Item 1.01 Entry into a Material Definitive
Agreement
On February 11, 2008, Focus Enhancements, Inc., a Delaware
corporation, (the “Company”) obtained new investment in the amount of
approximately $9.3 million through the sale of additional indebtedness under
revised terms of its existing January 24, 2006 Senior Secured Convertible
Note Purchase Agreement (the “Original Agreement”). Prior Investors under the
Original Agreement and new investors amended the Original Agreement through an
“Amended and Restated Senior Secured Note Purchase Agreement” (the “Amended
Agreement”). The Amended Agreement increases the amounts outstanding under the
Original Agreement from $11.5 million (after amendments to date) to $20.8
million in new senior secured notes (“Notes”), amends the terms of the Notes so
they are no longer convertible into Company common stock, and issues to the
holders of the Notes a total of 26 million warrants under which the holders
have the right to purchase one share of the Company’s common stock for $0.80
per warrant share (“Warrant”). The Notes mature on January 1, 2011
and initially bear interest at a 12% annual rate, increasing to 15% on October 1,
2008, with payment dates on June 30 and December 30 of each year the
Notes remain outstanding. The Notes are secured by all of the assets of the
Company. The transaction closed on February 11, 2008. No placement agent fee
or commissions are payable in connection with the Amended Agreement.
Under the Amended Agreement, the Company may, in its discretion, elect
to pay interest due on June 30, 2008 and December 30, 2008 in cash or
by issuing additional Notes in the full amount of such interest payment, if
there has been no event of default. If the Company elects to make the interest
payments by issuance of additional Notes, this would result is the additional
issuance of up to approximately $2,600,000 of Note principal and approximately
3.3 million Warrants (at the same exercise price of $0.80 per share).
Under the Amended Agreement, an event of default includes, but is not
limited to, (i) default in payment of interest or principal on the Notes; (ii) default
in the payment of other Company indebtedness in excess of $1,000,000, (iii) commencement
of any proceeding under federal bankruptcy law or any similar federal or state
proceeding or an assignment for the benefit of creditors, (iv) breach by
the Company of any obligation under the Amended Agreement or other agreements
entered into between the Company and the Note purchasers pursuant to the
Amended Agreement which breach is not cured within 30 days after receipt of a
notice of default, and (v) termination of the Company’s business or the
liquidation or dissolution of the Company. Generally, upon the occurrence of an
event of default, the Notes will become immediately due and payable in full,
and the holders of the Notes will be entitled to enforce their security
interest in all of the assets of the Company.
The Amended Agreement includes various negative covenants including the
following. The Company has agreed that it will not (i) transfer a
substantial amount of its properties or assets outside the ordinary course of
business, (ii) agree to be acquired in a merger or other acquisition
transaction involving the transfer of a substantial amount of properties or
assets of the Company or (iii) incur additional debt for borrowed money,
in each case without the consent of Purchase Agent (Ingalls & Snyder
LLC) or the holders of a majority of the outstanding Note principal.
The Warrants are exercisable at the option of the holder at any time at
the initial exercise price of $0.80 per Warrant share for one share of
Company’s Common Stock subject to standard adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar
transactions. Additionally, with some exceptions, if the Company subsequently
issues equity in a transaction, the primary purpose of which is raising
capital, and the equity is issued on a common stock equivalent per share basis
at less than $0.80/share, then the Warrant exercise price shall be adjusted to
the greater of (i) the same price at which such equity was issued or (ii) $0.35
per share.
The Warrants are redeemable as follows. Beginning January 1, 2009,
if the average closing price of the Company’s common stock is above $1.30 for
30 calendar days, the Company may repurchase the
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Warrants
for one cent ($0.01) in tranches of 2.6 million Warrants every 30 days, subject
to certain other conditions, including the exercise of such Warrants by the
holders thereof prior to the repurchase date.
The Notes are redeemable, in whole or in part, at any time at the
Company’s option upon 30 days’ prior written notice to the Note holders, at a
redemption price equal to 100% of the principal amount of the Notes then
outstanding plus accrued and unpaid interest.
In connection with the transactions contemplated by the Amended
Agreement, the Company entered into, among others, the following series of
agreements: (i) an Amended and Restated Security Agreement for the benefit
of the holders of the Notes pursuant to which the Company has granted the
holders of Notes a security interest in all of the Company’s assets (the
“Security Agreement”); (ii) an Amendment No. 2 to the Intercreditor
Agreement by and among Greater Bay Venture Banking, a division of Greater Bay
Bank, N.A. (the “Bank”), Carl Berg and the Company, dated as of November 15,
2004, pursuant to which the Bank, Berg and the purchasers of the Notes have
defined their relative rights and priorities with respect to the shared
collateral, with the Bank having a first priority security interest in certain
specified collateral of the Company (the “Amendment”) and (iii) and an
Amended and Restated Intercreditor Agreement setting forth the shared interests
of the Purchasers and Mr. Berg in the collateral securing both the Notes
and his guaranty of the Company’s obligations to the Bank, subject to the
priority security interest of the Bank (the “Intercreditor Agreement”).
In connection with the issuance of the Notes, the Company has entered
into a registration rights agreement with the purchasers of the Notes (the
“Registration Rights Agreement”) pursuant to which the Company is required to
file a registration statement under the Securities Act of 1933, as amended,
covering the resale of the Common Stock issuable on the exercise of the Warrants
within 90 days after January 11, 2008. The Company will pay all expenses
incurred in connection with the registration of the Warrants and the shares of
Common Stock issuable upon the exercise thereof.
The foregoing summary of the material terms of the Amended Agreement,
Notes, Intercreditor Agreement, Amendment, Security Agreement and Registration
Rights Agreement does not describe all the terms of such documents and is
qualified in its entirety by the complete terms of such documents, as amended
subsequently from time to time. Each of the agreements is included as an
exhibit to this report and is incorporated by reference in response to this
item. Each agreement should be read in its entirety for a complete
understanding of the terms and conditions of the sale and issuance of the Notes
and the related transactions described above.
Item 2.03 Creation of a Direct Financial Obligation or
an Obligation Under an Off-balance Sheet Arrangement of Registrant
The disclosure provided in Item 1.01 of this Form 8-K is hereby
incorporated by reference with respect to the terms and sale of, and the
financial obligations created by, the Notes.
Item 3.01 Notice of Delisting or Failure to Satisfy a
Continued Listing Rule or Standard; Transfer of Listing
On February 12, 2008, the Company received a letter from The
Nasdaq Stock Market notifying Focus that the Company will be provided with an
additional 180 calendar days to regain compliance with Nasdaq Capital Market’s
$1.00 per share minimum bid price requirement. To do so, the bid price of the
Company’s common stock must close at $1.00 or more per share, for a minimum of
10 consecutive business days, before August 11, 2008.
If the Company does not
regain compliance by August 11, 2008, Nasdaq Staff will provide written
notification that the Company’s common stock will be delisted. The Company may
appeal the Nasdaq Staff’s determination at that time.
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