DRONE AVIATION HOLDING CORP.

On December 8, 2020, the Company entered into a secured loan agreement in the aggregate principal amount of $1,100,000 with an original issue discount of $100,000, 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. Accrued interest and principal were due in full on the maturity date. A late charge of 10% would have been charged for any balance not paid when due. The loan was guaranteed by VNC and was secured by the Company’s equity interest in VNC, all of the assets of VNC 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 $142,800. The Company accounted for this as a contribution from Mr. Hodges, with $102,000 assigned as debt discounts for additional consideration to the lender, and $40,800 assigned as debt issuance costs to the brokers. The Company incurred debt issuance costs to the placement agent of this transaction in the amount of $50,000. For the three months ended March 31, 2021, $60,579 of the debt discounts and issuance costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of December 31, 2020, an aggregate principal amount of $1,100,000 was outstanding under this loan. On January 26, 2021, $350,000 of the principal amount of this loan and accrued interest with a combined total of $495,584, was fully extinguished at the rate of $4.15 per unit, as defined in our public offering and disclosed in Note 17- 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 $750,000 principal amount of this loan was fully repaid during the first quarter of 2021.

On January 15, 2021, in connection with its acquisition of the new manufacturing facility in Tucson, Arizona, AZCOMS entered into a secured loan agreement pursuant to which it received a loan in the amount of up to $5,355,000 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 $513,000 of the loan amount as an interest reserve. In addition, $875,000 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, AZCOMS will owe an exit fee equal to the greater of (a) $53,850, 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, AZCOMS may request a six-month extension of the maturity date. The loan is secured by the land, building and certain other assets of AZCOMS 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 AZCOMS of its obligations under the loan. This loan is subject to certain financial and non-financial covenants on the part of AZCOMS at the end of each fiscal quarter and fiscal year. The Company incurred debt issuance costs for transaction in the amount of $89,787 and paid a cash discount totaling $65,567. For the three months ended March 31, 2021, $26,999 of the debt discounts and issuance costs were amortized and recognized in interest expense in the Condensed Consolidated Statement of Operations. As of March 31, 2021, an aggregate principal amount of $4,480,000 was outstanding under this loan.

In connection with its acquisition of Fastback on January 29, 2021, the Company issued to the sellers $1,500,000 aggregate principal amount of term promissory notes. The individual principal amounts of the notes ranged from $1,500 to $393,484. These notes bear interest at the rate of 10% per annum and mature on the earlier of (i) January 1, 2022, (ii) the date on which an aggregate of $6,000,000 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 $12,000,000. Interest is payable in cash semi-annually in arrears on each June 1 and December 1, commencing on June 1, 2021, and on the maturity date. Upon an event of default, the interest rate will automatically increase to 15% per annum compounded semi-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 semi-annually on any unpaid principal. These notes matured on February 10, 2021 upon the Company’s closing of a public offering, as disclosed in Note 17- Shareholders’ Equity. However, the representative of the Fastback sellers has requested that the Company withhold payment of principal and interest on these notes until a dispute among such sellers can be resolved. As payment was withheld at the request of the sellers’ representative, no event of default has occurred and interest has been accrued only through the maturity date.

On December 1, 2020, Arrow filed suit against Elitise, LLC, the research and development arm of the Company’s wholly-owned subsidiary InduraPower, in the United States District Court for the Southern District of New York, Case No. 1:20-cv-10045. In its complaint, Arrow alleges that Elitise breached an August 19, 2016 secured promissory note and a September 11, 2019 forbearance agreement. The outstanding principal under this promissory note has been included in the Company’s balance sheet as a current portion of long-term debt. See Note 10 - Debt Agreements for detail on the promissory note. In such action, Arrow was seeking damages of approximately of up to $950,000. On December 3, 2020, Elitise provided a waiver of service of process in the case. In February 2021, the Company reached and paid a settlement on this matter totaling $900,000.

In May 20, 2019, and prior to its acquisition by the Company, Fastback entered into a purchase commitment agreement to purchase 11,800 DAN chips (the “Chips”) for a price of $105 per Chip from a vendor and paid a deposit on the purchase totaling $539,000. In addition, Fastback committed to an additional $1.00 per chip premium per month from and after May 20, 2019, to the date of payment for each chip until December 31, 2019, when this premium would be increased to $2.50 per chip per month. In addition, Fastback is prohibited from purchasing these Chips from any other vendor until the completion of the purchase of the agreed upon Chips. The deposit was to be applied to the purchase of the last $539,000 worth of chips, provided however that any remaining unapplied portion of the deposit shall be forfeit if all of the Chips are not purchased pursuant to this agreement on or before December 31, 2020. In December of 2020, this agreement, including the forfeiture date of the deposit, was extended through May 15 2021. As of March 31, 2021, the estimated cost to fulfil this contract totaled approximately $1.6 million which would have included a cash payment of approximately $1.1 million and the use of the deposit of $0.5 million. This agreement has not been extended as of the date of this 10-Q and the deposit has been forfeited.

On April 1, 2021 (the “RVision Closing Date”), the Company completed the acquisition (the “RVision Acquisition”) of RVision, Inc., a Nevada corporation, (“RVision”) pursuant to a Share Exchange Agreement (the “Exchange Agreement”) dated as of March 26, 2021 among the Company, RVision, Industrial Security Alliance Partners, Inc. and Halls of Valhalla, LLC. In accordance with the terms of the Exchange Agreement, on the RVision Closing Date, the Company acquired all of the issued and outstanding shares of capital stock of RVision in exchange for 2,000,000 shares of common stock, with an initial estimated fair value of approximately $5.6 million. The shares of the Company’s common stock issued at closing will be the maximum number of shares available for satisfying any post-closing indemnification claims of the former RVision stockholders under the Exchange Agreement. The Company has agreed to file 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 within 30 days of the RVision Closing Date and 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 RVision Closing Date, subject to certain exceptions. No registration statement has been filed as of the date of this form 10-Q.