Item
1.01 Entry into a Material Definitive Agreement
On
November 29, 2007, the Registrant entered into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with certain institutional investors (the
“Investors”) pursuant to which the Registrant agreed to issue an aggregate of
$7.0 million of a three-year senior secured convertible notes, and five-year
warrants to purchase 875,000 shares, to the Investors. The convertible notes
will carry interest at 7.50% per annum on the unpaid/unconverted principal
balance, payable quarterly in cash, and will be secured on a senior basis
against all of the assets of the Registrant. The convertible notes will convert
to approximately 2,500,000 shares, based on a conversion price equal to $2.80
per share. The warrants will have an exercise price of $2.93 per
share.
The
convertible notes will be convertible at the option of the Investors prior
to
their maturity. Additionally, beginning twelve (12) months after closing, and
provided that an event of default has not occurred, the Registrant will be
able
to require the Investors to convert the convertible notes to common stock if
the
simple average of the daily volume weighted average price of the Registrant’s
common stock is 175% of the initial conversion price ($2.80), or $4.90, for
twenty (20) consecutive trading days.
The
maturity date of the convertible notes will be three years following the closing
date. The Investors will be entitled to accelerate the maturity in the event
that there occurs an event a default under the convertible notes, including,
without limitation, if the Registrant fails to register for resale the shares
underlying the convertible notes and warrants, if the Registrant fails to pay
any amount under the convertible notes when due, if a judgment is rendered
against the Registrant in an amount set forth in the convertible notes, if
the
Registrant breaches any representation or warranty under the Securities Purchase
Agreement or other transaction documents, or if the Registrant fails to comply
with the specified covenants set forth in the convertible notes. Among the
other
covenants, the convertible notes contain a financial covenant whereby the
Registrant will be required to achieve specified EBITDA (earnings before
interest, tax, depreciation and amortization) and revenue targets in each of
the
fiscal quarters during which the convertible notes are outstanding. Any failure
by the Registrant to achieve an EBITDA or revenue target in two consecutive
fiscal quarters will be considered a breach of the financial
covenant.
The
transaction is expected to close on November 30, 2007. The net proceeds of
approximately $6.4 million, after the payment of placement agent fees and
transaction expenses, will be used for strategic initiatives and general working
capital purposes.
At
the
closing of the transactions contemplated by the Securities Purchase Agreement,
the Registrant and the Investors will enter into a Registration Rights Agreement
(the “Registration Rights Agreement”), pursuant to which, among other things,
the Registrant will agree to provide registration rights with respect to the
shares of common stock underlying the convertible notes and warrants under
the
Securities Act of 1933, as amended (the “Securities Act”) and applicable state
securities laws. The Registration Rights Agreement provides that the Registrant
must register for resale 130% of the sum of (i) the aggregate number of shares
of common stock issued or issuable upon conversion of the convertible notes
as
of the trading day immediately preceding the date the registration statement
is
initially filed with the Securities and Exchange Commission (the “SEC”), and
(ii) the aggregate number of shares of common stock issued or issuable upon
exercise of the related warrants as of the trading day immediately preceding
the
date the registration statement is initially filed with the SEC. The
Registration Rights Agreement also provides that if (i) the Registrant does
not
file a registration statement on or before the date that is 30 calendar days
after the closing of the transactions contemplated by the Securities Purchase
Agreement, (ii) a registration statement is not declared effective on or prior
to a certain required effectiveness date, or (iii) after its effective date,
such registration statement ceases to remain continuously effective and
available to the Investors at any time prior to the expiration of a certain
effectiveness period, then the Registrant must pay the Investors as a result
of
the event and for each month thereafter that such event continues, an amount
in
cash as partial liquidated damages equal to 1% of the aggregate purchase price
paid by the Investors pursuant to the Securities Purchase Agreement for the
shares underlying the convertible notes and warrants then held by the
Investors.
In
connection with the transaction, VM Investors, LLC, the Registrant’s majority
shareholder (whose members include Craig Ellins, the Registrant’s Chief
Executive Officer, and Amy Black, the President of the Registrant’s subsidiary,
VMdirect LLC), will enter into a Lock-Up Letter Agreement in favor of the
Investors pursuant to which VM Investors, LLC will agree not to offer, sell,
pledge or otherwise dispose of any shares of common stock of the Registrant
until
the date that none of the convertible notes remain outstanding
,
subject
to specified limited exceptions.
Also
in
connection with the transactions contemplated by the Securities Purchase
Agreement, the Registrant will be required to pay its previously engaged
placement agents an aggregate commission in cash equal to 8% of the gross
proceeds from the sale of the convertible notes and warrants, plus a warrant
to
purchase 7% of the shares underlying the convertible notes and warrants issuable
to the Investors, at an exercise price equal to $2.93. In addition, the
Registrant agreed to pay the placement agents 1% of the gross proceeds to cover
out-of-pocket expenses incurred in connection with the transactions contemplated
by the Securities Purchase Agreement, including the actual and reasonable fees
and disbursements of the placement agents’ legal counsel. Additionally, the
Registrant agreed to reimburse the fund manager of one of the Investors for
its
out-of-pocket expenses incurred in connection with the transactions contemplated
by the Securities Purchase Agreement, including the actual and reasonable fees
and disbursements of the fund manager’s legal counsel, up to an aggregate amount
of $85,000.
The
issuance of the convertible notes and warrants, and the shares underlying the
notes and warrants, is intended to be exempt from registration under the
Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation
D
(“Regulation D”) as promulgated by the SEC under the Securities Act, as the
convertible notes and warrants, and the shares underlying the notes and
warrants, will be issued to accredited investors and were not originated through
any general solicitation or advertisement. The convertible notes and warrants,
and the shares underlying the notes and warrants, to be issued may not be
offered or sold in the United States unless they are registered under the
Securities Act, or an exemption from the registration requirements of the
Securities Act is available. No registration statement covering these securities
has been filed with the SEC or with any state securities commission in respect
of the transactions contemplated by the Securities Purchase Agreement.
The
transaction documents, including, the Securities Purchase Agreement, and a
form
of the Senior Secured Convertible Note, Warrant, Registration Rights Agreement,
Security Agreement, Pledge Agreement and Guaranty, are attached hereto as
Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, and 10.7, respectively, and
incorporated herein by reference.
On
November 30, 2007, the Registrant issued a press release announcing its entry
into the Securities Purchase Agreement, which release is furnished herewith
as
Exhibit 99.1.