Beyond the fact they are doing business with Aegis who I am not fond of, here is the summary of how the deal works:
Debentures
On April 4, 2014, the Company entered into the Initial Debentures with the Investors in the aggregate principal amount of $543,378 for a purchase price of $500,000 (8% original issue discount). The Debentures accrue interest at the rate of 12% annually and have a maturity date of April 4, 2015. The Company is obligated to make amortization payments beginning on the six month anniversary of the issuance date of the Debentures and continuing monthly thereafter. The Debentures are convertible into shares of common stock of the Company at any time at the discretion of the Investors at a conversion price equal to the lesser of (i) $0.10 or (ii) 70% of the lowest traded price per share of the common stock during the twenty five (25) trading days prior to the date of conversion.
The conversion price of the Debentures is subject to full ratchet anti-dilution protection upon the occurrence of stock dividends, stock splits, sales of securities of the Company, rights offerings, certain pro rata distributions or a certain fundamental transactions as defined in the Debentures. The Company also has a right of redemption with respect to some or all of the outstanding principal balance under the Debentures.
The Debentures include customary events of default, such as defaults in payment, breaches of covenants or agreements, or changes in control. Upon the occurrence of an event of default, the outstanding principal and interest (which shall accrue at 18% per annum after the event of default) under the Debentures will be due and shall also be convertible at the lesser of the conversion price and 60% of the volume weighted average price (“VWAP”) for the five (5) trading days in the preceding twenty (20) trading days that have the lowest VWAP during such period.
Registration Rights Agreement
On April 4, 2014, the Company entered into the Registration Rights Agreement (the “Rights Agreement”) with the Investors pursuant to which the Company agreed to register an amount of shares of common stock of the Company equal to 125% of the shares of common stock issuable upon conversion of the Debentures (the “Registrable Securities”). The Company is required to file a registration statement with the SEC to register the Registrable Securities by May 19, 2014 (the “Filing Deadline”) and have the registration statement declared effective by the SEC within on hundred (100) days of the Filing Deadline (the “Effectiveness Deadlines”).
If the Company fails to meet the Filing Deadline or the Effectiveness Deadline, or if the registration statement ceases or fails to remain effective for the requisite time, the Company is required to pay liquidated damages equal to 1% of the aggregate purchase price paid by the Investors pursuant to the Agreement on a monthly basis, until the expiration of the Effectiveness Deadline. The liquidated damages may not exceed 10% of the purchase price paid by the Investors, in the aggregate.
The parties to the Rights Agreement also agreed, among other things, to indemnify each other for losses that may arise based on untrue statements that may be included in a registration statement and certain other fees and expenses that the parties may incur in connection therewith. The Company will pay all expenses relating to the filing of the registration statement.
Security Agreement
In connection with the Company’s obligations under the Debentures, on April 4, 2014, the Company entered into a Security Agreement with Dominion Capital LLC (“Dominion”), as collateral agent on behalf of the Investors, pursuant to which the Company granted a lien on all assets of the Company (the “Collateral”) for the benefit of the Investors, to secure the Company’s obligations under the Debentures. In the event of a default as defined in the Debentures, Dominion or the Investors may, among other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
The foregoing descriptions are qualified in their entirety by reference to the Agreement, Form of Debenture, Form of Rights Agreement and Form of Security Agreement filed as Exhibits 10.1, 10.2, 10.3 and 10.4 attached hereto and incorporated herein by reference. A copy of the press release issued by the Company in connection with its entry into such agreements is included as Exhibit 99.1 attached hereto.
