Item 3.02
Unregistered Sales of Equity Securities.
The
Company entered into a $310,000 private placement of convertible notes and
warrants based upon the Securities Purchase Agreement referred to in Item 1.01
above.
The
securities issued in the private placement are $310,000 of Secured Convertible
Notes (the “Notes”) and 10,000,000 seven-year Warrants (the
“Warrants”).
The Notes
bear interest at 8%, mature three years from the date of issuance, and are
convertible into the Company’s common stock at any time, at the Purchasers'
option, at 35% of the average of the three lowest intraday trading prices for
the Common Stock for the 20 trading days ending the day before the date that the
investors elect to convert. In addition, the conversion prices of
outstanding notes payable to the same or related holders in the aggregate
principal amount of approximately
$6,978,000
issued from September 2005 through December 2007 were adjusted from 40%
to 35% of the average of the three lowest intraday trading prices of the common
stock for the 20 trading days preceding the date that the holders elect to
convert.
The full
principal amount of the Notes, plus a default interest rate of 15%, is due upon
a default under the terms of the Notes. We have a right to prepay the Notes
under certain circumstances at a premium ranging from 20% to 35% depending on
the timing of such prepayment.
In
addition, the Company granted the Purchasers a security interest in
substantially all of our assets. The Company is further required to file the
Registration Statement with the Securities and Exchange Commission within 30
days of receipt of demand from the Purchasers. If the Registration Statement is
not filed on time or not declared effective within 120 days from the date of
receipt of such demand, we are required to pay to the Purchasers damages in
Common Stock or cash, at the election of the Company, in an amount equal to two
percent of the outstanding principal amount of the Notes per month plus accrued
and unpaid interest.
The
Warrants are exercisable until seven years from the date of issuance at a
purchase price of $0.01 per share. The Purchasers may exercise the Warrants on a
cashless basis if the shares of Common Stock underlying the Warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the Warrants on a cashless basis, we will not receive
any proceeds. In addition, the Warrants are subject to standard anti-dilution
provisions.
The
Purchasers have agreed to restrict their ability to convert their Notes or
exercise their Warrants and receive shares of our common stock such that the
number of shares of common stock held by them and their affiliates in the
aggregate after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of Common Stock.
The
transactions described in this Item 3.02 are exempt from registration
requirements pursuant to Section 4(2) and/or Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended.
Copies of
the Agreements related to this private placement are attached to this
Report as
Exhibits.
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