In June 2008, in connection with the sale of the June 2008 Debentures (Note 7), the Company issued 1,200 shares of its Series D 0% Convertible Preferred Stock $0.001 Par Value (Preferred Stock). Each share of Preferred Stock has a stated value of $1,000 and is convertible into shares of common stock at $0.05 per share based on the stated value with potential conversion price resets based on the daily volume weighted average price of the common stock for 20 consecutive trading days prior to the sixteenth, nineteenth and twenty-four month anniversaries of the original issue date. The shares of Preferred Stock are convertible by the holders at any time into shares of the Company’s common stock. On or after January 1, 2009, the Company may force the conversion of Preferred Stock into its common stock if the daily volume weighted average price of the common stock for any 20 consecutive trading days equals or exceeds $0.25 per share, subject to certain conditions. The Company may redeem outstanding shares of Preferred Stock by paying 110% its stated value. Shares of Preferred Stock do not have separate voting rights as a class (but do vote on an “as-converted” to common stock basis), do not pay a dividend and do not have a liquidation preference.
Also in June 2008, the Company issued 300 shares of its Preferred Stock to a purchaser that did not also purchase June 2008 Debentures. The aggregate purchase price for these shares was $250,000. These shares of Preferred Stock were otherwise issued on substantially the same terms and conditions of the Preferred Stock issued to the purchasers of the June 2008 Debentures.
NOTE 7 - DEBT
Notes Payable to Related Parties
On July 28, 2006, the Company borrowed $125,000 from an affiliate of Michael D’Amelio, a director of the Company and issued a promissory note in that amount. The note bears interest at a rate of 15% per annum and matured on August 28, 2006. At September 30, 2008, the note was in default and carried a default interest rate of 18% per annum, which amounted to $2,528 and $5,517 for the three months and $ 13,747 and $16,875 for the nine months ended September 30, 2008 and 2007, respectively. Effective through November 19, 2008, the Company obtained a waiver of default under this note from the lender. At September 30, 2008 and December 31, 2007, the outstanding loan balance was $50,000 and $125,000, respectively and accrued interest was $35,341 and $21,594, respectively.
In 2006, the Company issued various notes for $1,712,085 to parties, related to the Company through its executives and common management. The notes are collateralized by substantially all assets of Solomon. On December 31, 2006, the Company entered into an agreement with holders of these notes to extend their maturity dates until September 30, 2007. To induce the noteholders to so extend the notes, the Company agreed to issue at the noteholders’ option either shares of common stock at a rate of 10,000 shares for each $100,000 of note principal or cash equal to five percent of the principal amounts of the notes. Noteholders received 79,009 shares of common stock with a fair value of $179,363 and $48,100 in cash which were included in deferred debt costs and amortized to interest expense through September 30, 2007.
On September 28, 2007, the Company entered into an agreement with the noteholders pursuant to which the maturity date of the notes was extended to September 7, 2008. To induce the holders to so extend the notes, the Company agreed to compensate the noteholders by an amount equal to 7% of the principal balance of the notes or $119,846, which was capitalized to the principal amount of the notes, included in deferred debt costs, and amortized to interest expense through September 7, 2008. The noteholders were also offered the opportunity to buy, for $100, the right (subject to certain restrictions) to convert their notes to common stock in the future at a conversion price of $0.35 per share of common stock. The notes are subject to further extension through April 17, 2009 based on the effective date of certain future registration statements related to the Company’s convertible debentures and accrual or payment of additional extension fees. The Company has offered to compensate the noteholders by an amount equal to 5% of the original principal balance of the notes to extend the maturity date to January 16, 2009. As of November 19, 2008, the noteholders have agreed to these terms. The principal balance outstanding under the notes was $1,731,931 and $1,831,931 at September 30, 2008 and December 31, 2007, respectively, and the Company incurred interest expense (including accretion of deferred debt cost) of $78,086 and $113,107 for the three months and $248,799 and $ 361,569 for the nine months ended September 30, 2008 and 2007, respectively.
Note Payable to Related Party under Acquisition Credit Facility
On August 24, 2007, the Company entered into an agreement with JMC Venture Partners LLC (“JMC”), an affiliate of Michael A. D'Amelio, a director and officer of Solomon, pursuant to which JMC agreed to provide the Company with a line of credit, the aggregate principal amount of which may not exceed $15,000,000 that is to be used exclusively for acquisitions (the “Acquisition Credit Facility”). The line of credit was available through August 24, 2008. Any amounts loaned under the line of credit will accrue interest at a rate of 12% per annum, plus quarterly investment fees of 1% of the amounts then outstanding and one-time monitoring fees of 2.5% of the amounts advanced under the line of credit. Upon execution of the line of credit agreement, the Company incurred a 2.5% commitment fee on the full amount of the line of credit. The monitoring fees and commitment fee are each payable in shares of common stock. The number of shares issued was calculated by dividing the dollar amount of the fee by the average closing price of a share of common stock for the 10 business days preceding the date of payment. The Company agreed to register the shares for resale under the Securities Act of 1933, as amended, but has not yet done so. In the event of a default, the interest rate will increase to 18% per annum. Loans made under the line of credit will be conditioned upon the approval of the proposed acquisition by the lender's investment committee and will be subject to the lender's normal due diligence and will mature on the last day of the twelfth month after they are made. The loans will be made to acquisition subsidiaries and unconditionally guaranteed by Solomon. The line of credit is subject to ordinary documentation requirements for each closing.
At September 30, 2008, Deltron, LLC had a note payable of $2,750,000 to JMC used to finance acquisition of Deltron Inc. (Note 4). The note bears interest at 12% per annum plus a quarterly investment fee of 1%. Interest expense, including default interest of 18% and late fees, amounted to $273,737 for the three months and $603,114 for the nine months ended September 30, 2008. The note is collateralized by substantially all assets of Deltron, LLC and its subsidiary Delinc, and guaranteed by Solomon. The note matured on September 5, 2008, and has not been repaid. The loan agreement also contains certain financial covenants. JMC has waived defaults under this note through May 31, 2008 for certain covenants and through July 31, 2008 for certain other covenants. At September 30, 2008, the Company is in violation of certain covenants and is in default of this note. Although the Company does not have a formal written agreement in place, it has agreed in principal with JMC on the terms pursuant to which the loan will be restructured as part of the Company’s efforts to refinance the Revolving Note Payable. The Company believes that it will be successful in restructuring the terms of the JMC agreement. However, there can be no assurance that a formal agreement will be reached. If an agreement cannot be reached and the lender was to exercise its rights, it would have a material adverse effect on the Company.
During the first and second quarters of 2008 the Company has made the required monthly redemptions in common stock shares.
(a) Based on the September 30, 2008 market price of the Company’s common stock shares, the Company would need to issue approximately 449 million shares to redeem the entire outstanding principal balance of the convertible debentures at September 30, 2008. As of September 30, 2008, the Company had approximately 326 million shares available to be issued. Subsequent to September 30, 2008, the Company has made additional redemptions by issuing shares of common stock .
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