Michelex Corp (fka MLXO)

[sawdin]

The Draft Audit lists a liability of $1,105,800 relating to ‘Convertible Notes – past due’. Under ‘Note 4. Notes Payable, Convertible Notes Payable – Past Due’ (Page 5 of the Draft Audit), it states that “The holder of the noted has the right to convert all or any part of the note into shares of the common stock of the Company.” This note is held by AJW/NIR Group/Corey Ribotsky. A question exists as to whether the conversion clause is still in effect and/or enforceable. Mr. Ritotsky and his companies have found themselves in some recent legal ‘issues’. My best guess is that this note could be paid off at ‘negotiated rate’ much lower than face value. Following are the terms of the note, per the draft audit:




The Draft Audit lists liabilities associated with ‘convertible notes’ due in the amount of $7,328,820. This appears to be related to the two following notes (I should be able confirm this over the weekend or early next week):

1) A note held by United Mortgage Bankers: Note 4 of the Draft Audit (pp 5-6) states that “In connection with the acquisition of United, the company issued a $4,000,000 note which is due May, 2012 and is non-interest bearing… The note is convertible into such number of shares as may be mutually agreeable and is collateralized by a pledge of shares of United.”

However, this note was issued with the assumption that United Mortgage Bankers, LTD provided Michelex with $3,000,000 of paid up capital and $10,505,500 of ‘investable funds’. If those funds were never actually provided, this note is probably not worth the paper it was written on.

2) A note held by Moriah Capital. Moriah Capital did provide funding for the purchase of equipment, intellectual property, formulations/inventory. Terms as follows (this is just a partial listing of the terms, but it provides a pretty good overiew):

Maturity: Unless otherwise converted into the Conversion Securities (as defined in Section 6 hereof), in accordance with Section 6 hereof, this Note shall mature on June 29, 2013 (the Maturity Date). On the Maturity Date, unless, and to the extent, converted into Conversion Securities (as defined in Section 6) in accordance with the provisions hereof, any and all outstanding Principal Amount and any accrued and unpaid interest due and owing under the Note shall be immediately paid by the Company.

Interest; Interest Rate; Payment. (a) This Note shall bear interest at a rate equal to five (5%) percent (the Interest Rate) per annum, on a 360-day year. Simple Interest shall accrue until all amounts owed under this Note shall be fully repaid or the date on which the Note shall be converted, in whole, into the Conversion Securities (the Conversion Date), as the case may be, and shall be due and payable in full on the Maturity Date unless earlier converted into Conversion Securities, as applicable. (b) All payments to be made by the Company hereunder or pursuant to this Note shall be made, without setoff or counterclaim, in lawful money of the United States by check or wire transfer in immediately available funds, as directed by Holder.

(a) Conversion. If any time on or after the full 12-month anniversary hereof and prior to the Maturity Date, the Company has generated EBITDA (as defined below) equal to or exceeding One Million Dollars ($1,000,000) on a trailing twelve-month basis (the LTM EBITDA), as set forth in a certification of the Company’s chief financial officer (the Conversion Certification), with the calculation of such LTM EBITDA set forth in reasonable detail in such Conversion Certification, then, effective as of the last day of the month in which such LTM EBITDA has been achieved (the Conversion Date), the entire Principal Amount owing on this Note and any and all accrued interest thereon shall convert into such percentage of the number of shares of the Company’s common stock, par value $0.0001 per share (Common Stock), on a fully-diluted basis (as defined below), as shall constitute the Conversion Percentage (the Conversion Securities). Conversion Percentage means the percentage equal to the lesser of (i) 20% or (ii) the percentage derived from the following formula:
CP = [A/B] x 100, where:
CP = Conversion Percentage
A = $3,500,000
B = the product of LTM EBITDA multiplied by eight
EBIDTA of the Company for any period shall mean, for such period, earnings before deduction for interest charges, taxes, depreciation and amortization, determined in accordance with GAAP.
Fully-diluted basis shall mean the number of shares of Common Stock on a fully diluted basis after giving effect to any and all outstanding options, warrants, rights (including, but not limited to, conversion or preemptive rights and rights of first refusal), or other arrangements or agreements of any kind, whether or not then exercisable, for the purchase or acquisition from the Company of any of its Common Stock