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Item 1.01.
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Entry into a Material Definitive Agreement.
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First Closing of Amortizable Promissory Note
and Warrant Private Placement
On November 3, 2017, pursuant to a Securities
Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, we completed a private placement
of our original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $3,383,325.
The investors funded net proceeds of $1,400,000 at the first closing of the private placement on November 6, 2017, and agreed
to fund the remaining net proceeds of $1,500,000 at a second closing to occur 45 to 90 days after the first closing, subject to
the satisfaction of certain closing conditions including the execution of definitive documents to effect the consummation of a
contemplated acquisition transaction. Each note was issued at a price equal to 85% of its principal amount, or $3,000,000 in aggregate
purchase price. The notes mature on July 3, 2019 (18 months after the date of their issuance) and do not bear regularly scheduled
interest.
Beginning on February 4, 2018 (90 days after
the issuance date), we are required to make monthly amortization payments, consisting of 1/18
th
of the outstanding aggregate
principal amount, until the notes are no longer outstanding. The investors may elect to receive each monthly payment in cash, or
in shares of our common stock (in-kind) if certain equity conditions are satisfied. The equity conditions require that our total
trading volume in common stock over the 30 days prior to a monthly payment be equal to or greater than ten times the amount of
shares derived in the in-kind payment price of the monthly payment. If the equity conditions are satisfied, and the investor elects
to receive a monthly payment in common stock, then the shares of common stock to be delivered will be calculated as the amount
of the monthly payment divided by the in-kind payment price. The in-kind payment price will be equal to 75% of the lowest three
trade prices of the common stock during the 20 trading days immediately preceding the monthly payment date. If an event of default
under the notes is in effect, the investors have the right to receive common stock at 65% of the lowest trade price of the common
stock during the 20 trading days immediately preceding the monthly payment date.
The notes are not redeemable or subject to voluntary
prepayment by us prior to maturity without the consent of the note holders. The notes are identical for all of the investors except
for principal amount.
The investors agreed not to convert their notes
or exercise their warrants to the extent such conversion, exercise or issuance would result in beneficial ownership of more than
4.99% of our outstanding shares at such time.
Events of default under the notes include:
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failure to pay principal or any liquidated damages on any note when due;
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failure to perform other covenants under the note that is not cured five trading days after notice by holders;
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default under the other financing documents, subject to any grace or cure period provided in the applicable agreement, document
or instrument;
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certain events of bankruptcy or insolvency of our company or any significant subsidiary;
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any default by our company or any subsidiary under any instrument in excess of $100,000 that results in such obligation
becoming due and payable prior to maturity;
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we become party to a change of control transaction, or dispose of greater than 50% of our assets;
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failure to deliver common stock certificates to a holder prior to the third trading day after a note in-kind payment date;
and
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failure to consummate our contemplated acquisition transaction by the 120
th
day following the issuance date of the
notes.
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Upon an event of default, the outstanding principal
amount of the notes, plus any late fees, shall become immediately due and payable to the holders of the notes. We are also required
upon our default under the notes to enter into a lock-box agreement with the investors pursuant to which we must wire a portion
of our gross revenues on a monthly basis into a bank account designated by the lead investor to direct the satisfaction of our
obligations under the notes as our agent and on behalf of all note holders.
As part of the private placement, under the
Securities Purchase Agreement, we covenanted not to:
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(a) issue or sell any rights, warrants or options convertible into or exchangeable or exercisable for common stock at a
price which varies with the market price of our common stock, (b) effect any sale, lease, license agreement, transfer or other
disposition of all or substantially all of our assets, (c) effect any reclassification, reorganization or recapitalization of our
common stock, or (d) complete any merger, business combination or consolidation with or of another person which would trigger a
requirement for us to file with the SEC historical audited financial statements of such person unless management is reasonably
certain that such person’s financial statements can be audited by a qualified accounting firm within 60 days following completion
of such transaction, until such time when no investor beneficially owns more than 10% of our notes issued in the private placement;
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(a) enter into any agreement creating indebtedness for borrowed money, either individually or in aggregate with other such
agreements, with obligations greater than $100,000, or (b) enter into any equipment lease, agreement evidencing purchase money
security interests or other similar transaction, individually or in aggregate with other such agreements, with obligations greater
than $250,000, for a period of one year after the issuance date of the notes without the consent of a majority in interest of the
note holders; or
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make any distributions of cash or property on equity while the notes remain outstanding without the consent of a majority in
interest of the note holders.
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The investors and their
respective affiliates have agreed as part of the private placement that they will not engage in any short sales of or hedging transaction
with respect to our common stock.
We also issued to the investors three-year
common stock purchase warrants (referred to as the warrants) to purchase up to 3,759,192 shares of our common stock at an exercise
price of $0.45 per share. The warrants may be exercised on a cashless basis at any time in the event the underlying shares have
not been fully registered for resale with the SEC. The warrants are not callable. The warrants and the notes contain a provision
for anti-dilution adjustments in the event of a subsequent equity financing at a price less than the respective warrant exercise
price or in-kind payment price.
Additionally, we issued 241,935 shares of our
common stock to the investors at the first closing as “commitment shares” in consideration for entering into the private
placement.
We intend to use the net proceeds from the first
closing of the private placement primarily for our working capital requirements, and the net proceeds from the second closing of
the private placement primarily to fund the closing of our contemplated acquisition transaction.
The financing transaction was completed through
a private placement to unaffiliated institutional accredited investors and was exempt from registration pursuant to Section 4(a)(2)
of the Securities Act of 1933, as amended.
RK Equity LLC acted as the placement
agent for the private placement. At the first closing, we paid a cash placement fee of $98,000 to RK Equity for acting in
this capacity and issued a warrant to RK Equity to purchase 217,778 shares of the Company's common stock on the same terms
given to the investors.
The securities offered in the private placement
have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. This current report shall not constitute an offer to sell
or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation
or sale would be unlawful prior to the registration or qualification under the securities laws of any such state.
The foregoing summary of each of the Securities
Purchase Agreement, the notes and the warrants is qualified in its entirety to reference to the full text of each such document,
a copy of each of which is attached hereto as Exhibits 10.1, 10.2 and 10.3, respectively, and each of which is incorporated herein
in its entirety by reference. We announced the private placement in a press release issued on November 13, 2017, a copy of which
is attached as Exhibit 99.1 hereto and is incorporated in its entirety by reference.