Re: Notice of the Automatic Conversion of 12.5% Original Issue Discounts Senior Secured Debentures and Agreement to Certain Amendments to Common Stock Purchase Warrants
Exhibit 10.18
April
16, 2021
INVESTOR
ADDRESS
VIA ELECTRONIC MAIL
Re:
Notice of the Automatic Conversion
of 12.5% Original Issue Discounts Senior Secured Debentures and
Agreement to Certain Amendments to Common Stock Purchase
Warrants
NAME;
You are
being sent this letter (the “Letter Agreement”) as you
are currently the holder of $_______ 12.5% Original Issue Discount
Senior Subordinate Convertible Debentures (the
“Debentures”) issued by Xxxxxxxxx.xxx Group, Inc. (the
“Company”) and $_______ Common Stock Purchase Warrants
(the “Warrants”) entitling you to purchase in
additional _______ of common stock of the Company. Reference is
made to transaction documents entered into by and among the Company
and Xxxxxxx X. Xxxxxx pursuant to which you acquired the Debentures
and Warrants (the “Transaction Documents”). The
Transaction Documents refer to the documents entered into in
connection with the Company’s bridge offering consummated
between May and June 2020 (the “Initial Bridge Transaction
Documents”) and /or our bridge offering consummated in
January 2021 (the “Subsequent Bridge Transaction
Documents”), depending upon which (or both) offerings in
which you participated.
Our Current Financing – Potential Uplisting
As you
may be aware, the Company is currently in the process of pursuing a
public offering of its securities, including but not limited to,
its common stock, par value $0.001 per share (the “Common
Stock”), to raise up to $12,000,000, and list its securities
onto the NASDAQ (the “Offering”). The Company has filed
a registration statement on Form S-1 with the United States
Securities and Exchange Commission (the “SEC”) related
to the Offering which is being led by Xxxxxx Xxxxxx & Co. LLC
(the “Underwriter”). In connection with the Offering
and prior to its closing, the Company will be engaging in a reverse
stock split pursuant to which the number of our shares of Common
Stock issued and outstanding will be reduced proportionately based
on the reverse stock split ratio to be determined. The share and
dollar figures in this Letter Agreement are pre-split and the share
amounts actually issued will be adjusted post-split based on the
reverse stock split ratio that is ultimately agreed to by the
Underwriter and the Company. The Company believes that attaining
and maintaining the listing of our shares of Common Stock on NASDAQ
is in the best interests of our Company and its stockholders,
because if listed on NASDAQ, the Company believes that the
liquidity in the trading of its Common Stock could be significantly
enhanced, which could result in an increase in the trading price
and may encourage investor interest and improve the marketability
of our Common Stock to a broader range of investors. The Underwriter has advised the Company that in
order for it to proceed with the Offering and with the
Company’s listing of the Common Stock on NASDAQ, it requires
that certain actions be taken by holders of securities of the
Company. The Company is therefore contacting you and other
holders of Debentures and Warrants issued pursuant to the
Transaction Documents (i) to advise that the Offering, if
consummated, will trigger mandatory conversion of the Debentures
into Common Stock (or units of Common Stock and warrants to
purchase Common Stock if units are offered to the public in the
Offering), (ii) to request certain amendments to the Warrants
issued pursuant to the Transaction Documents and (iii) to request
that you agree to certain lock-up provisions with respect to the
Securities issued to you pursuant to the Transaction Documents as
contemplated in the Securities Purchase Agreement that was executed
in connection with your purchase of Debentures and
Warrants.
Please Note the Following:
Automatic Conversion of your Debentures in connection with the
Offering
As of
April 16, 2021 our records indicate that you own $_______
Debentures whose outstanding principal balance equals $_______
excluding interest owed which will be paid in cash upon
conversion.
The
closing of the Offering is currently contemplated to qualify as
Qualified Offering under the terms of the Debentures and will
trigger automatic conversion of amounts owed under the Debentures
into restricted shares of Common Stock or units of Common Stock and
warrants to purchase Common Stock if units are offered to the
public in the Offering pursuant to Section 4(e) of the Debentures
(the “Automatic Debenture Conversion”). These
securities will be issued pursuant to an exemption from
registration as promulgated by the SEC. The Automatic Debenture
Conversion shall be calculated as follows:
The
amounts owing under your Debenture shall convert to securities of
the Company by taking the outstanding principal balance of and any
unpaid accrued interest owed pursuant to the Debenture and dividing
it by the lower of (i) $1.60, and (ii) 80% of the per share price
of Common Stock in the Offering (or unit price if applicable) (the
“Qualified Offering Conversion Price”). By way of
example, if the outstanding principal balance of your Debenture is
$1,000 and the public offering price per share in the Offering is
$5.00 (in this example no warrants are issued in the Offering), the
Qualified Offering Conversion Price of your Debenture will be $1.60
per share and you will be entitled to receive $1,000 divided by
1.60 or 625 shares of Common Stock.
Upon
the triggering of the Automatic Debenture Conversion, the Company
shall send you prompt written notice (the “Automatic
Debenture Conversion Notice”) specifying the conversion price
and date upon which such conversion was effective (the
“Effective Date”) and the number and type of restricted
securities to be issued to you upon conversion. The Automatic
Debenture Conversion Notice will also contain instructions on
surrendering to the Company your Debenture; provided, however, the
Automatic Debenture Conversion shall be effective on the Effective
Date whether or not you surrender your Debenture, which shall be
null and void on the Effective Date.
Warrant Amendment
We are
requesting an amendment to certain language in the warrants that
were issued to you in connection with your Debenture purchase to
eliminate provisions that have created a warrant derivative
liability on our balance sheet, as of December 31, 2020, in the
amount of $11,537,997. This is due to the accounting treatment of
the current Black Scholes language in the warrant (creating a
potential liability upon a change in control). This $11,537,997
derivative liability reduces our shareholders equity by that same
amount. As one of the criteria to meet NASDAQ's listing
requirements is a positive shareholders equity of $5mm, we need to
eliminate this liability in our efforts to meet NASDAQ's listing
requirements.
2
By
executing and delivering this letter, you agree to the amendment of
the provisions of the Warrants as follows:
(a)
Section 3(b)(iii)
thereof is hereby amended by deleting the section entitled
“Change in Option
Price or Rate of Conversion” therein in its entirety
and replacing it with the following:
Change in Option Price or Rate of
Conversion. If any Option and/or Common Stock Equivalents
and/or Adjustment Right (as defined below) is issued in connection
with the issuance or sale or deemed issuance or sale of any other
securities of the Company (as determined by the Holder, the
“Primary Security”, and such Option and/or Common Stock
Equivalents and/or Adjustment Right (as defined below), the
“Secondary Securities”), together comprising one
integrated transaction, (or one or more transactions if such
issuances or sales or deemed issuances or sales of securities of
the Company either (A) have at least one investor or purchaser in
common, (B) are consummated in reasonable proximity to each other
and/or (C) are consummated under the same plan of financing) the
aggregate consideration per share of Common Stock with respect to
such Primary Security shall be deemed to be equal to the difference
of (x) the lowest price per share for which one Common Stock was
issued (or was deemed to be issued pursuant to Section 3(b)(i) or
3(b)(ii) above, as applicable) in such integrated transaction
solely with respect to such Primary Security, minus (y) with
respect to such Secondary Securities, the sum of (I) the fair
market value (as determined by the Holder in good faith) of such
Adjustment Right (as defined below), if any, and (II) the fair
market value (as determined by the Holder) of such Common Stock
Equivalents, if any, in each case, as determined on a per share
basis in accordance with this Section 3(b)(iv). If any shares of
Common Stock, Options or Common Stock Equivalents are issued or
sold or deemed to have been issued or sold for cash, the
consideration received therefor (for the purpose of determining the
consideration paid for such Common Stock, Option or Common Stock
Equivalents) will be deemed to be the net amount of consideration
received by the Company therefor. If any shares of Common Stock,
Options or Common Stock Equivalents are issued or sold for a
consideration other than cash, the amount of such consideration
received by the Company (for the purpose of determining the
consideration paid for such Common Stock, Option or Common Stock
Equivalents) will be the fair value of such consideration, except
where such consideration consists of publicly traded securities, in
which case the amount of consideration received by the Company for
such securities will be the arithmetic average of the VWAPs of such
security for each of the five (5) Trading Days immediately
preceding the date of receipt. If any shares of Common Stock,
Options or Common Stock Equivalents are issued to the owners of the
non-surviving entity in connection with any merger in which the
Company is the surviving entity, the amount of consideration
therefor (for the purpose of determining the consideration paid for
such shares of Common Stock, Option or Common Stock Equivalents)
will be deemed to be the fair value of such portion of the net
assets and business of the non- surviving entity as is attributable
to such shares of Common Stock, Options or Common Stock Equivalents
(as the case may be). The fair value of any consideration other
than cash or publicly traded securities will be determined jointly
by the Company and the Holder. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair
value of such consideration will be determined within five (5)
Trading Days after the tenth (10th) day following such Valuation
Event by an independent, reputable appraiser jointly selected by
the Company and the Holder. The determination of such appraiser
shall be final and binding upon all parties absent manifest error
and the fees and expenses of such appraiser shall be borne by the
Company). “Adjustment Right” means any right granted
with respect to any securities issued in connection with, or with
respect to, any issuance or sale (or deemed issuance or sale
hereunder) of Common Stock (other than rights of the type described
in Sections 3(c) and 3(d) hereof) that could result in a decrease
in the net consideration received by the Company in connection
with, or with respect to, such securities (including, without
limitation, any cash settlement rights, cash adjustment or other
similar rights).
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(b)
Section 3(e)
thereof is hereby amended by deleting in its entirety the following
portion of Section 3(e):
Notwithstanding
anything to the contrary, in the event of a Fundamental
Transaction, the Company or any Successor Entity (as defined below)
shall, at the Holder’s option, exercisable at any time
concurrently with, or within 30 days after, the consummation of the
Fundamental Transaction (or, if later, the date of the public
announcement of the applicable Fundamental Transaction), purchase
this Warrant from the Holder by paying to the Holder an amount of
cash equal to the Black Scholes Value (as defined below) of the
remaining unexercised portion of this Warrant on the date of the
consummation of such Fundamental Transaction. “Black Scholes
Value” means the value of this Warrant based on the
Black-Scholes Option Pricing Model obtained from the
“OV” function on Bloomberg, L.P.
(“Bloomberg”) determined as of the day of consummation
of the applicable Fundamental Transaction for pricing purposes and
reflecting (A) a risk-free interest rate corresponding to the U.S.
Treasury rate for a period equal to the time between the date of
the public announcement of the applicable Fundamental Transaction
and the Termination Date, (B) an expected volatility equal to the
greater of 100% and the 100 day volatility obtained from the HVT
function on Bloomberg as of the Trading Day immediately following
the public announcement of the applicable Fundamental Transaction,
(C) the underlying price per share used in such calculation shall
be the greater of (i) the sum of the price per share being offered
in cash, if any, plus the value of any noncash consideration, if
any, being offered in such Fundamental Transaction and (ii) the
greater of (x) the last VWAP immediately prior to the public
announcement of such Fundamental Transaction and (y) the last VWAP
immediately prior to the consummation of such Fundamental
Transaction and (D) a remaining option time equal to the time
between the date of the public announcement of the applicable
Fundamental Transaction and the Termination Date. The payment of
the Black Scholes Value will be made by wire transfer of
immediately available funds within five Business Days of the
Holder’s election (or, if later, on the effective date of the
Fundamental Transaction).
By your
agreement and acknowledgment below, this Letter Agreement shall
serve as written confirmation that you acknowledge and agree that
the terms of the Warrants have been amended as set forth above on
the date of your agreement and acknowledgment below.
Lock Up Agreement
As
contemplated in Section 4.19 of the Securities Purchase Agreement
you executed in connection with your Debenture and Warrant
purchase, you covenanted and agreed to enter into a standard
lock-up agreement, solely with respect to the Securities (as
defined in the Securities Purchase Agreement), that shall provide
that for a period beginning on the closing date of a Qualified
Offering (which the contemplated Offering will so qualify) and
ending on the six (6) month anniversary of such closing date, you
shall not sell into the market pursuant to Rule 144 or pursuant to
a then effective registration statement any of the
Securities.
Accordingly,
by your agreement and acknowledgment below, this Letter Agreement
shall serve as written confirmation that you acknowledge and agree
to the below lock up provisions as set forth below as of the date
of your agreement and acknowledgment below.
4
You
agree to the following lock-up conditions to take effect upon the
Effective Date of the Qualified Offering:
a.
That for a period
of 180 days beginning on the Effective Date of the Qualified
Offering (the “Lock-Up Period”), you will not, without
the prior written consent of the Underwriter, (1) offer, pledge,
sell, contract to sell, grant, lend, or otherwise transfer or
dispose of, directly or indirectly, any shares of the Common Stock
(the “Shares”) or any securities convertible into or
exercisable or exchangeable for Shares, whether now owned or
hereafter acquired by you or with respect to which you have or
hereafter acquire the power of disposition (collectively, the
“Lock-Up Securities”); (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Lock-Up Securities,
whether any such transaction described in clause (1) above or this
clause (2) is to be settled by delivery of Lock-Up Securities, in
cash or otherwise; (3) make any demand for or exercise any right
with respect to the registration of any Lock-Up Securities; or (4)
publicly disclose the intention to make any offer, sale, pledge or
disposition, or to enter into any transaction, swap, hedge or other
arrangement relating to any Lock-Up Securities. Notwithstanding the
foregoing, and subject to the conditions below, you may transfer
Lock-Up Securities without the prior written consent of the
Underwriter in connection with (a) transactions relating to Lock-Up
Securities acquired in open market transactions after the
completion of the Offering; provided that no filing under Section
16(a) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), shall be required or shall be
voluntarily made in connection with subsequent sales of Lock-Up
Securities acquired in such open market transactions; (b) transfers
of Lock-Up Securities as a bona fide gift, by will or intestacy or
to a family member or trust for the benefit of a family member (for
purposes of this Letter Agreement, “family member”
means any relationship by blood, marriage or adoption, not more
remote than first cousin); (c) transfers of Lock-Up Securities to a
charity or educational institution; or (d) if you, directly or
indirectly, control a corporation, partnership, limited liability
company or other business entity, any transfers of Lock-Up
Securities to any shareholder, partner or member of, or owner of
similar equity interests in such entity, as the case may be;
provided that in the case of any transfer pursuant to the foregoing
clauses (b), (c) or (d), (i) any such transfer shall not involve a
disposition for value, (ii) each transferee shall sign and deliver
to the Underwriter a lock up agreement substantially in the form of
the lock-up provisions of this Letter Agreement and (iii) no filing
under Section 16(a) of the Exchange Act shall be required or shall
be voluntarily made. You also agree and consent to the entry of
stop transfer instructions with the Company’s transfer agent
and registrar against the transfer of your Lock-Up Securities
except in compliance with the lock-up provisions of this Letter
Agreement.
b.
No portion of the
lock-up provisions of this Letter Agreement shall be deemed to
restrict or prohibit the exercise, exchange or conversion by you of
any securities exercisable or exchangeable for or convertible into
the Shares, as applicable; provided that you do not transfer the
Shares acquired on such exercise, exchange or conversion during the
Lock-Up Period, unless otherwise permitted pursuant to the terms of
the lock-up provisions of this Letter Agreement. In addition, no
provision herein shall be deemed to restrict or prohibit the entry
into or modification of a so-called “10b5-1” plan at
any time (other than the entry into or modification of such a plan
in such a manner as to cause the sale of any Lock-Up Securities
within the Lock-Up Period).
c.
You understand that
the lock-up provisions of this Letter Agreement are irrevocable and
shall be binding upon your heirs, legal representatives, successors
and assigns.
By
signing below, this Letter Agreement shall serve as written
confirmation that you have reviewed this Letter Agreement (and
consulted with your legal and tax advisors to the extent you deemed
necessary) and agree to the amendments to the Warrants and the lock
up provisions hereto. Upon the Effective Date in respect of the
Automatic Debenture Conversion, you understand that the Company and
its affiliates will be released and discharged from any and all
obligations and duties that such persons may have to you with
respect to the Debenture. Notwithstanding anything contained
herein, in the event the Offering is not consummated on or before
June 30, 2021, this Letter Agreement will terminate and the
Automatic Debenture Conversion shall not take place in connection
with the Offering For the avoidance of doubt, the Warrant
amendments shall remain in place even if the Offering is not
consummated on or before June 30, 2021.
5
This
Letter Agreement contains the entire understanding between and
among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Letter
Agreement. In addition, you hereby represent that you meet the
requirements of at least one of the suitability standards for an
“accredited investor” as that term is defined in
Regulation D promulgated under the 1933 Act and that you have had
the opportunity to obtain any additional information, to the extent
the Company has such information in its possession or could acquire
it without unreasonable effort or expense, necessary in connection
with the matters set forth in this Letter Agreement including,
without limitation, information concerning the financial condition,
results of operations, capitalization and business of the Company
deemed relevant by you or your advisors, if any, and all such
requested information, to the extent the Company had such
information in its possession or could acquire it without
unreasonable effort or expense, has been provided to your full
satisfaction. This Letter Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada
without regard to choice of law principles. This Letter Agreement
may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one
and the same instrument. Counterparts may be delivered via
facsimile, electronic mail (including .pdf or any electronic
signature complying with the U.S. federal ESIGN Act of 2000, for
example, xxx.xxxxxxxx.xxx) or other transmission method and any
counterpart so delivered shall be deemed to have been duly and
validly delivered and be valid and effective for all purposes. In
case any provision of this Letter Agreement shall be held to be
invalid, illegal or unenforceable, such provision shall be
severable from the rest of this Letter Agreement, and the validity
legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
This
letter evidences waiver by the undersigned with respect to any and
all defaults or events of default by the Company with respect to
any failure by the Company to comply with any covenants contained
in the Transaction Documents.
The
parties hereby consent and agree that if this Letter Agreement
shall at any time be deemed by the parties for any reason
insufficient, in whole or in part, to carry out the true intent and
spirit hereof or thereof, the parties will execute or cause to be
executed such other and further assurances and documents as in the
reasonable opinion of the parties may be reasonably required in
order more effectively to accomplish the purposes of this Letter
Agreement.
***REMAINDER
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Please
indicate confirmation of the terms provided herein by executing and
returning this letter in the space provided below.
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Very
truly yours,
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XXXXXXXXX.XXX GROUP, INC.
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By:
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Name:
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Xxxx X.
Xxxx
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Title:
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CEO
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Date:
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April
16, 2021
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ACCEPTED AND AGREED:
INVESTOR
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Name:
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Title:
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Date:
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