to be treated as equity, and accordingly, shall be recorded as a liability. The Company is required to present these instruments at fair value at each reporting date and any changes in fair values shall be recorded as an adjustment to earnings.

12% short-term promissory note

On February 5, 2020, the Company issued a 12% promissory note in the principal face amount of $585,919. The 12% short-term promissory note was issued pursuant to the February 2020 Exchange Agreement (see Note 19) and was due upon issuance.

12% January '20 short-term promissory note

On January 29, 2020, the Company issued a 12% promissory note in the principal amount of $235,796 to an accredited investor. The maturity date of the promissory note was February 28, 2020 and included an OID of $28,296 and debt issuance costs of $7,500, resulting in net proceeds of $200,000. The Company received cash of $150,000 and cancelled $50,000 of accrued liabilities due the investor. In addition, Mr. Ault and MCKEA Holdings, LLC (“MCKEA”) guaranteed the Company’s obligation to repay this note pursuant to a Guaranty.

Esousa short-term promissory notes

During the six months ended June 30, 2020, the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $875,000 and five-year warrants to purchase an aggregate of 890,103 shares of common stock at an average exercise price equal to $1.08 per share of common stock. The Esousa 12% short-term promissory notes have a term of three months.

The Company computed the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $354,426 based on the estimated fair value of the warrants. During the six months ended June 30, 2020, non-cash interest expense of $310,957 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rates ranged from 0.34% and 1.11% and were derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor was between 86.31% and 94.51% and was determined based on historical stock prices of similar technology companies. The Company was prohibited from issuing the shares of common stock issuable upon exercise of the warrants until stockholder approval of such issuance of securities was obtained as required by applicable NYSE American listing rules. The Company received stockholder approval of such share issuances on July 8, 2020.

Paycheck Protection Program

In March 2020, U.S. lawmakers agreed on the passage of a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic. On March 27, 2020, President Trump signed the bill into law. The main driver of small business stimulus in the CARES Act is contained in the Paycheck Protection Program (PPP). PPP Loans may be used to cover payroll, benefits, and salaries, as well as interest payments, rent, and utilities. Fees are waived, and collateral and personal guarantees are not required. Payments are deferred for a minimum of six months, up to one year, and there are no prepayment penalties.

During April 2020, the Company received loans under the PPP in the principal amount of $715,101 and the Company’s majority owned subsidiary, Microphase, received loans in the principal amount of $467,333. The principal of the loan may be forgiven up to the total cost of payroll, mortgage interest payments, rent and utility payments made during the eight-week period after origination. In addition to meeting the size requirement (500 or fewer employees for most companies), the Company was required to demonstrate that its business had been negatively impacted by COVID-19. The Company expects that the entire amount received under the PPP is eligible for loan forgiveness.

Economic Injury Disaster Loan

On May 27, 2020, the Company received an Economic Injury Disaster Loan in the principal amount of $150,000 with an annual interest rate of 3.75%. The Company shall begin making principal and interest payments of $731 every month beginning on May 27, 2021. All remaining principal and interest is due and payable thirty years from the date of the note.