Item 3.02.
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Unregistered Sales of Equity Securities.
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In accordance with the Credit Agreement and the warrant exercise prices established therein, and in connection with the Second Funding, on November 22, 2019, the Company issued to the Lenders warrants to purchase up to a total of 14,000,000 shares of the Company’s common stock (the “Warrants”), with an initial exercise price with respect to 8,000,000 of such shares of $0.242 per share and with an initial exercise price with respect to 6,000,000 of such shares of $0.620 per share (such $0.620 per share exercise price being at a premium to the market price at the time of entry into the Credit Agreement).
As previously disclosed, under the Credit Agreement, the parties agreed that the loans funded on the date of the Second Funding, together with the Warrants, shall be treated as an investment unit. The purchase price of each such investment unit shall equal the total purchase price paid by the Lenders for such loans on the date of the Second Funding, with $1,228,164 of the purchase price of the investment unit allocable to the purchase of the Warrants for U.S. federal income tax purposes.
The terms of the Warrants were previously described in the Current Report on Form 8-K filed by the Company on November 6, 2019 and are restated here for ease of reference.
The Warrants have an eight-year term from the date of issuance, are exercisable immediately beginning on the date of issuance, and include provisions permitting cashless exercises. During the term in which the Warrants are exercisable, the Company is required to reserve from its authorized and unissued common stock a sufficient number of shares to provide for the issuance of common stock upon the exercise of all of the outstanding Warrants. Furthermore, under the terms of the Warrants, the Company may not effect the exercise of any portion of a Warrant, and the holder of such Warrant shall not have the right to exercise any portion of such Warrant, to the extent that after giving effect to such exercise, such holder, collectively with its other Attribution Parties (as defined in the Warrant), would beneficially own in excess of 4.99% of the shares of the Company’s common stock outstanding immediately after giving effect to such exercise. Except as otherwise expressly provided in the Warrant, prior to the exercise of a Warrant, the holder of such Warrant will not have any of the rights of a stockholder of the Company, and will not be entitled to, among other things, vote or receive dividend payments or similar distributions on the shares of common stock purchasable upon exercise of such Warrant.
The Warrants contain customary provisions regarding adjustment to their exercise prices and the type or class of security issuable upon exercise, including, without limitation, adjustments as a result of the Company undertaking or effectuating (a) a stock dividend or dividend of other securities or property, (b) a stock split, subdivision or combination, (c) a reclassification, (d) the distribution by the Company to substantially all of the holders of its common stock (or other securities issuable upon exercise of a Warrant) of rights, options or warrants entitling such holders to subscribe for or purchase common stock (or other securities issuable upon exercise of a Warrant) at a price per share that is less than the average of the closing sales price per share of the Company’s common stock for the ten consecutive trading days ending on and including the trading day before such distribution is publicly announced, and (e) a Fundamental Transaction (as defined below) or Change of Control (as defined in the Credit Agreement), as explained further below.
If, while a Warrant or any portion thereof is outstanding and unexpired, there is (a) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for in such Warrant), (b) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company’s capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (c) a sale or transfer of the Company’s properties and assets as, or substantially as, an entirety to any other person (any such event, a “Fundamental Transaction”), then, except in the event of a Fundamental Transaction that constitutes a Change of Control, as part of such Fundamental Transaction, the successor corporation or entity must assume in writing all of the obligations of the Company under such Warrant, such that the holder of such Warrant shall thereafter be entitled to receive, upon exercise of such Warrant, the shares of stock or other securities or property of the successor corporation or entity that the holder would have been entitled to receive if such Warrant had been exercised immediately prior to such Fundamental Transaction.
Notwithstanding the foregoing, at the request of a holder of a Warrant delivered at any time during the period commencing on the earliest to occur of (A) the public disclosure of (1) any Fundamental Transaction in which the successor corporation or entity is not a publicly traded entity whose common equity or ordinary shares, as the case may be, is quoted on or listed for trading on an Eligible Board or Market (as defined in the Warrants) or (2) any Change of Control, as applicable, (B) the consummation of any such Fundamental Transaction or any Change of Control, and (C) such holder first becoming aware of any such Fundamental Transaction or any Change of Control, and ending on the date that is 90 days after the public disclosure of the consummation of such Fundamental Transaction or Change of Control, the Company or the successor corporation or entity (as the case may be) must purchase such Warrant from such holder. The price payable to a holder for a Warrant with respect to which notice is delivered in accordance with the preceding sentence is an amount equal to: (i) in the event that such payment date is on or prior to the second anniversary of the date of issuance of such Warrant, the Black Scholes Value (as defined in the Warrant) of the unexercised portion of such Warrant, or (ii) in the event that such payment date is after the second anniversary of the date of issuance of such Warrant, the difference of (x) the product of (I) the remaining amount of shares of common stock issuable upon the exercise of such Warrant, multiplied by (II) the consideration per share of common stock paid or payable to each holder of common stock in connection with such Fundamental Transaction or Change of Control, minus (y) the aggregate exercise price of such Warrant.
In addition, the Warrants provide that, if while a Warrant, or any portion thereof, remains outstanding and unexpired, common stockholders shall have received, or become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then such Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of such Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would have been entitled to as if such Warrant had been exercised (without regard to any limitations on exercise set forth therein).
In addition, the Company has granted to the holders of the Warrants certain registration rights. Specifically, the Company has agreed to use its commercially reasonable efforts to effect, as soon as practicable after issuance of the Warrants, but in no event later than March 16, 2020, the registration of resales of all shares of common stock issuable upon exercise of the Warrants on a delayed or continuous basis at then-prevailing market prices. Under the terms of the Warrants, the Company agrees to maintain the effectiveness of such registration at all times following the effective date of such registration statement until the earlier of (x) the date as of which a holder of a Warrant may sell all of the shares of common stock issuable upon the exercise of such Warrant without restriction pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and without the need for public information under Rule 144(c)(1) (or Rule 144(i)(2), if applicable) of the Securities Act and (y) the date on which the holder of such Warrant shall have sold all of the shares of common stock issuable upon exercise of such Warrant. In the event that (a) such a registration statement is not declared effective by the Securities and Exchange Commission on or before March 16, 2020, including if a final prospectus is not filed under Rule 424(b) on or prior to the fifth business day immediately following the effective date for such registration statement (an “Effectiveness Failure”), (b) on any day after the effective date of such a registration statement, sales of common stock cannot be made pursuant to such registration statement or the prospectus contained therein is not available for use for any reason (a “Maintenance Failure”), or (c) such a registration statement is not effective for any reason or the prospectus contained therein is not available for use for any reason, and either (i) the Company fails to satisfy Rule 144(c)(1), or (ii) the Company has ever been an issuer under Rule 144(i)(1)(i) or becomes such an issuer in the future, and the Company shall fail to satisfy any condition set forth in Rule 144(i)(2) (a “Current Public Information Failure”), such that a holder is unable to sell all of the shares of stock issuable upon exercise of the Warrant without restriction under Rule 144, then, as partial relief to the holder for damages caused by the delay in, or reduction of, its ability to sell all of such shares (and not exclusive of any other remedies available in equity), the Company shall pay to the holder $25,000 in cash on the date of such Effectiveness Failure, Maintenance Failure, or Current Public Information Failure, as applicable, and on every subsequent 30-day anniversary of (I) an Effectiveness Failure until such Effectiveness Failure is cured; (II) a Maintenance Failure until such Maintenance Failure is cured; and (III) a Current Public Information Failure until the earlier of (i) the date such Current Public Information Failure is cured and (ii) such time that such public information is no longer required pursuant to
Rule 144 (in each case, pro-rated for periods totaling less than 30 days). In the event that any of such payment is not timely made, such payment shall bear interest at the rate of 1.0% per month, prorated for partial months, until paid in full.
The Warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder.
The foregoing summary of the terms of the Warrants does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Warrant, a copy of which is attached as Exhibit 10.3 to this Current Report on Form 8-K and incorporated herein by reference.