Notes to Consolidated Financial Statements

June 30, 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. 

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.

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.

On April 1, 2021, the Company completed the acquisition of RVision, Inc., a Nevada 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.

On June 3, 2021, the Company completed the acquisition of Innovation Digital, LLC, a California limited liability company (“Innovation Digital”). Innovation Digital is a premier provider of “beyond state-of-the-art” mixed analog/digital signal processing solutions, intellectual property (IP) licensing, and design and consulting services.

See Note 11 – Business Acquisitions for further discussion of the Company’s acquisitions.

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 15 – 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. 

Principles of Consolidation

The results for the three and six months ended June 30, 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.

The unaudited Condensed Consolidated Financial Statements as of, and for the three and six months ended, June 30, 2021 and 2020 include the accounts of the Company and all of its subsidiaries. All intercompany transactions and accounts have been eliminated.

COVID-19 and Market Update

In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic and the President of the United States declared it a national emergency. The Company continues to monitor the market and environment for impacts to the business as the pandemic continues to evolve and its future effects remain uncertain.

Reclassifications

Certain immaterial June 30, 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 six months ended June 30, 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 May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (ASU 2021-04). This guidance clarifies an issuer’s accounting for certain modifications of freestanding equity-classified written call options and provides a “principles-based” framework to determine whether an issuer should recognize the modification or exchange and an adjustment to equity or an expense. The Company is currently evaluating the potential impact ASU 2021-04 will have on the Condensed Consolidated Financial Statements.

In August 2020, the FASB issued 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 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.

Accounting Standards Adopted

During the six months ended June 30, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740). This guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. The impact that adopting this ASU has not had any material effect 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 six months ended June 30, 2021, the Company generated negative cash flows from operations of $28.85 million and had an accumulated deficit of $91.41 million.

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. 

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

Revenue by source consisted of the following for the three and six months ended June 30, 2021 and 2020:

Revenue by geographic destination consisted of the following for the for the three and six months ended June 30, 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 June 30, 2021, the Company did not have a 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 six months ended June 30, 2021 was primarily due to invoiced amounts that did not yet meet the revenue recognition criteria, partially offset by the revenue recognition criteria being met for previously deferred revenue.

The Company recognized $0.20 million and $0.13 million of bad debt expense for the three months ended June 30, 2021 and 2020, respectively, and $0.20 million and $0.38 million for the six months ended June 30, 2021 and 2020, respectively.

The Company recognized $0.44 million and $0.29 million of depreciation expense for the three months ended June 30, 2021 and 2020, respectively, and $0.8 million and $0.52 million for the six months ended June 30, 2021 and 2020, respectively.

10. LEASES

Operating Leases

The Company has operating leases for office, manufacturing and warehouse space, office equipment, and vehicles.

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. Monthly payments are $16 thousand 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.

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. Monthly average payments are $2 thousand during the remaining life of the leases. The leases included an implicit rate of return from 5.41% to 6% and no renewal options.

In April 2021, the Company entered into a 60-month office equipment lease with monthly payments and no renewal options. 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.

In April 2021, a subsidiary of the Company entered into several vehicle leases with approximately 36-month terms. Monthly payments range from $1 thousand to $2 thousand. Each lease had an implicit rate of 6.0% and no renewal options.

In May 2021, a subsidiary of the Company entered into an amendment to its existing facility lease to extend the expiration date through June 20, 2022 and to increase the annual base to $12 thousand per month. 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 modification resulted in additional right-of-use asset and lease liability of $0.12 million

As part of the RVision business acquisition on April 1, 2021, the Company assumed a lease of office space with a remaining term of approximately 35 months that will expire on March 31, 2024. Monthly payments ae $7 thousand 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.

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 June 30, 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 June 30, 2021:

Finance Leases

The Company has finance leases for certain manufacturing and office equipment.

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 June 30, 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 June 30, 2021:

11. BUSINESS ACQUISITIONS

Skyline Partners Technology LLC

On January 29, 2021, the Company completed the acquisition of Fastback for cash consideration paid of $1.32 million and the issuance of $1.50 million aggregate principal amount of term notes and $11.15 million 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 13 – Debt Agreements for further discussion of the notes. Fastback’s products complement and enhance the Company’s 5g connectivity offerings. All resulting goodwill is expected to be tax deductible.

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 June 30, 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 SKS. The total preliminary purchase price consideration amounted to $11.78 million, subject to working capital and other post-closing adjustments, representing (i) cash paid on the closing date of $2.71 million, (ii) 2,555,209 shares of the Company’s common stock with a fair value of $9.07 million or $3.55 per share, of which an aggregate of 1,151,461 shares is being held in an escrow fund for the purpose of satisfying any post-closing indemnification claims against the sellers under the share purchase agreement. SKS’s products complement and enhance the Company’s tethered drone product portfolio for commercial communications, defense and national security markets. All resulting goodwill is expected to be tax deductible.

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 June 30, 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.

RVision, Inc.

On April 1, 2021, the Company completed the acquisition of RVision. The Company acquired 100% of the outstanding capital stock of RVision in exchange for 2,000,000 shares of its common stock with a fair value of $5.5 million or $2.75 per share. Pursuant to the terms of the acquisition, the Company filed a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), to register the resale of 1,000,000 of such shares of common stock, and agreed to include the remaining shares in any registration statement the Company files under the Securities Act for a primary offering within one year of the closing date, subject to certain exceptions. RVision’s products complement and enhance the Company’s communication offerings and provides additional access to governmental and private sector commercial industries. All resulting goodwill is expected to be tax deductible.

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 June 30, 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.

Innovation Digital, LLC

On June 3, 2021, the Company completed the acquisition of Innovation Digital. The total preliminary purchase price consideration amounted to $8.94 million, representing cash consideration paid of $1.0 million, 3,165,322 shares of common stock with a fair value of $7.34 million or $2.32 per share, and a promissory note in the principal amount of $0.60 million that is convertible into common stock at a conversion price of $2.35. Pursuant to the terms of the acquisition, the Company has agreed to filed a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), to register the resale of the 3,165,322 shares of common stock. See Note 13 – Debt Agreements for further discussion of the notes. Innovation digital enhances the Company’s portfolio of intellectual property and licensing capabilities. All resulting goodwill is expected to be tax deductible.

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 June 30, 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.

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s intangible assets as of June 30, 2021 and December 31, 2020:

Amortization expense of intangible assets was $3.17 million and $2.62 million for the three months ended June 30, 2021 and 2020, respectively, and $6.47 million and $5.23 million for the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021, the Company impaired obsolete software that was replaced during the year. Impairment expense for the three and six months ended June 30, 2021 was $0.28 million. There was no impairment expense for the three and six months ended June 30, 2020. 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 the greater of (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 June 30 2021, the expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter was as follows:

13. DEBT AGREEMENTS

Secured Notes Payable

A subsidiary of the Company had previously entered into a promissory note not to exceed the principal amount of $0.55 million that bore interest at 8.5% per annum with a maturity date of August 31, 2018. On September 11, 2019, the note was amended with both parties agreeing that the outstanding balance of $0.81 million would be due on February 28, 2020. This promissory note was secured by substantially all of the assets of the subsidiary. As of December 31, 2020, an aggregate principal amount of $0.79 million was outstanding under this note. The aggregate principal amount of this note was fully repaid during fiscal 2021.

A subsidiary of the Company had previously entered into a promissory note in the principal amount of $0.45 million that bore interest at 9.0% per annum and was scheduled to mature on March 1, 2022. As of December 31, 2020, an aggregate principal amount of and $0.15 million, was outstanding under this note. This promissory note was secured by all assets, certain real estate and cash accounts of the subsidiary, and was guaranteed by certain management of the subsidiary. The aggregate principal amount of this note was fully repaid during fiscal 2021.

A subsidiary of the Company had previously entered into a promissory note in the principal amount of $50 thousand that bore interest at 7.9% per annum and was scheduled to mature on September 1, 2021. This promissory note was secured by business equipment, certain real estate and cash accounts of the subsidiary and was guaranteed by certain management of the subsidiary. As of December 31, 2020, an aggregate principal amount of $11 thousand was outstanding under this note. The aggregate principal amount of this note was fully repaid during fiscal 2021.

A subsidiary of the Company had previously entered into a loan agreement under which it received $2.0 million bearing interest at the rate of 9.0% per annum and is 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. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal is scheduled to be due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of the subsidiary and is guaranteed by the Company. The debt issuance costs were the result of the issuance of 350,000 shares of common stock and a cash payment of $80 thousand. 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 $2.0 million was outstanding under this loan. On January 26, 2021, $1.0 million of the principal amount of this loan and all accrued interest with a combined total of $1.23 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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. The extinguishment on January 26, 2021 cured all events of default. As of June 30, 2021, an aggregate principal amount of $1.0 million was outstanding under this loan. 

On February 26, 2020, the Company entered into a $0.6 million secured business loan that bore interest at 78.99% per annum which matured on December 26, 2020. The loan was secured by the assets of the Company. As of December 31, 2020, an aggregate principal amount of $75 thousand was outstanding and past due under this loan. The aggregate principal amount of this loan was fully repaid during 2021.

In connection with the acquisition a subsidiary on March 6, 2020, the Company assumed a secured loan with FirstBank in the principal amount of $0.98 million that bore interest at 5% per annum, with a maturity date of June 1, 2020. This loan was subsequently extended to September 15, 2020 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 the subsidiary. This loan was subjected to covenants, whereby the subsidiary 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 $0.86 million was outstanding and past due under this loan. The aggregate principal amount of this loan was fully repaid during fiscal 2021.

On March 19, 2020, the Company entered into a secured loan agreement in the amount of $2.01 million that bore interest at 5% per annum with a maturity date of August 31, 2020, which was subsequently 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. The loan was secured by certain intellectual property assets of the Company. As of December 31, 2020, an aggregate principal amount of $2.01 million 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 $2.25 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 a subsidiary on March 6, 2020, the Company: assumed various equipment financing loans with aggregate principal balances of approximately $0.2 million, which were secured by the related equipment, that bore interest ranging from 6.7% to 8.5% per annum. Monthly principal and interest payments were due over the term. As of December 31, 2020, aggregate principal balances of approximately $0.18 million were outstanding and past due under these loans. The aggregate principal amounts of these loans were fully repaid during fiscal 2021.

On December 8, 2020, the Company entered into a secured loan agreement in the aggregate principal amount of $1.1 million with an original issue discount of $0.1 million, 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. The loan was guaranteed by a subsidiary of the Company and was secured by the Company’s equity interest in the subsidiary, all of the assets of the subsidiary 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 $0.14 million. The Company accounted for this as a contribution from Mr. Hodges, as debt issuance costs. The Company incurred debt issuance costs to the placement agent of this transaction in the amount of $50 thousand. As of December 31, 2020, an aggregate principal amount of $1.1 million was outstanding under this loan. On January 26, 2021, $0.4 million of the principal amount of this loan and accrued interest with a combined total of $0.5 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 $0.7 million principal amount of this loan was fully repaid during fiscal 2021.

On January 15, 2021, in connection with its acquisition of the new manufacturing facility in Tucson, Arizona, a subsidiary entered into a secured loan agreement pursuant to which it received a loan in the amount of up to $5.36 million 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 $0.51 million of the loan amount as an interest reserve. In addition, $0.88 million 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, the subsidiary will owe an exit fee equal to the greater of (a) $54 thousand, 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, the subsidiary may request a six-month extension of the maturity date. The loan is secured by the land, building and certain other assets of the subsidiary 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 the subsidiary of its obligations under the loan. This loan is subject to certain financial and non-financial covenants on the part of the subsidiary at the end of each fiscal quarter and fiscal year. The Company incurred debt issuance costs for transaction in the amount of $0.16 million. As of June 30, 2021, an aggregate principal amount of $4.48 million was outstanding under this loan.

In connection with its acquisition of a subsidiary on January 29, 2021, the Company assumed the obligations of the sellers on a secured loan in the principal amount of $0.21 million 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 thousand 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 was secured by the assets of the subsidiary. The principal amount of this loan was fully repaid during fiscal 2021.

Notes Payable

In connection with previous acquisitions of two subsidiaries, the Company assumed the obligations of the seller on a promissory note in the principal amount of $0.5 million that bore interest at 12.0% per annum with a maturity date of October 17, 2017, which was subsequently extended to September 30, 2020 and the interest rate was reduced to 10% per annum. 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. During 2020, all unpaid accrued interest from October 1, 2019 through December 31, 2019 was converted into 4,832 shares of common stock. As of December 31, 2020, an aggregate principal amount of $0.5 million 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 $0.56 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 previous acquisitions of two subsidiaries, the Company assumed the obligations of the seller of a promissory note in the principal amount of $0.18 million that bore interest at the rate of 15% per annum and was due on November 30, 2017, which was subsequently extended to September 30, 2020 and the interest rate was reduced to 10% per annum. 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 $0.18 million was outstanding and past due. The aggregate principal amount of this note was fully repaid during fiscal 2021.

A subsidiary of the Company had previously entered into a 90-day promissory note in the principal amount of $4.4 million with an original issue discount of $0.4 million. Subsequently, this note was amended to accrue interest at the rate of 8% per annum and to extend the maturity date with new payment terms. In September 2019, the promissory note was increased to $5.0 million as all unpaid accrued interest was added to the principal balance and to extend the maturity date to March 20, 2020 and increase the interest rate to 10% per annum. In April 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. As of December 31, 2020, an aggregate principal amount of $3.5 million was outstanding under this note. On January 26, 2021, the aggregate principal amount of this note and accrued interest with a combined total of $4.21 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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.

A subsidiary of the company had previously entered into several promissory notes in the aggregate principal amount of $0.45 million that bore an effective interest rate of 133% per annum due to a single payment incentive, which matured on December 6, 2019. Of these promissory notes, an aggregate principal amount of $0.2 million was owed to three employees. Accrued interest and principal were due and payable at maturity. These notes had been past due and were accruing interest at a rate of 18% per annum. As of December 31, 2020, the aggregate principal amount of $67 thousand was outstanding and past due under these notes. The aggregate principal amount of these notes was fully repaid during fiscal 2021.

On March 5, 2020, the Company sold a promissory note in the principal amount of $0.5 million with an original issue discount of $54 thousand, that matured on November 30, 2020. Additionally, in lieu of interest, the Company issued to the lender 16,667 shares of its common stock with a fair value of $57 thousand, 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 $0.5 million 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 $0.51 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 a subsidiary on March 6, 2020, the Company, entered into promissory notes or agreed to pay the sellers an aggregate principal amount of $0.58 million that did not bear interest and required monthly principal payments. As of December 31, 2020, an aggregate amount of $0.55 million was outstanding and past due. However, there were no penalties associated with this default. The aggregate principal amount of these notes was fully repaid during fiscal 2021.

In addition, the Company assumed a note payable in the amount of $87 thousand bearing interest at 3% per annum and with a maturity date of February 16, 2023. Monthly payments of principal and interest are due over the term. As of June 20, 2020 and December 31, 2020, an aggregate principal amount of $33 thousand and $83 thousand, respectively, was outstanding under this note.

On May 29, 2020, the Company entered into a promissory note in the principal amount of $0.29 million with an original issue discount of $40 thousand and a maturity date of September 30, 2020. The 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 $0.29 million 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 $0.33 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 $1.2 million from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes were between $50 thousand and $200 thousand. 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, with a fair value of $0.48 million, to the accredited investors and brokers, as part of this transaction. The Company accounted for this as a contribution from Mr. Hodges and as debt discounts and issuance costs. 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 $1.2 million was outstanding and past due under these notes. On January 26, 2021, $0.75 million of the aggregate principal amount of these notes, a 10% principal bonus, and accrued interest with a combined total of $0.89 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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 $0.45 million aggregate principal amount of these notes was fully repaid during fiscal 2021.

Between November 4, 2020 and November 24, 2020, the Company borrowed an aggregate of $0.55 million from accredited investors and issued to such investors promissory notes evidencing such loans. The principal amounts of the notes were between $50 thousand and $100 thousand. 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, with a fair value of $0.26 million, to the accredited investors, as part of this transaction. The Company accounted for this as a contribution from Mr. Hodges and as debt discounts and issuance costs. 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 of December 31, 2020, an aggregate principal amount of $0.55 million was outstanding under these notes. On January 26, 2021, $0.5 million of the aggregate principal amount of these notes, a 10% principal bonus, and accrued interest with a combined total of $0.57 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- Stockholders’ 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 thousand aggregate principal amount of these notes was fully repaid during fiscal 2021.

In connection with an acquisition of a subsidiary on January 29, 2021, the Company issued to the sellers $1.5 million aggregate principal amount of term promissory notes. The individual principal amounts of the notes ranged from $1 thousand to $393 thousand. These notes bore interest at the rate of 10% per annum and matured on the earlier of (i) January 1, 2022, (ii) the date on which an aggregate of $6.0 million 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 $12.0 million. Interest was payable in cash semi-annually in arrears on each June 1 and December 1, commencing on June 1, 2021, and on the maturity date. Principal and any unpaid accrued interest was due on the maturity date. These notes matured on February 10, 2021 upon the Company’s closing of a public offering, as disclosed in Note 15- Stockholders’ Equity. However, the representative of the Fastback sellers requested that the Company withhold payment of principal and interest on these notes until a dispute among such sellers could be resolved. As payment was withheld at the request of the sellers’ representative, no event of default occurred and interest was accrued only through the maturity date. These notes were fully repaid during fiscal 2021.

Various subsidiaries of the Company received loan proceeds or the Company assumed in conjunction with various acquisitions an aggregate amount of $0.77 million under the Paycheck Protection Program (“PPP”). The PPP loans have maturity dates ranging from two to five 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. During the six months ended June 30, 2021, an aggregate of $0.32 million of these notes has been forgiven. This forgiveness was recorded as a gain on extinguishment of debt in the Condensed Consolidated Statement of Operations. As of June 20, 2021 and December 31, 2020, an aggregate principal amount of $0.45 million and $0.58 million, respectively, was outstanding under these loans. As described in Note 19 – Subsequent Events, an additional $0.1 million of these notes was forgiven subsequent to June 30, 2021.

In connection with the acquisition of a subsidiary by the Company on April 1, 2021, the Company assumed two notes payable with aggregate principal balances of $0.3 million. These notes bore interest at 6% and were paid in full immediately following the completion of the acquisition by the Company. 

Senior Debentures

In connection with previous acquisitions of two subsidiaries, the Company assumed the obligations of the seller of $0.1 million 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 thousand was outstanding under these debentures. The aggregate principal amount of this debenture was fully repaid during fiscal 2021.

Convertible Notes Payable

On July 7, 2020, the Company sold a convertible promissory note in the principal amount of $0.29 million with an original issue discount of $36 thousand that bore interest at a rate of 12.5% per annum, and warrants to purchase 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 Report on Form 10-K. In connection with this note, the Company recognized debt discounts of $0.22 million. On July 28, 2020, the Company defaulted on this note by not filing a registration statement under the Securities Act by July 28, 2020. As a result, the aggregate principal balance increased by penalties and interest of $88 thousand. In addition, the interest rate was increased to 24% per annum, and the note and accrued interest became due on demand. As of December 31, 2020, there was an aggregate principal amount of $0.37 million outstanding and past due under this note. On January 22, 2021, the note holder converted the full principal of $0.37 million and all accrued interest with a combined total of $0.42 million into 155,013 shares of common stock.

On August 21, 2020, the Company sold a convertible promissory note in the principal amount of $1.7 million with an original issue discount of $0.2 million that bore interest at a rate of 5.0% per annum and matured on November 20, 2020. Accrued interest and principal were due on the maturity date. 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. 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. 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 these transactions, the Company recognized aggregate debt discounts of $1.73 million. 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 penalties and interest of $0.54 million. In addition, the interest rate was increased to 24% per annum. As of December 31, 2020, an aggregate principal amount of $2.24 million was outstanding and past due under this note. The aggregate principal amount of this note was fully repaid during fiscal 2021.

In connection with its acquisition a subsidiary on January 29, 2021, the Company issued to the sellers $11.15 million aggregate principal amount of convertible promissory notes. The individual principal amounts of the notes ranged from $6 thousand to $5.58 million. 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 June 30, 2021, an aggregate principal amount of $11.15 million was outstanding.

In connection with its acquisition of a subsidiary on June 3, 2021, the Company issued to the seller, who became an employee of the Company, a convertible promissory note in the principal amount of $0.6 million that bears interest at the rate of 5% per annum, maturing on June 3, 2022. Accrued interest and principal is due at maturity. Commencing December 3, 2021, the outstanding principal and accrued interest on this note may be converted into shares of the Company’s common stock at an initial conversion price of $2.35 per share, subject to certain terms, conditions and adjustments. As of June 30, 2021, the full principal amount of $0.6 million of this note was outstanding.

Senior Convertible Promissory Note

On May 27, 2021, the Company sold a senior secured convertible promissory note in the principal amount of $11.0 million with an original issue discount of $1.0 million bearing an interest rate of 6% per annum that matures on May 27, 2023 and is subject to certain restrictive covenants. This note is convertible at any time following the earlier of the 6-month anniversary of the date of issuance or the date of effectiveness of a registration statement covering the applicable conversion shares at a conversion price of $4.50, subject to adjustment. The Company also issued to the buyer warrants to purchase up to 1,8200,000 shares of common stock with an exercise price of $4.50 per share, subject to adjustment, any time prior to May 27, 2026, and a grant date fair value of $0.505 per share. The Company also paid aggregate cash debt issuance costs of $0.69 million. The resulting aggregate debt discount recorded by the Company amounted to $2.6 million. Principal payments of $0.61 million plus interest are required to be paid monthly commencing six months after the date of issuance. This note is guaranteed by each of the Company’s subsidiaries and is secured by a first priority lien on all of the assets and properties of the Company and the assets and properties of its subsidiaries, subject only to the liens securing approximately $1.0 million principal amount of outstanding indebtedness of one of its subsidiaries. As of June 30, 2021, an aggregate principal amount of $11.0 million was outstanding.

Senior Convertible Debentures

The Company had previously sold $0.25 million 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 was paid semi-annually in arrears in June and December of each year in cash or, at the Company'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 the Company. Upon an event of default, the interest rate shall automatically increase to 15% per annum. In connection with these debentures, the Company recognized aggregate debt discounts of $0.25 million. 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. 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 the Company’s common stock and the conversion price was changed from $7.50 per share to $2.268 per share. The Company defaulted on these debentures during the 2020 fiscal year, causing the interest rate to increase to 15% per annum, and the debentures and accrued interest to become due on demand. Any remaining 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 of December 31, 2020, an aggregate principal amount of $0.25 million was outstanding and past due under these debentures. On January 26, 2021, the holder of these debentures converted the aggregate principal and interest of $0.28 million into 125,186 shares of common stock.

On July 2, 2020, the Company sold $1.0 million 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, subsequently extended to November 30, 2020. Accrued interest and principal were due at maturity, 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 recorded total debt discounts of $0.16 million. 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 $1.0 million was outstanding and past due under these debentures. On January 26, 2021, the holder of these debentures converted the principal amount of $0.9 million into 300,000 shares of common stock. The remaining principal amount of $0.1 million and accrued interest with a combined total of $0.16 million, 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 15- Stockholders’ Equity, resulting in the issuance of 38,713 shares of common stock of the Company, 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.

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

See Note 19 – Subsequent Events for details regarding additional debt incurred after June 30, 2021.

14. RELATED PARTY TRANSACTIONS 

Accrued Liabilities – Related Party

As of June 30, 2021 and December 31, 2020, the accrued liabilities – related party balance was $31 thousand and $30 thousand, 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 an exercise price of $1.00. This option immediately vested and terminates on September 26, 2022. Pursuant to the GSIS Agreement, GSIS is paid a fee of $10 thousand 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 June 30, 2021 and December 31, 2020, GSIS was owed $31 thousand and $30 thousand, 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 a subsidiary of the Company $0.2 million 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, $0.2 million 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 thousand 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 were 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 thousand 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 $0.6 million 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 $0.1 million and $0.4 million, 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, $0.6 million 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 $0.16 million 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 thousand and $120 thousand, 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, $0.16 million 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 $0.18 million, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 15- 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.

15. STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2021

As of June 30, 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 71,541,070 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.

Earnings 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 stockholders. 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 stockholders. The following weighted-average potential common shares were excluded from the diluted loss per common share as their effect was anti-dilutive as of June 30, 2021 and 2020, respectively: stock options of 3,320,181 and 2,548,345, unvested restricted stock units of 328,543 and 314,938, warrants of 775,362 and 94,465, and convertible notes that, if converted, would result in an estimated 4,835,781 and 229,348 shares of common stock.

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 16 – 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, 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 $16.0 million, 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 $1.37 million 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 16 – 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 warrants to purchase 100,000 shares of the Company’s common stock at $4.15 per share to compensate a vendor for certain offering costs. See Note 16 – 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 $27.6 million, 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 16 – 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. During the six months ended June 30, 2021 and 2020, respectively, the Company issued 15,740 shares of its common stock with a fair value of $69 thousand and 55,032 shares of its common stock, with a fair value of $193 thousand to the consultant for services previously rendered.

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 $31 thousand 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 of $13 thousand has been recognized, through satisfaction of the performance obligation. During the first quarter of the fiscal 2021 year, the remaining shares of 2,875 vested and $18 thousand of additional expense was recognized.

16. 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.

As originally approved, a total of 3,333,334 shares of the Company’s common stock were authorized for issuance with respect to awards granted under the 2020 Plan. As approved by the stockholders on or about June 25, 2021, the amount authorized to be issued under the 2020 Plan has been increased to 8,333,334 shares of the Company’s common stock. 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 June 30, 2021, 5,430,505 options have been issued under the 2020 Plan, of which 33,334 were forfeited, 63,333 have been exercised, and 2,936,163 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 Restricted Stock Awards (“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 $0.17 million during the six months ended June 30, 2021. As of June 30, 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 six months ended June 30, 2021. For the three and six months ended June 30, 2021, respectively, the Company recognized $0.18 million and $0.53 million of compensation expense related to RSAs and had unrecognized compensation cost as of June 30, 2021 for RSAs of $0.64 million.

Stock Options

On April 1, 2021, from shares available to be issued under the 2020 Long-Term Incentive Plan, the Board of Directors of the Company granted options to purchase an aggregate 2,458,163 shares of common stock with exercise prices ranging from $2.75 to $3.025 per share and a grant date fair value ranging from $0.961 to $1.042 per share. These options have a three-year service period and vest ratably on the first, second and third anniversary of their grant date.

Also, on April 1, 2021, the Board of Directors of the Company authorized the issuance of options to purchase an aggregate of 1,778,837 shares of common stock with an exercise price of $2.75 per share. These shares were in excess of the number of shares available under the 2020 Plan at that time and are subject to the approval by the Company’s stockholders of an increase to the shares available in the 2020 Plan as noted above. Effective with the approval of the stockholders on June 25, 2021, these shares are considered granted and have a grant date fair value ranging from $0.759 to 0.768 per share. Of these, 753,837 have a three-year service period and vest ratably on the first, second and third anniversary of their authorization for issuance and 1,025,000 have a two-year service period and vest ratably on the first and second anniversary of their authorization for issuance.

On May 5, 2021, the Board of Directors of the Company authorized the issuance of options to purchase an aggregate of 295,000 shares of common stock with an exercise price of $2.75 per share. These shares were in excess of the number of shares available under the 2020 Plan at that time and are subject to the approval by the Company’s stockholders of an increase to the shares available in the 2020 Plan as noted above. Effective with the approval of the stockholders on June 25, 2021, these shares are considered granted and have a grant date fair value of $0.873 per share. Of these, 270,000 have a one-year service period and vest ratably on the six month and twelve-month anniversary of their authorization for issuance and 25,000 vested immediately upon grant.

On June 29, 2021, the Board of Directors approved the modification of 655,002 options previously issued outside of the corporate plan. These options were scheduled to expire 90 days after the March 31, 2021 retirement of a long-time employee. This modification extended the expiration date of these options through December 15, 2021. The Company has recognized incremental compensation expense of $0.13 million related to this modification.

The following table summarizes the assumptions used to estimate the fair value of options granted during the six months ended June 30, 2021:

The following tables represent stock option activity for the three months ended June 30, 2021 and 2020: