THE COMPANY MAY NOT HAVE ACCESS TO THE FULL AMOUNT AVAILABLE UNDER THE EQUITY AGREEMENT.
We have not drawn down funds and have not issued shares of our common stock under the Equity Purchase Agreement with Kodiak. Our ability to draw down funds and sell shares under the Equity Purchase Agreement requires that the registration statement, of which this prospectus is a part, be declared effective by the SEC, and that this registration statement continue to be effective. In addition, the registration statement of which this prospectus is a part registers 50,000,000 Put Shares issuable under the Equity Purchase Agreement, and our ability to access the Equity Purchase Agreement to sell any remaining shares issuable under the Equity Purchase Agreement is subject to our ability to prepare and file one or more additional registration statements registering the resale of these shares. These subsequent registration statements may be subject to review and comment by the staff of the SEC, and will require the consent of our independent registered public accounting firm. Therefore, the timing of effectiveness of these subsequent registration statements cannot be assured. The effectiveness of these subsequent registration statements is a condition precedent to our ability to sell the shares of common stock subject to these subsequent registration statements to Kodiak under the Equity Purchase Agreement. Even if we are successful in causing one or more registration statements registering the resale of some or all of the shares issuable under the Equity Purchase Agreement to be declared effective by the SEC in a timely manner, we will not be able to sell shares under the Equity Purchase Agreement unless certain other conditions are met. Accordingly, because our ability to draw down amounts under the Equity Purchase Agreement is subject to a number of conditions, there is no guarantee that we will be able to draw down any portion or all of the $1,500,000 available to us under the Equity Purchase Agreement.
CERTAIN RESTRICTIONS ON THE EXTENT OF PUTS AND THE DELIVERY OF PUT NOTICES MAY HAVE LITTLE, IF ANY, EFFECT ON THE ADVERSE IMPACT OF OUR ISSUANCE OF SHARES IN CONNECTION WITH THE EQUITY PURCHASE AGREEMENT, AND AS SUCH, KODIAK MAY SELL A LARGE NUMBER OF SHARES, RESULTING IN SUBSTANTIAL DILUTION TO THE VALUE OF SHARES HELD BY EXISTING SHAREHOLDERS.
Kodiak has agreed, subject to certain exceptions listed in the Equity Purchase Agreement, to refrain from holding an amount of shares which would result in Kodiak or its affiliates owning more than 4.99% of the then-outstanding shares of the Company’s common stock at any one time. These restrictions, however, do not prevent Kodiak from selling shares of common stock received in connection with a put, and then receiving additional shares of common stock in connection with a subsequent put. In this way, Kodiak could sell more than 4.99% of the outstanding common stock in a relatively short time frame while never holding more than 4.99% at one time.
ASSUMING WE UTILIZE THE MAXIMUM AMOUNT AVAILABLE UNDER THE EQUITY LINE OF CREDIT, EXISTING SHAREHOLDERS COULD EXPERIENCE SUBSTANTIAL DILUTION UPON THE ISSUANCE OF COMMON STOCK.
Our Equity Purchase Agreement with Kodiak contemplates the potential future issuance and sale of up to $1,500,000 of our common stock to Kodiak subject to certain restrictions and obligations. The following table is an example of the number of shares that could be issued at various prices assuming we utilize the maximum amount remaining available under the Equity Purchase Agreement. These examples assume issuances at a market price of $0.045 per share and at 10%, 25%, 50%, and 75% below $0.03375 per share, taking into account Kodiak’s 25% discount.
The following table should be read in conjunction with the footnotes immediately following the table.
Percent below Current market price Price per share (1) Number of shares issuable (2) Shares outstanding (3) Percent of outstanding shares (4)
10 % $ 0.030375 49,382,717 276,272,995 18 %
25 % $ 0.025312 59,260,430 286,150,708 21 %
50 % $ 0.016875 88,888,889 315,779,167 28 %
75 % $ 0.008437 177,788,314 404,678,592 44 %
(1) Represents purchase prices equal to 75% of $0.045 and potential reductions thereof of 10%, 25%, 50% and 75%.
(2) Represents the number of shares issuable if the entire $1,500,000 under the Equity Purchase Agreement were drawn down at the indicated purchase prices. Our Articles of Incorporation currently authorizes 500,000,000 shares of common stock.
(3) Based on 226,890,278 shares of common stock outstanding at December 30, 2014. Our Articles of Incorporation currently authorizes 500,000,000 shares of common stock. We may in the future need to amend our Articles of Incorporation in order to increase our authorized shares of common stock.
(4) Percentage of the total outstanding shares of common stock after the issuance of the shares indicated, without considering any contractual restriction on the number of shares the selling shareholder may own at any point in time or other restrictions on the number of shares we may issue.
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