XML 41 R25.htm IDEA: XBRL DOCUMENT

NOTES PAYABLE

12 Months Ended

Dec. 31, 2020

19. NOTES PAYABLE

Notes Payable at December 31, 2020 and 2019, are comprised of the following.

	December 31,
	2020			2019
Esousa purchased notes	$	-		$	2,828,323
Esousa additional purchased notes		200,000			632,000
Other short-term notes payable		1,088,899			1,050,339
Notes payable to Wells Fargo		182,615			290,560
Note payable to Dept. of Economic and Community Development		196,597			229,096
Paycheck Protection Program Loans		1,162,302			—
SBA Economic Injury Disaster Loan		150,000			—
Enertec Short term bank credit		1,404,096			1,622,337
Total notes payable		4,384,509			6,652,655
Less:
Unamortized debt discounts		—			(29,348	)
Unamortized financing cost		—			(3,668	)
Total notes payable, net of financing cost		4,384,509			6,619,639
Less: current portion		(4,048,009	)		(6,137,015	)
Notes payable – long-term portion	$	336,500		$	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 the Company to Dominion Capital LLC (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 and during the three months ended September 30, 2020, Esousa acquired $2,240,015 in principal amount, plus accrued but unpaid interest, of certain additional promissory notes that had been previously issued by us (the “Esousa Additional Purchased 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 following debt securities were acquired by Esousa pursuant to the Master Exchange Agreement:

Dominion short-term promissory note

On June 18, 2019, the Company entered into a securities purchase agreement with Dominion Capital, LLC, a Connecticut limited liability company (“Dominion”), to sell a 10% senior secured promissory note with a principal face amount of $2,900,000 and issue 12,500 shares of the Company’s common stock (see Note 24). In addition, Ault & Company had guaranteed the prompt and complete payment and performance of the obligations of the Company pursuant to this senior secured promissory note. Pursuant to the terms of the note, the Company was required to make six monthly amortization payments beginning on July 18, 2019. The Company did not make these payments. On February 10, 2020, the Dominion short-term promissory note was acquired pursuant to the terms of a Master Exchange Agreement.

8% short-term promissory note

On August 16, 2018, as amended on November 29, 2018, the Company entered into a securities purchase agreement with an institutional investor providing for the issuance of an 8% promissory note in the principal amount of $318,150, due February 15, 2019. On February 10, 2020, the 8% short-term promissory note in the principal amount of $318,150 was acquired pursuant to the terms of the Master Exchange Agreement.

May 2020 promissory notes

On May 28, 2020, the Company entered into a securities purchase and exchange agreement with an institutional investor. Pursuant to the agreement, the Company exchanged a 12% short-term promissory note in the principal amount of $235,796 plus accrued interest of $118,985 for a new note due and payable on June 30, 2020. In addition, pursuant to the agreement, the Company issued to the investor a note due and payable on November 28, 2020, for a purchase price of $160,000, with an aggregate principal face amount of $200,000 and an original issue discount (“OID”) of twenty percent (20%). The Company also issued to the investor a five-year warrant to purchase an aggregate of 400,000 shares of Common Stock at an exercise price of $1.07. On July 30, 2020, the May 2020 promissory notes in the principal amount of $554,781 plus accrued interest of $44,734 were acquired pursuant to the terms of the Master Exchange Agreement.

12% promissory note

On February 5, 2020, the Company issued a 12% promissory note in the principal face amount of $585,919. The 12% promissory note was issued pursuant an exchange agreement (the “February 2020 Exchange Agreement”) with an institutional investor (see Note 21) and was due upon issuance. On August 7, 2020, the 12% promissory note in the principal amount of $585,919 plus accrued interest of $162,863 was acquired pursuant to the terms of the Master Exchange Agreement.

12% July 2019 convertible promissory note

On March 23, 2018, the Company entered into a securities purchase agreement pursuant to which it issued a 12% promissory note including a 10% OID. The promissory note was in the principal amount of $1,000,000, was sold for $900,000, accrued simple interest at 12% and was due on June 22, 2018. On July 3, 2019, the Company entered into an exchange agreement with the institutional investor pursuant to which, in exchange for the term promissory note issued by the Company to the investor on March 23, 2018, we sold a convertible promissory note in the principal face amount of $1,292,000 plus a default premium of $200,000, and (ii) a five-year warrant to purchase of 25,000 shares of our common stock at an exercise price of $8.80 per share.

This convertible promissory note was in the aggregate principal amount of $1,492,000 and accrued interest at 12% per annum. The principal and all accrued and unpaid interest was due on January 22, 2020. Subject to certain beneficial ownership limitations, the investor had the right to convert the principal amount of this note and accrued interest earned thereon at any time into shares of Common Stock at $8.80 per share. During the year ended December 31, 2019, the Company issued 99,753 shares of Common Stock in payment of principal and interest in the amount of $860,000 and $17,837, respectively. On September 2, 2020, the remaining amount due under the 12% July 2019 convertible promissory note in the principal amount of $632,000, plus accrued interest of $258,788 was acquired pursuant to the terms of the Master Exchange Agreement.

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 $142,070 based on the estimated fair value of the warrants. At the time of issuance of the note, the closing price of Common Stock was in excess of the effective conversion price, resulting in a BCF of $209,888, based on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction

In aggregate, the Company recorded debt discount in the amount of $351,958 based on the fair values of the warrants and BCF. During the year ended December 31, 2019, non-cash interest expense of $351,958 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 rate of 1.75% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 85.47% was determined based on historical stock prices of similar technology companies.

The first exchange occurred on the date of the Master Exchange Agreement when the Creditor exchanged a portion of 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”) began July 8, 2020 when the Company received stockholder approval at a special meeting thereof for the Exchange of the Esousa Additional Purchased 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 commenced after the date on which the Creditor received the Exchange Shares pursuant to the Initial Exchange and ended on the date that was 90 days after receipt thereof, 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 became exercisable in July 2020. In connection therewith, the Company 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. Since the Creditor did not purchase all of the additional notes, the Company has the option to acquire a portion of the warrants from the Creditor for an aggregate price of $1.00. Consequently, at December 31, 2020, the option represented the right to acquire 132,236 of the warrants from the Creditor. Therefore, only 1,700,360 options are deemed outstanding at December 31, 2020.

The Company computed the fair value of the 1,700,360 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded a loss on extinguishment in the amount of $2,713,874 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 0.23% to 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% to 100.82% was determined based on historical stock prices of similar technology companies.

During the year ended December 31, 2020, the Company issued to the investor an aggregate of 8,332,904 shares of the Company’s common stock upon the exchange of principal and interest in the amount of $4,401,023 and $2,142,504, respectively. A loss on extinguishment of $15,488,644 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. During January 2021, the remaining outstanding principal and accrued interest of $200,000 and $15,948, respectively, of debt securities acquired by Esousa was satisfied through the issuance of 183,214 shares of Common Stock. The Company recognized a loss on extinguishment of $551,718 as a result of this issuance (see Note 28).

Esousa short-term promissory notes

During the year ended December 31, 2020, the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $2,000,000 and five-year warrants to purchase an aggregate of 1,536,655 shares of Common Stock at an average exercise price equal to $1.43 per share of Common Stock. The Esousa 12% short-term promissory notes had a term of three months and were repaid at December 31, 2020.

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 $836,725 based on the estimated fair value of the warrants. During the year ended December 31, 2020, the entire amount of debt discount was amortized as non-cash interest expense. 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 100.82% and was determined based on historical stock prices of similar technology companies.

Between August 2020 and October 2020, the Company also received $3,200,000 in loans from Esousa pursuant to which the Company agreed to issue unsecured short-term promissory notes with interest rates of 13% and 14% and warrants with terms of approximately one and a half years to purchase an aggregate of 1,303,863 shares of Common Stock at an average exercise price of $2.70 per share of Common Stock. The notes had a term of three months from the date the Company received the proceeds and were repaid at December 31, 2020. The Company is prohibited from issuing the Common Stock issuable upon exercise of the warrants until stockholder approval of such issuance of securities is obtained as required by applicable NYSE American listing rules and subsequently, authorization from the NYSE American (the “Required Approvals”). The Company shall seek stockholder approval at its annual meeting of stockholders expected to be held during the quarter ended June 30, 2021. If the Required Approvals are received, the warrants shall be immediately exercisable, including, at the option of Esousa, by means of a cashless exercise. These warrants to purchase common stock do not qualify to be treated as equity, and accordingly, were 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.

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 $3,062,644 based on the estimated fair value of the warrants. During the year ended December 31, 2020, the entire amount of debt discount was amortized as non-cash interest expense. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rates ranged from 0.12% and 0.17% 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 of 104.56% was determined based on historical stock prices of similar technology companies.

Other short-term notes payable

(i)

On August 23, 2018, DP Lending issued an unsecured promissory note in the principal amount of $85,000 to an accredited investor. During the year ended December 31, 2019, the Company made principal payments of $46,500 resulting in a remaining outstanding balance of $38,500. This note was not repaid on the specified maturity date and is currently in default.

(ii)

On October 9, 2018, DP Lending issued a promissory note in the principal amount of $60,000 to an accredited investor. During the year ended December 31, 2019, the Company made principal payments of $33,301 resulting in an outstanding balance of $26,699 which was repaid during the year ended December 31, 2020.

(iii)

On July 11, 2019, the Company entered into a non-binding term sheet with Ding Gu to sell, for a purchase price of $400,000, a 12% original issue discount promissory note with an aggregate principal face amount of $440,000. Definitive documents have not been executed and a dispute has arisen over the transaction. On January 17, 2020, Mr. Gu. filed a complaint in the Supreme Court of the State of New York (see note 23) regarding the terms of this non-binding term sheet and those of a 4% convertible promissory note, in the amount of $660,000 (see note 21), seeking, among other things, monetary damages in excess of $1,100,000.

(iv)

Between September 2019 and December 2019, DP Lending entered into a series of 12% three year term promissory notes in the aggregate amount of $155,000. These notes remain outstanding at December 31, 2020.

(v)

During November 2019, the Company entered into a short term promissory note in the aggregate principal amount of $360,000. The promissory note contained an original issue discount of $60,000 resulting in net proceeds of $300,000. The interest rate on the promissory note was 12% per annum and was payable on the maturity date, February 14, 2020.

(vi)

Pursuant to the terms of the purchase agreement with Power-Plus, the Company entered into a two-year promissory note in the amount of $255,000 payable to the former owner as part of the purchase consideration. On October 18, 2017, for cancellation of debt, the Company entered into a subscription agreement with the former owner under which the Company sold 173 shares of common stock at $537.57 per share for an aggregate purchase price of $93,000. At December 31, 2020 and 2019, the outstanding balance on this note was $13,250.

(vii)

Microphase utilizes a $20,000 overdraft credit line at People’s United Bank with an annual interest rate of 15%. At December 31, 2020 and 2019, the balance of that overdraft credit line was $17,101 and $16,890, respectively.

Notes payable to Wells Fargo

At December 31, 2020 and 2019, Microphase had guaranteed the repayment of certain equity lines of credit in the aggregate amount of $182,615 and $290,560, respectively, with Wells Fargo Bank, NA (“Wells Fargo”) (collectively, the “Wells Fargo Notes”). These loans originated prior to the Company’s acquisition of Microphase and Microphase was the recipient of the actual proceeds from the loans. As of December 31, 2020, the first line of credit, which is secured by residential real estate owned by a former officer, had an outstanding balance of $182,615, with an annual interest rate of 4.00%. The second Wells Fargo equity line originated in 2014 when Microphase had received working capital loans from the former CEO from funds that were drawn against the second Wells Fargo equity line. During the year ended December 31, 2020, the second Wells Fargo equity line was repaid by the estate of Microphase’s former CEO.

Note payable to Dept. of Economic and Community Development

In August 2016, Microphase received a $300,000 loan, of which $103,403 has been repaid, pursuant to the State of Connecticut Small Business Express Job Creation Incentive Program which is administered through the Department of Economic and Community Development (“DECD”) (the “DECD Note”). The DECD Note accrues interest at a rate of 3% per annum and is due in August 2026. Payment of principal and interest commenced in September 2017, payable in equal monthly installments over the remaining term.

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. 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.

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 Common Stock at an exercise price of $2.43 per share of Common Stock. These notes had a term of three months and were repaid during the quarter ended December 31, 2020. The warrants were exercised on a cashless basis which resulted in the issuance of 438,077 shares of Common Stock (see Note 24). These warrants to purchase Common Stock did not qualify to be treated as equity, and accordingly, were recorded as a liability. The Company was required to present these instruments at fair value at each reporting date and any changes in fair values were recorded as an adjustment to earnings.

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 $765,082 based on the estimated fair value of the warrants. During the year ended December 31, 2020, the entire amount of debt discount was amortized as non-cash interest expense. The risk-free rate was 0.32% and was derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement date. The volatility factor of 135% was derived from the stated terms of the warrants.

Enertec short-term bank credit and secured promissory note

At December 31, 2020 and 2019, Enertec had short term bank credit of $1,404,096 and $1,622,337, respectively, that bears interest at prime plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company has undertaken to comply with certain covenants under its bank loan.

On December 28, 2018, Enertec entered into a $500,000 secured promissory note (the “Enertec Note”), whereby Enertec agreed to pay interest in an amount of 10% per annum in cash to the investor, beginning on January 15, 2019, on a monthly basis, until the Enertec Note was paid in full. The proceeds from the Enertec Note were received in January 2019. The Enertec Note was paid from proceeds received in the April 2, 2019 public offering (see note 24). In connection with the Enertec Note, the Company’s Executive Chairman provided a personal guarantee for the benefit of the investor.