On December 2, 2013, the Company entered into the Purchase Agreement with Iliad. See Item 1, “Business—Our Current Business—Iliad Note.” Pursuant to the Purchase Agreement, the Company issued to Iliad the Note in the original principal amount of $667,500, which Note bears interest at 8% per annum and is compounded daily. All outstanding principal and accrued interest on the Note is due and payable on the maturity date, which date is 23 months from Issuance Date of the Note. Net cash expected will be $607,500, net of original issue discount of $60,000.
The initial cash purchase price of $202,500 (which amount is net of the pro-rata portion of original issue discount of $20,000 and certain transactional expenses of $5,000) was paid on the issuance date and (ii) the balance of $400,000 shall be paid no later than the Maturity Date, as evidenced by four separate $100,000 promissory notes issued by Iliad to the Company.
Beginning six months after the Issuance Date and continuing for each installment date thereafter, the Company is required to make monthly payments under the Note of $37,083.33, plus any accrued and unpaid interest as of the installment date. Any installment payment may be either cash or shares of Common Stock, at our election.
At any time after 180 days from the Issuance Date, the Note is convertible into shares of the Company’s common stock, at the option of the Note holder, at a conversion price of $0.12 per share, subject to adjustment downward under certain circumstances defined in the Note. At December 31, 2013, the Company has reserved 16.67 million shares of authorized but unissued common stock in accordance with the terms of the Note. The Company has agreed to reserve these shares until all of the Company’s obligations under the Note are paid and performed in full and the warrants are exercised in full or otherwise expired. The Company may prepay part or all of the Note at any time, provided that any prepayment is subject to a 25% penalty on the amount prepaid.
The Note is subject to various default provisions, including as a result of a failure to make an installment payment by the due date, a failure to deliver shares when required under the Note, or a breach of covenants in the Note and Purchase Agreement, among others. Upon an event of default, the Note accrues interest at the default rate of 1.83% per month (or 22% per annum), compounding daily. The Company is in default on this loan as of June 2, 2014 as a result of failing to make the required installment payments, as well as a result of the Company’s failure to timely file its annual reports with the SEC. Accordingly, the total due Iliad of $227,500 is classified as a current liability. On October 1, 2014, we received an event of default redemption notice from (the “Notice”) from Iliad. Pursuant to the Notice, Iliad indicated that it had elected to redeem the full outstanding balance of the Note, including default premiums, of $1,198,123.08. Iliad requested payment of the outstanding balance no later than October 15, 2014. Iliad has indicated a willingness to enter into a forbearance agreement and we are currently in negotiations with Iliad to enter into a forbearance agreement or otherwise to delay redemption. Based on discussions with Iliad, we believe that we will be able to reinstate the Note (perhaps with modifications) and cure the default.
