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Item 1.01.
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Entry into a Material Definitive Agreement.
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On May 17, 2018, pursuant to a Securities
Purchase Agreement, dated as of May 17, 2018, with Cavalry Fund I LP and several other institutional investors, we completed a
private placement of our 10% original issue discount senior secured convertible promissory notes (referred to as the convertible
notes), receiving gross and net proceeds of $972,222 and $875,000, respectively. Each convertible note was issued at a purchase
price equal to 90% of its principal amount. The convertible notes mature six months after the date of their issuance and bear
interest at 5% per annum. Investors may convert their convertible notes into shares of our common stock at any time and from time
to time on and after the maturity date at a conversion price of $0.14 per share. In the event of a default under the convertible
notes, the conversion price may be reduced to a price equal to 60% of the lowest closing price of our common stock during the
prior 20 trading days.
The convertible notes are secured obligations
of our company, and rank senior to general liabilities. The convertible notes are not redeemable. Prior to maturity, we may prepay
the convertible notes at any time in an amount equal to 110% of the outstanding principal amount for the first 90 days after the
issuance date and 120% of the outstanding principal amount from 91 to 181 days after the issuance date, upon ten trading days’
written notice to the investors. The convertible notes are identical for all of the investors except for principal amount.
The investors agreed not to convert their
convertible 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
convertible notes include:
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failure to pay principal or any liquidated damages on any convertible note when due;
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failure to perform other covenants under the note that is not cured seven 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; and
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failure to deliver common stock certificates to a holder on or prior to the second trading day after a convertible note
conversion date.
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Upon an event of default, 130% of the outstanding
principal amount of the convertible notes will become immediately due and payable to the holders of the convertible notes. Following
an event of default and so long as it is continuing, the convertible notes will bear interest at a rate of 2% per month.
The convertible notes contain
various covenants that limit our ability to:
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incur additional indebtedness, other than permitted indebtedness as defined in the convertible note;
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incur specified liens, other than permitted liens as defined in the convertible note;
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amend our articles of incorporation or by-laws in a material adverse manner to the holders; and
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repay or repurchase more than a de minimus number of shares of our common stock.
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As part of the financing, we
agreed to grant the investors a right of participation in any offering of securities or conventional debt issued by us for a period
of 18 months following the closing date, other than in connection with strategic investments and other permitted exceptions.
We also issued to the investors five-year
common stock purchase warrants to purchase up to 5,555,557 shares of our common stock at an exercise price of $0.175 per share.
The warrants may be exercised on a cashless basis at any time if the underlying shares have not been fully registered for resale
with the SEC. The warrants are not callable.
The warrants and the convertible notes each
contain a provision for a “full ratchet” anti-dilution adjustment in the event of a subsequent equity financing at
a price less than the respective warrant exercise price or convertible note conversion price.
We intend to use the net proceeds of the
private placement for our working capital and capital expenditure requirements.
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, and Rule 506(b) thereunder.
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, convertible notes and common stock purchase 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, 10.3, and 10.4, respectively, and
each of which is incorporated herein in its entirety by reference.