NOTES PAYABLE

12 Months Ended

Dec. 31, 2022

Notes Payable

NOTES PAYABLE

24. NOTES PAYABLE

Notes payable at December 31, 2022 and 2021, were comprised of the following.

	Interest rate	Due date	December 31, 2022			December 31, 2021
Short-term notes payable	5.0%	January 3, 2023	$	700,000		$	118,000
10% original issue discount senior secured notes				-			65,972,000
AGREE Madison secured construction loans	7.0%	January 1, 2025		62,395,000			55,055,000
SMC line of credit	8.0%	October 14, 2025		1,761,000			-
SMC installment notes	7.6%	June 18, 2024		158,000			-
SMC line of credit	8.4%	December 16, 2025		14,724,000			-
SMC line of credit	7.2%	November 16, 2026		10,677,000			-
XBTO note payable	12.5%	December 30, 2023		2,749,000			-
16% senior secured promissory note	16.0%	March 16, 2023		17,456,000			-
3% secured promissory notes	3.0%	May 18, 2023		5,672,000			-
8.5% secured promissory notes	8.5%	May 7, 2024		17,389,000			-
10% secured promissory notes	10.0%	August 10, 2023		8,789,000			-
Short-term bank credit facilities	4.4%	Renews monthly		1,702,000			960,000
Total notes payable			$	144,172,000		$	122,105,000
Less:
Unamortized debt discounts				(13,087,000	)		(27,496,000	)
Total notes payable, net			$	131,085,000		$	94,609,000
Less: current portion				(39,621,000	)		(39,554,000	)
Notes payable – long-term portion			$	91,464,000		$	55,055,000

During the years ended December 31, 2022 and 2021, the Company recorded amortization of debt discounts of $30.0 million and $7.3 million, respectively.

Notes Payable Maturities

The contractual maturities of the Company’s notes payable, assuming the exercise of all extensions that are exercisable solely at the Company’s option, as of December 31, 2022 were:

Year
2023	$	51,069,000
2024		13,807,000
2025		64,132,000
2026		15,164,000
	$	144,172,000

December 2021 Secured Promissory Notes

On December 30, 2021, the Company entered into a securities purchase agreement with certain sophisticated investors providing for the issuance of:

· secured promissory notes (the “Secured Promissory Notes”) that bear interest at 8% per annum with an aggregate principal face amount of approximately $66 million including a 10% original issue discount;

· five-year warrants to purchase an aggregate of 14,095,350 shares of the Company’s common stock at an exercise price of $2.50, subject to adjustment; and

· five-year warrants to purchase an aggregate of 1,942,508 shares of Common Stock (the “Class B Warrant Shares”) at an exercise price of $2.50 per share, subject to adjustment. The Class B Warrant Shares are deemed to be a derivative instrument.

In March 2022, the $66 million Secured Promissory Notes were repaid and the Company fully amortized the related debt discount of $26.3 million, which is included within interest expense on the consolidated statements of operations. 

AGREE Madison Construction Loan Agreements

On December 22, 2021, AGREE Madison, through various wholly owned subsidiaries, entered into construction loan agreements. The outstanding balances under the construction loans was $62.4 million as of December 31, 2021. The construction loans are due on January 1, 2025, but may be extended for two additional 12-month terms, subject to certain terms and conditions as set forth in the construction loan agreements. The loans accrue interest at a rate equal to the greater of (i) the LIBOR Rate plus 675 basis points or (ii) 7% per annum. The AGREE Madison subsidiaries will make monthly installment payments of interest only, starting January 1, 2022. Ault Alliance also provided a completion guaranty to the lenders for the completion of the property improvement plans.

10% Secured Promissory Notes

On August 10, 2022, the Company, through its BNI subsidiary, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate principal face amount of $11.0 million and an interest rate of 10%. The purchase price (proceeds to the Company) for the secured promissory notes was $10.0 million. The secured promissory notes have a security interest in $10 million of marketable securities and investments and certain Bitcoin mining equipment with a carrying amount of $23.1 million. The secured promissory notes are further secured by a guaranty provided by the Company, Ault Lending and by Milton C. Ault, the Executive Chairman of the Company.

The maturity date of the secured promissory notes is August 10, 2023. The Company is required to make monthly payment (principal and interest) of $1.0 million on the tenth calendar day of each month, starting in September 2022. Provided that the Company makes the first six monthly payments in full and on a timely basis, after six months, the Company may elect to pay a forbearance fee of $0.3 million in lieu of a monthly payment, which would extend the maturity date of the related secured promissory notes by one month for each forbearance. The Company may not elect forbearance in consecutive months.

On November 18, 2022, the Company’s BNI subsidiary entered into an amendment to the 10% secured promissory notes issued on August 10, 2022, whereby the investors permitted the Company to (i) elect to utilize one of the six monthly forbearances under the notes for the November 2022 monthly payment and (ii) make the forbearance payment with the December 2022 monthly payment.

As of December 31, 2022, the Company was in default under the terms of the 10% secured promissory notes because it did not hold the required $1.0 million worth of Bitcoin as collateral. However, the lenders granted the Company a waiver for this default. The 10% secured promissory notes were subsequently retired in March 2023 and replaced with preferred shares, as described in Note 33 – Subsequent Events.

SMC Credit and Security Agreement with Fifth Third Bank

On October 14, 2022, SMC entered into a Credit and Security Agreement (the “Credit Agreement”) with Fifth Third Bank, National Association, as Lender (“Fifth Third”) replacing SMC’s credit facilities with Crestmark Bank and Iron Horse Credit that were terminated by the Company on October 13, 2022. The Credit Agreement provides for a three-year secured revolving credit facility in an aggregate principal amount of up to $15.0 million decreased to $7.5 million during the period of January 1 through July 31 of each year. The Credit Agreement matures on October 14, 2025.

As of December 31, 2022, SMC was in default under the Credit Agreement due to non-compliance with the fixed charge coverage ratio covenant primarily due to SMC’s decrease in revenue in the fourth quarter of 2022 and increased general and administrative expenses. To date, Fifth Third has not taken action to accelerate SMC’s obligations under the Credit Agreement and SMC is currently in negotiations with Fifth Third to obtain a waiver and renegotiate the fixed charge coverage ratio covenant. There can be no assurance that the negotiations will be successful and that Fifth Third will grant SMC a waiver or renegotiate the covenant.

The SMC debt is secured by a perfected security interest in all SMC assets including a first-priority security interest in SMC accounts receivable and inventory. 

Secured Debt Financing

On November 7, 2022, the Company and certain of its subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from certain institutional investors (the “Financing”). The Loans mature in 18 months from issuance, which may be extended to 24 months, accrue interest at the rate of 8.5% per annum and are secured by certain assets of the Company and various subsidiaries. Starting in January 2023, the lenders have the right to require the Company to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans were issued with an original issue discount of $1.89 million.

The lenders received warrants to purchase approximately 4.5 million shares of the Company’s common stock, exercisable for four years at $0.45 per share and warrants to purchase another approximately 4.5 million shares of the Company’s common stock, exercisable for four years at $0.75 per share, subject to adjustment.

On November 7, 2022, Ault Aviation used proceeds from the Loans to purchase a private aircraft for a total purchase price of $15.8 million. In addition, the Company and certain of its subsidiaries entered into various agreements as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a pledge of the membership interests of Third Avenue Apartments, LLC, a wholly owned subsidiary of the Company (“Third Apartments”), (iii) a pledge of the membership interests of Alliance Cloud Services, LLC, a wholly owned subsidiary of the Company (“Alliance Cloud”), (iv) a pledge of the membership interests of Ault Aviation, LLC, a wholly owned subsidiary of the Company (“Ault Aviation”), (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security agreement by Third Avenue on the real estate property owned by Third Avenue in St. Petersburg, Florida, (vii) a future advance mortgage by Alliance Cloud on the real estate property owned by Alliance Cloud in Dowagiac, Michigan, and (viii) an aircraft mortgage and security agreement by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are further secured by a guaranty provided by Ault Lending and Milton C. Ault, the Executive Chairman of the Company.

3% Secured Promissory Notes

On November 18, 2022, the Company, through its BNI subsidiary, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate principal face amount of $8,181,819 and an interest rate of 3%. The purchase price (proceeds to the Company) for the secured promissory notes was $8.2 million. The secured promissory notes have a security interest in certain marketable securities to be acquired by BNI (the “Collateral”).

The maturity date of the secured promissory notes is May 18, 2023. When the Company sells the Collateral, the Company is required to make a payment towards the secured promissory notes equal to 45% of the realized gains. After the secured promissory notes have been repaid in full and until all of the Collateral is sold, when the Company sells any remaining Collateral, the Company is required to give the investors a profits participation interest equal to 45% of the realized gains.

16% Secured Promissory Notes

On December 16, 2022 the Company entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor (the “Initial Investor”) providing for the issuance of a secured promissory note with an aggregate principal face amount of $14.7 million (the “Financing”). On December 29, 2022, the Company and the Initial Investor entered into an amended and restated amendment to the SPA (the “Amendment”), pursuant to which the total amount of the Financing was increased to $17.5 million and the Company sold an additional Note to a second accredited investor (the “Subsequent Investor” and together with the Initial Investor, the “Investors”).

Under the SPA, the Company shall repay, while the Note remains outstanding, (i) eighty percent (80%) of the proceeds it may receive from any financing conducted, other than at-the-market offerings and (ii) one hundred percent (100%) of the proceeds it may receive from the sale of marketable securities by Ault Lending. In addition, if Third Avenue Apartments, LLC sells the property it owns in St. Peterburg, Florida, the Company shall use the net proceeds from the sale of such property in excess of $10 million to repay the Note.

In addition, the Company agreed to issue 11,605,913 shares of the Company’s common stock (the “Registrable Shares”) to the Investor in exchange for the cancellation of all outstanding warrants previously issued to the Investor, which warrants were exercisable for 11,605,913 shares of the Company’s common stock. The Company agreed to file a registration statement on Form S-3 to register the Registrable Shares and certain other shares owned by the Investor within ten (10) days of the Closing Date. The Company agreed to pay the Investor liquidated damages of approximately $0.1 million per month that the Registrable Shares have not been registered.

Pursuant to the SPA, the Company, Ault Lending, BNI and Esousa Group Holdings, LLC, as the collateral agent on behalf of the Investors entered into a security agreement (the “Security Agreement”), pursuant to which (i) BNI granted to the Investor a security interest in 12,000 Bitcoin miners and (ii) Ault Lending granted to the Investor a security interest in, among other items, substantially all of the Ault Lending’s deposit accounts, securities accounts, chattel paper, documents, equipment, general intangibles, instruments and inventory, and all proceeds therefrom (the “Assets”), as set forth in the Security Agreement, except for assets previously granted security interests to other parties.

The Notes are further secured by a guaranty (the “Guaranty”) provided by Ault Lending, BNI, Ault & Company, an affiliate of the Company, as well as by Milton C. Ault, the Company’s Executive Chairman and the Chief Executive Officer of Ault & Company.

The Notes have a principal face amount of $17.5 million and bear interest at 16% per annum. The maturity date of the Notes is March 16, 2023, although if the Company repays at least $14.3 million of principal payment on or before the maturity date, the Company may extend the maturity date by forty-five (45) days by paying a fee of 10% of the outstanding balance owed on the Notes as of the original maturity date. The Notes contain standard and customary events of default including, but not limited to, failure to make payments when due under the Notes, failure to comply with certain covenants contained in the Notes, or bankruptcy or insolvency of the Company. The Company may prepay any or all outstanding principal and accrued and unpaid interest at any time without penalty. The purchase price for the Notes was $16.1 million, of which $13.3 million was paid in cash, $1.8 million was a non-accountable expense allowance and $1.0 million was the forgiveness of cash owed to the Subsequent Investor for cashless exercise of warrants previously issued to the Subsequent Investor.