Item
1.01. Entry
into a Material Definitive Agreement.
The
information set forth under Items 3.02 of this Current Report on Form 8-K is
hereby incorporated by reference into this Item 1.01.
Item
2.03.
Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance
Sheet Arrangement of a
Registrant.
The
information set forth under Item 3.02 of this Current Report on Form 8-K is
hereby incorporated by reference into this Item 2.03.
Item
3.02.
Unregistered Sales of Equity
Securities.
As previously reported on August 22, 2008 in a
Current Report filed on Form 8-K, Commerce Energy Group, Inc. (the “Company”),
Commerce Energy, Inc. (“Commerce”) and AP Finance, LLC (the “AP Lender”) entered
into a Note and Warrant Purchase Agreement dated August 21, 2008 whereby the AP
Lender agreed to purchase from the Company one or more senior secured promissory
notes (the “Initial Purchase Agreement”). On August 22, 2008, the
Company, Commerce and AP Finance, LLC entered into the First Amendment to Note
and Warrant Purchase Agreement providing for the issuance of warrants in
connection with the issuance of the Second Note described below (the “First
Amendment to Purchase Agreement”). The Initial Purchase Agreement, as
amended by the First Amendment to Purchase Agreement, shall be referred to
herein as the Purchase Agreement.
As previously reported on August 22, 2008 in a
Current Report filed on Form 8-K, the Company and Commerce executed a Senior
Secured Convertible Promissory Note (the “Initial Note”) on August 21, 2008 in
the principal amount of $20,931,579 and as partial inducement to purchase the
Initial Note, the Company issued to the AP Lender on August 21, 2008 a warrant
(the “Initial AP Lender Warrant”) exercisable for 2,773,333 shares of the
Company’s common stock (“Common Stock”).
On August 22, 2008, the Company and Commerce
executed a second Senior Secured Convertible Promissory Note (the “Second Note”)
in the principal amount of $2,225,410.98 pursuant to the Purchase
Agreement. The Second Note matures on December 22, 2008 (the
“Maturity Date”) and bears interest, in arrears, at a rate per annum equal to
twelve percent (12%), compounded monthly, payable in cash on the Maturity
Date. On the Maturity Date, an amount equal to: (i) the
principal amount, plus (ii) 10% of the principal amount, and plus (iii) all
outstanding interest and other amounts due and owing thereunder shall be due and
payable. The Second Note is subject to acceleration upon an Event of
Default and may be prepaid at any time in an amount equal to 110% of the face
value of the Second Note plus outstanding interest. The Second Note
is immediately convertible (in whole or in part) at the option of the AP Lender
into such number of shares of the Company as determined by dividing that portion
of the outstanding principal balance plus any accrued but unpaid interest under
the Second Note as of the date the AP Lender elects to convert by $3.00 (subject
to adjustments,
e.g.,
stock splits, combinations, dividends, distributions and
reclassifications).
The Company and Commerce may repay the entire
principal amount of the Second Note at any time throughout its term at 110% of
its face value, plus all outstanding interest and all other amounts due and
owing thereunder without other penalty or premium.
The Second Note contains customary events of default
and affirmative and negative covenants for transactions of this nature,
including without limitation defaults in the performance or observance of any
covenant contained in the Purchase Agreement, covenants regarding the ongoing
operations of the business, new indebtedness, liens, compliance with laws and
regulations, financial condition and delivery of financial statements. The
Purchase Agreement contains covenants with respect to a sale of at least
$8,000,000 in assets and requires the Company to provide the AP Lender with an
executed term sheet from BNP Paribas, S.A., or another comparable lender, on or
prior to October 30, 2008 providing for a complete refinancing of the Credit
Facility, with a contemplated closing prior to December 22, 2008. The Second
Note is subject to acceleration upon an event of default and the collateral
agent may, at any time thereafter, declare the entire principal balance of the
Second Note,
together
with all interest accrued thereon, plus fees and expenses, due and payable. For
certain types of events of defaults (
e.g.,
bankruptcy cases) the outstanding principal balance and accrued interest, plus
fees and expenses, shall be automatically due and payable.
Commerce and the Company’s obligations under the
Second Note are secured by substantially all the assets of Commerce and the
Company (the “Junior Security Interest”) pursuant to a Security Agreement among
Commerce, the Company and the AP Lender dated August 21, 2008 (the “Security
Agreement”). Under the terms of an Intercreditor Agreement dated as
of August 21, 2008 (the “Intercreditor Agreement”) among the AP Lender,
Commerce, the Company and Wachovia Capital Finance Corporation (Western) (“the
Agent”), the Junior Security Interest is subordinated to the senior security
interest (the “Senior Security Interest”) Commerce and the Company granted in
favor of the Agent pursuant to an existing credit facility.
As
partial inducement to purchase the Second Note, the Company issued to the AP
Lender on August 22, 2008 a warrant exercisable for 296,721 shares of Common
Stock (the “Second AP Lender Warrant”). The Second AP Lender Warrant
has an exercise price equal to $1.15 per share (subject to adjustments,
e.g.,
stock splits, combinations, dividends, distributions and reclassifications) of
Common Stock, has a cashless exercise feature, and is exercisable at any time
through August 22, 2013. At any time commencing on February 20, 2009,
the AP Lender may require the Company to redeem the unexercised portion of the
Second AP Lender Warrant for cash at a redemption price equal to $0.30 per share
of Common Stock for which the Second AP Lender Warrant is then exercisable,
without giving effect to any adjustments (
e.g.,
stock splits, combinations and the like) occurring after August 22,
2008.
The
Second Note and the Second AP Warrant, like the Initial Note, the Initial AP
Warrant and the related previously disclosed finder and investment banker
warrants, were issued and sold in a private placement not involving any public
offering under Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”), and Rule 506 promulgated thereunder and are exempt from the
registration obligations under Section 5 of the Securities Act. The
AP Lender has represented to the Company that it is an “accredited investor” as
such term is defined in Rule 501 under the Securities Act. The
issuance of shares of Common Stock upon the conversion of the Second Note or
exercise of the warrants will be made through a private placement not involving
any public offering under Section 4(2) of the Securities Act and Rule 506
thereunder and will be exempt from the registration obligations under Section 5
of the Securities Act.
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