| Subsequent Events |
10. SUBSEQUENT EVENTS
Promissory Note
Subsequent to September 30, 2017, in connection
with the JMJ Agreement (as defined below) with JMJ, the Company received an additional advance of $949,900 under the Promissory
Note.
JMJ Agreement
On October 23, 2017, the Company entered into
a Lockup, Conversion, and Additional Investment Agreement (the “JMJ Agreement”) with JMJ whereby the Company and JMJ
agreed to settle the current defaults under the Promissory Note, which, as of September 30, 2017 resulted in default penalties
of $12 million. Pursuant to the JMJ Agreement, the parties agreed to two different scenarios under which the defaults under the
Promissory Note would be settled, provided that (i) the Company completes its public offering by December 15, 2017, and (ii) no
additional event of default or breach occurs between the date of the JMJ Agreement and the close of the public offering. Pursuant
to the JMJ Agreement, the following options are available to the Company:
Option A
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i. |
Cash Payment - Within three (3) trading days after closing of the public offering, the Company shall pay JMJ $2 million of the Promissory Note balance in cash. |
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ii. |
Mandatory Default Amount – JMJ agrees to settle the $12 million default penalty for $1,100,000 of common stock (“Settlement Shares”). |
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iii. |
Warrants – JMJ’s warrants (with a derivative liability value of $25 million on the September 30, 2017 balance sheet) shall be exchanged for $3.5 million of common stock (“Warrant Shares”). |
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iv. |
Promissory Note Balance - The balance on the Promissory Note, after applying the $2 million Cash Payment, shall be payable in common stock (“Note Balance Shares”). |
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v. |
Lockup Fee - The Company agrees to pay a lockup fee of $250,000 payable in common stock as consideration for JMJ entering into a lockup agreement, not to exceed six months, that will be effective upon closing of the public offering (“Lockup Shares”). |
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vi. |
Defaults - The Company agrees to pay to JMJ $750,000 in common stock as fees for the numerous events of default under the Purchase Agreement, the Promissory Note and related documents (“Default Shares”). |
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vii. |
Share Delivery and Pricing - The number of Settlement Shares, Warrant Shares, Note Balance Shares, Lockup Shares, Origination Shares and Default Shares (collectively, “Investor Shares”) deliverable to JMJ, and the time of the delivery of the Investor Shares, shall be determined in accordance with the pricing formula and delivery specified in the Purchase Agreement. |
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viii. |
Investor Shares Beneficial Ownership Limitation - Unless agreed by both parties, at no time will the Company issue such shares that would result in JMJ owning more than 9.99% of all shares of common stock. |
Option B
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i. |
No Cash Payment – The Company shall not pay to JMJ any part of the Promissory Note balance in cash. |
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ii. |
Mandatory Default Amount – JMJ agrees to settle the $12 million default penalty for $2,100,000 of common stock (“Settlement Shares”). |
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iii. |
Warrants – JMJ’s warrants (with a derivative liability value of $25 million on the September 30, 2017 balance sheet) shall be exchanged for $3.5 million of common stock (“Warrant Shares”). |
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iv. |
Promissory Note Balance - The balance on the Promissory Note shall be payable in common stock (“Note Balance Shares”). |
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v. |
Lockup Fee - The Company agrees to pay a lockup fee of $250,000 payable in common stock as consideration for JMJ entering into a lockup agreement, not to exceed six months, that will be effective upon closing of the public offering (“Lockup Shares”). |
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vi. |
Defaults - The Company agrees to pay to JMJ $750,000 in common stock as fees for the numerous events of default under the Purchase Agreement, the Promissory Note and related documents (“Default Shares”). |
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vii. |
Share Delivery and Pricing - The number of Settlement Shares, Warrant Shares, Note Balance Shares, Lockup Shares, Origination Shares and Default Shares (collectively, “Investor Shares”) deliverable to JMJ, and the time of the delivery of the Investor Shares, shall be determined in accordance with the pricing formula and delivery specified in the Purchase Agreement. |
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viii. |
Investor Shares Beneficial Ownership Limitation - Unless agreed by both parties, at no time will the Company issue such shares that would result in JMJ owning more than 9.99% of all shares of common stock. |
Furthermore, at JMJ’s election at any
time prior to the closing of the public offering, the Company shall create, within five (5) business days after such election,
a series of convertible preferred stock to address the Beneficial Ownership Limitation on Investor Shares. JMJ shall have the right
to invest up to $5 million in the public offering and up to $5 million in each of the Company’s subsequent financings during
the two year period after the public offering, on the same terms as the best terms, as determined by JMJ, provided to any investor
in the public offering or in any such subsequent financing.
Pursuant to the JMJ Agreement, the Promissory
Note maturity date and was extended to December 15, 2017.
Warrant Agreement
On November 20, 2017, a warrant holder confirmed
in writing that he would not pursue a price reset of his outstanding warrants as a result of the August 29, 2017 exercise of certain
warrants that were not impacted by the Reverse Split. The Company expects that this will result in a substantial reduction of
the fair market value of derivative liabilities ($25 million on the September 30, 2017 balance sheet) in the fourth quarter of
2017.
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