Item
3.02 Unregistered Sales of Securities.
The
information set forth in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 3.02.
Securities
Purchase Agreement
Effective December 1, 2016, the Company entered
into the Purchase Agreement with the Purchaser, pursuant to which the Company sold to the Purchaser, for a cash purchase price
of $2,500,000, securities comprising: (i) the Debenture with an interest rate of 12% and an initial principal balance of $2,500,000,
due December 30, 2018 (the “
Maturity Date
”), (ii) the Series A Warrants, exercisable for five years, to acquire
up to 16,666,667 shares of Common Stock at the Series A Initial Exercise Price and expiring on December 1, 2021, and (iii)
the Series B Warrants, exercisable for five years, to acquire up to 16,666,650 shares of Common Stock at the Series B Initial
Exercise Price and expiring on December 1, 2021. Pursuant to the Purchase Agreement, the Company shall pay $25,000 to the Purchaser
and issue to the Purchaser 500,000 shares of Common Stock to cover the Purchaser’s legal fees. The closing of the transaction
occurred following the execution of the foregoing documents on December 1, 2016.
Debenture
The Debenture will accrue interest on the
aggregate unconverted and then outstanding principal amount of the Debenture at the rate of 12% per annum. Interest is payable
quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January 1, 2017, (ii) on each date the Purchaser converts,
in whole or in part, the Debenture into Common Stock (as to that principal amount then being converted), and (iii) on the
day that is 20 days following the Company’s notice to redeem some or all of the of the outstanding principal of the Debenture
(only as to that principal amount then being redeemed) and on the Maturity Date.
The Debenture is convertible into shares of
the Company’s Common Stock at any time at the option of the holder, at an initial conversion price of $0.15 per share
(as adjusted, the “
Conversion Price
”), provided, however, from and after an event of default, the Conversion
Price shall be equal to the lesser of (i) the then Conversion Price or (ii) 50% of the average of the three lowest trade prices
during the 20 Trading Days immediately prior to the applicable Conversion Date. The initial Conversion Price is subject to adjustments
in connection with, among other things, (i) the Company’s issuance of additional shares of Common Stock, or securities convertible
into or exercisable for additional shares of Common Stock, at a price lower than the then current Conversion Price, and (ii) future
stock splits, reverse stock splits, mergers or reorganizations, and similar changes affecting holders of Common Stock.
The
Debenture includes customary negative covenants, including covenants restricting the Company from incurring certain additional
indebtedness, granting security interests or liens on its assets (other than certain permitted liens), and entering into any transaction
involving the repurchase of shares of the Company’s Common Stock, except as permitted under the Debenture or the Purchase
Agreement.
Warrants
At the closing of the transaction, the Company
also issued to the Purchaser the Series A Warrants and the Series B Warrants. The Warrants may be exercised immediately upon the
issuance date, upon the option of the holder. The Warrants may be exercised, in whole or in part, at any time after the six-month
anniversary of the closing date, provided there is no effective registration statement registering, or no current prospectus
available for, the resale of the Common Stock underlying the Warrants, by means of a “cashless exercise.” The Series
A Initial Exercise Price and the Series B Initial Exercise Price are subject to adjustments in connection with (i) the Company’s
issuance of securities to acquire additional shares of Common Stock at a price lower than the then effective exercise price and
(ii) future stock splits, reverse stock splits, mergers or reorganizations, and similar changes affecting holders of Common Stock.
Other
The
Debenture and Warrants issued to Purchaser under the Purchase Agreement were not registered under the Act and were issued and
sold in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder.
The Debenture and Warrants, as well as the shares underlying the Debenture and the Warrants, may not be reoffered or sold in the
United States by the holders in the absence of an effective registration statement, or valid exemption from the registration requirements,
under the Act.
Copies of the form of the Purchase
Agreement, the form of the Debenture, the form of the Warrants, and the form of the Security Agreement are filed as exhibits to
this Current Report on Form 8-K. The summary of these agreements set forth above is qualified by reference to such exhibits.