As consideration for the execution of the Stock Purchase Agreement, we issued to Mr. Block a common stock purchase warrant to purchase an aggregate of 75,000,000 shares of our common stock (“SPA Warrant”). In addition, at closing and as consideration for our purchase of the outstanding shares of Government-Buys Stock, we paid or issued to Mr. Block the following: (a) a common stock purchase warrant to purchase an aggregate of 75,000,000 shares of our common stock (the “Acquisition Warrant”), (b) a promissory note in the aggregate principal amount of $500,000 (the “Acquisition Note”), and (c) a promissory note in the aggregate principal amount of $600,000 (the “Five Year Note”).
The SPA Warrant and Acquisition Warrant are exercisable for a period of ten years from the date of issuance at an exercise price of $0.0005 per share, contain certain anti-dilution provisions, a “cashless exercise” provision, and other customary provisions.
The Acquisition Note and Five Year Note bear interest at the rate of 6% per annum and may not be assigned or negotiated without our consent. Interest under the Acquisition Note is due monthly in arears. The principal amount of the Acquisition Note is due in three installments as follows: $200,000 on or before May 6, 2011; $150,000 on or before August 6, 2011; and $150,000 on or before November 6, 2011. The principal amount and accrued interest under the Five Year Promissory Note are due on April 6, 2016.
The offering of the foregoing securities in connection with the Acquisition was and will be made exclusively to an accredited investor pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder.
We granted to Mr. Block a repurchase option with regard to the Government-Buys Stock that is triggered in the event: (a) we fail to pay the principal amount under the Acquisition Note or the Five Year Note, (b) YA Global Investments, LP, and/or Montgomery Equity Partners, Ltd., in one or a series of transactions convert the shares of our Series A Preferred Shares that they own so that, following such transactions, they beneficially own in the aggregate and collectively 15% or more of the then issued and outstanding shares of our common stock, or (c) at any time prior to the payment of all amounts due under the terms of the Acquisition Note and Five Year Note, we shall intend to sell the Government-Buys Stock or all or substantially all of the assets of the Government-Buys to a third party, we are required to give the Mr. Block 45 days’ advance written notice of such a proposed transaction. If one of these events occurs, Mr. Block has an option (the “Repurchase Option”) to re-purchase from us all (but not less than all) of the Government-Buys Stock for nominal consideration. The Repurchase Option is exercisable for a period of 30 days following the first occurrence of an event that triggers the Repurchase Option (the “Repurchase Option Exercise Period”) and, if not exercised during such Repurchase Option Exercise Period, the Repurchase Option automatically terminates and is of no further force or effect.
