PROXY
STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
In
this proxy statement (the “Proxy Statement”), xG Technology, Inc., a Delaware corporation, is referred to as “xG,”
the “Company”, “we”, “us” and “our”.
Information
Concerning the Proxy Materials and the Special Meeting
Proxies
in the form enclosed with this Proxy Statement are being solicited by our board of directors (“Board of Directors”)
for use at our special meeting of our stockholders (the “Special Meeting”) to be held at 9:00 a.m. (Eastern Time)
on January ___, 2019, at the Company’s offices at 240 S. Pineapple Avenue, Suite 701, Sarasota, FL 34236, and at any adjournment
thereof. Your vote is very important. For this reason, our Board of Directors is requesting that you permit your common stock,
$0.00001 par value per share, of the Company (the “Common Stock”), to be represented at the Special Meeting by the
proxies named on the enclosed proxy card. This Proxy Statement contains important information for you to consider when deciding
how to vote on the matters brought before the meeting. Please read it carefully.
Voting
materials, which include this Proxy Statement and the enclosed proxy card, will be first mailed to stockholders on or about January
___, 2019.
Only
stockholders of record as of the close of business on December 14, 2018, (the “Record Date”) of our Common Stock will
be entitled to notice of, and to vote at, the Special Meeting. As of December 14, 2018, 18,700,556 shares of Common Stock were
issued and outstanding. Holders of Common Stock are entitled to one vote per share held by them. Stockholders may vote in person
or by proxy, however, granting a proxy does not in any way affect a stockholder’s right to attend the Special Meeting and
vote in person. Any stockholder giving a proxy has the right to revoke that proxy by (i) filing a later-dated proxy or a written
notice of revocation with us at our principal office at any time before the original proxy is exercised or (ii) attending the
Special Meeting and voting in person.
Roger
Branton and/or Susan Swenson are named as attorneys-in-fact in the proxy. Mr. Branton is our Chief Executive Officer and
Chief Financial Officer. Ms. Swenson is our Chairman of the Board of Directors. Mr. Branton or Ms. Swenson will vote all shares
represented by properly executed proxies returned in time to be counted at the Special Meeting, as described below under “Voting
Procedures”. Where a vote has been specified in the Proxy Statement with respect to the matters identified in the notice
of the Special Meeting, the shares represented by the proxy will be voted in accordance with those voting specifications. If no
voting instructions are indicated, your shares will be voted as recommended by our Board of Directors on all matters, and as the
proxy holders may determine in their discretion with respect to any other matters properly presented for a vote before the Special
Meeting.
Our
stockholders will consider and vote upon a proposal to approve the issuance of more than 19.99% of the Company’s outstanding
shares of common stock, par value $0.00001 per share (the “Common Stock”) in connection with (i) shares of
Common Stock issuable upon conversion of certain 6% Senior Secured Convertible Debentures, as amended and restated, as applicable
(the “May Debentures”), (ii) the exercise of certain warrants to purchase 3,000,000 shares of Common Stock (the “May
Warrants”), (iii) the exercise of certain warrants to purchase 200,000 shares of Common Stock (the (“Placement Agent
Warrants”), (v) the issuance of 302,655 shares of Common Stock, issued as compensatory shares (the “Compensatory Shares”),
and (v) shares of Common Stock issuable upon conversion of certain 10% Senior Secured Convertible Debentures (the “December
Debentures”), with all such securities described (i)-(iv) being issued in connection with a private placement completed
by the Company on May 29, 2018, and all such securities described (v), being issued in connection with a tranche of a private
placement completed by the Company on December 3, 2018. Stockholders also will consider and act upon such other business as may
properly come before the Special Meeting.
Voting
Procedures and Vote Required
Mr. Branton and/or Ms. Swenson will vote all
shares represented by properly executed proxies returned in time to be counted at the Special Meeting. The presence, in person
or by proxy, of at least a one-third (1/3) of the issued and outstanding shares of Common Stock entitled to vote at the
Special Meeting is necessary to establish a quorum for the transaction of business. Shares represented by proxies which contain
an abstention, as well as “broker non-vote” shares (described below) are counted as present for purposes of determining
the presence or absence of a quorum for the Special Meeting, but will not be counted in favor of any of the proposal in the Proxy
Statement. Accordingly, an abstention with respect to any proposal in this Proxy Statement will have the same effect as a vote
“AGAINST” such proposal.
All
properly executed proxies delivered pursuant to this solicitation and not revoked will be voted at the Special Meeting as specified
in such proxies.
Vote
Required for the issuance of more than 19.99% of outstanding shares of Common Stock upon the conversion of the May Debentures,
the exercise of the May Warrants, the exercise of the Placement Agent Warrants, the issuance of the Compensatory Shares, and the
conversion of the December Debentures (Proposal No. 1).
Our By-laws, as amended, provide that, on all matters (other
than the election of directors and except to the extent otherwise required by our Certificate of Incorporation, as amended,
or applicable Delaware law), the affirmative vote of a majority of the shares outstanding and entitled to vote on the matter
will be required for approval. Accordingly, the affirmative vote of a majority of the shares outstanding on the Record Date, in
person or by proxy, and entitled to vote on the matter will be required to approve the issuance of up more than 19.99% of the
Company’s outstanding Common Stock in connection with the conversion of the May Debentures, the exercise of the May Warrants,
the exercise of the Placement Agent Warrants, the issuance of the Compensatory Shares, and the conversion of December Debentures.
If
you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute
“broker non-votes.” Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter
without instructions from the beneficial owner and instructions are not given. Brokers that have not received voting instructions
from their clients cannot vote on their clients’ behalf on “non-routine” proposals. Broker non-votes are not
counted in tabulating the voting result for any particular proposal and shares that constitute broker non-votes are not considered
entitled to vote. The vote on all of the proposals in this Proxy Statement are considered “non-routine”.
Abstentions
are counted as “shares present” at the Special Meeting for purposes of determining the presence of a quorum but are
not counted in the calculation of the vote.
Votes
at the meeting will be tabulated by one or more inspectors of election appointed by the Company’s Chief Executive Officer.
Our
stockholders will not be entitled to dissenter’s rights with respect to any matter to be considered at the Special Meeting.
Delivery
of Documents to Security Holders Sharing an Address
We
will send only one set of Special Meeting materials and other corporate mailings to our stockholders who share a single address
unless we received contrary instructions from any stockholder at that address. This practice, known as “householding”,
is designed to reduce our printing and postage costs. However, we will deliver promptly upon written or oral request a separate
copy of the Special Meeting materials to a stockholder at a shared address to which a single copy of the Special Meeting materials
was delivered. You may make such a written or oral request by (a) sending a written notification stating (i) your name, (ii) your
shared address and (iii) the address to which we should direct the additional copy of the Special Meeting materials, to the Company’s
Secretary at 240 S. Pineapple Avenue, Suite 701, Sarasota, FL 34236, telephone: (941) 953-9035.
If
multiple stockholders sharing an address have received one copy of the Special Meeting materials or any other corporate mailing
and would prefer that we mail each stockholder a separate copy of future mailings, you may send notification to or call our principal
executive offices. Additionally, if current stockholders with a shared address received multiple copies of the Special Meeting
materials or other corporate mailings and would prefer that we mail one copy of future mailings to stockholders at the shared
address, notification of such request may also be made by mail or telephone to our principal executive offices.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of December 14, 2018, information regarding beneficial ownership of our capital stock by:
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each
person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;
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each
of our named executive officers;
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each
of our directors; and
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all
of our current executive officers and directors as a group.
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Beneficial
ownership is determined according to the rules of the U.S. Securities and Exchange Commission (the “SEC’) and generally
means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power
of that security, including options that are currently exercisable or exercisable within sixty (60) days of December 14, 2018.
Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the
table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own,
subject to community property laws where applicable.
Common
Stock subject to stock options currently exercisable or exercisable within sixty (60) days of December 14, 218, are deemed to
be outstanding for computing the percentage ownership of the person holding these options and the percentage ownership of any
group of which the holder is a member but are not deemed outstanding for computing the percentage of any other person.
Unless
otherwise indicated, the address of each beneficial owner listed in the table below is c/o xG Technology, Inc., 240 S. Pineapple
Avenue, Suite 701, Sarasota, Florida 34236.
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Name and Address of Beneficial Owner:
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Amount
and
Nature of
Beneficial
Ownership
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Percent
of Class
of
Common
Stock(1)
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5% Stockholders:
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None
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Named Executive Officers and Directors:
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George F. Schmitt(2)
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814,181
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4.34
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%
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Roger G. Branton(3)
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350,209
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1.87
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%
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John C. Coleman(4)
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223,783
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1.19
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John Payne IV(5)
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125,000
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*
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Belinda Marino(6)
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25,007
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*
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Richard L. Mooers(7)
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498,176
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2.66
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%
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Raymond M. Sidney(8)
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67,025
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*
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General James T. Conway(9)
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64,668
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*
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Susan Swenson(10)
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11,946
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*
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All Executive Officers and Directors as a Group (9 Persons):
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1,850,561
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9.74
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%
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*
Less than 1%
(1) Based on 18,700,556 shares of Common Stock
issued and outstanding as of December 14, 2018. Shares of Common Stock subject to options or warrants currently exercisable or
exercisable within sixty (60) days of December 14, 2018, are deemed outstanding for purposes of computing the percentage
of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any
other person.
(2)
Includes 598,944 shares of Common Stock and 50,520 shares of Common Stock underlying options and warrants that are presently exercisable
and held directly by Mr. Schmitt, and 162,949 shares of Common Stock and 1,768 shares of Common Stock underlying options and warrants
that are presently exercisable and beneficially owned through MB Technology Holdings, LLC (“MBTH”). Mr. Schmitt has
a direct 36.84% ownership interest in MBTH. In addition, Mr. Schmitt, through his employment agreement as Chief Executive Officer
of MBTH, has been granted an option to purchase MBTH shares sufficient to give him 5% of the equity ownership of MBTH shares,
based on MBTH’s total capitalization as of the date of execution of his employment agreement with MBTH and fully diluted
to incorporate all shares issued and amounts paid in the exercise of such options.
(3)
Includes 135,369 shares of Common Stock and 50,123 shares of Common Stock underlying options and warrants that are presently exercisable,
beneficially owned through Branton Partners, LLC, of which various family entities, including Mr. Branton’s spouse, children
and trusts for the benefit of Mr. Branton’s children, beneficially own 100%, 12 shares of Common Stock beneficially owned
through Mooers Branton and Company (“MBC”), of which Mr. Branton is a 20% owner, and 162,949 shares of Common Stock
and 1,768 shares of Common Stock underlying options and warrants that are presently exercisable, beneficially owned through MBTH.
Mr. Branton beneficially holds 20% of the issued share capital of MB Merchant Group, LLC (“MBMG”), which has a 45.85%
ownership interest in MBTH.
(4)
Includes 173,783 shares of Common Stock and 50,000 shares of Common Stock underlying options and warrants that are presently exercisable.
Includes 10 shares of Common Stock owned by Mr. Coleman’s wife.
(5)
Includes 75,000 shares of Common Stock and 50,000 shares of Common Stock underlying options and warrants that are presently exercisable.
(6)
Includes 7 shares of Common Stock and 25,000 shares of Common Stock underlying options and warrants that are presently exercisable.
(7)
Includes 308,393 shares of Common Stock and 25,066 shares of Common Stock underlying options and warrants that are presently exercisable.
Mr. Mooers’ family entities and trusts for the benefit of his and his wife’s children hold 80% of the share capital
of MBMG and MBC. MBTH owns 162,949 shares of Common Stock and 1,768 shares of Common Stock underlying options that are presently
exercisable. MBMG owns 45.85% of MBTH. MBC directly owns 12 shares of Common Stock.
(8)
Includes 42,025 shares of Common Stock and 25,000 shares of Common Stock underlying options and warrants that are presently exercisable.
(9)
Includes 39,668 shares of Common Stock and 50,000 shares of Common Stock underlying options and warrants that are presently exercisable.
(10)
Includes 11,946 shares of Common Stock..
PROPOSAL
TO AUTHORIZE THE
issuance of more than 19.99% of outstanding shares of Common Stock upon
conversion of the May Debentures, exercise of the May Warrants, Exercise of the placement agent warrants, THE ISSUANCE OF THE
COMPENSATORY SHARES, and the conversion of the december debentures
(Proposal No. 1)
Background
May
2018 Private Placement and Subsequent Amendments
Background
On
May 30, 2018, the Company completed a private placement (the “May Private Placement”) of $4 million in principal amount
of 6% Senior Secured Convertible Debentures (the “Original May Debentures”) and warrants to purchase 3,000,000 shares
of Common Stock (the “May Warrants”) to certain institutional investors (the “May Investors”).
The Original May Debentures and May Warrants were issued pursuant to a Securities Purchase Agreement, dated May 29, 2018 (the
“May Purchase Agreement”), by and among the Company and the May Investors. The May Private Placement resulted
in gross proceeds of $4 million before fees and other expenses associated with the transaction. The proceeds will be used primarily
for working capital and general corporate purposes.
Pursuant
to the terms of a Security Agreement, dated May 29, 2018 (the “May Security Agreement”), by and among the Company,
its subsidiaries, and the May Investors, the Company’s obligations under the Original May Debentures and the subsidiary
companies’ obligations under the Subsidiary Guarantee, dated May 29, 2018 (the “May Subsidiary Guarantee”),
executed by such subsidiaries, are secured by all of the assets of the Company and the subsidiary companies, including without
limitation all right, title and interest of the Company in and to all trademarks, patents and copyrights and applications and
licenses therefore and products and proceeds thereof.
Pursuant to the Registration Rights Agreement,
dated May 29, 2018 (the “May Registration Rights Agreement”), by and among the Company and the May Investors, the
Company was required within thirty (30) days of the closing date to file with the SEC a registration statement
on Form S-3 (or other applicable registration statement under the Securities Act) covering the resale of all shares of Common
Stock issuable upon conversion of the Original May Debentures. Such registration statement was filed with the SEC on Form S-1
(File No. 333-225975).
In
connection with the foregoing, the Company obtained from the May Investors Voting Agreements, dated May 29, 2018 (each, a “May
Voting Agreement”), whereby the May Investors agreed to vote all shares of Common Stock over which they have voting
control in favor of any resolution presented to the stockholders of the Company to approve the issuance, in the aggregate, of
more than 19.99% of the number of shares of Common Stock outstanding on May 29, 2018.
On October 11, 2018, the Company entered
into an agreement with a majority of the May Investors (the “Majority Investors”) to modify the Original May Debentures
by issuing amended and restated debentures (the “First Amended May Debentures”) to the Majority Investors (the “October
2018 Amendments”). In connection with the October 2018 Amendments, the Company issued to the Majority Investors an aggregate
of 302,655 shares of Common Stock as compensatory shares (the “Compensatory Shares”).
On December 3, 2018, the Company entered
into an agreement with the Majority Investors to modify the First Amended May Debentures by issuing the second amended and
restated debentures (the “Second Amended May Debentures”; and together with the Original May Debentures and the First
Amended Debentures, the “May Debentures”) to the Majority Investors.
The
May Warrants are exercisable to purchase up to an aggregate of 3,000,000 shares of Common Stock commencing on the date of issuance
at an exercise price of $1.00 per share (the “Exercise Price”). The May Warrants are exercisable immediately and will
expire on the fifth (5
th
) anniversary of their date of issuance. The Exercise Price is subject to adjustment upon stock
splits, reverse stock splits, and similar capital changes.
A.G.P./Alliance Global Partner served as the
placement agent for the Company (“AGP” or the “Placement Agent”). The Placement Agent received cash commissions
of seven percent (7%) of the aggregate subscription amount paid by the May Investors. Additionally, the Placement Agent received
warrants to purchase 200,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement Agent Warrants
are exercisable commencing on the date of issuance at an exercise price of $1.00 per share (the “Placement Agent Exercise
Price”). The Placement Agent Warrants are exercisable immediately and will expire on the fifth (5
th
) anniversary
of their date of issuance. The Placement Agent Exercise Price is subject to adjustment upon stock splits, reverse stock splits,
and similar capital changes
On May 30, 2018, we filed with the SEC a Current
Report on Form 8-K (the “First 8-K”) that described the terms of the May Private Placement, prior to the amendments
of the Original May Debentures. We filed as exhibits 10.1, 10.2, 10.3, 10,1, 10.4, 10.5, 10.6, and 10.7 to the First
8-K the forms of the May Purchase Agreement, the Original May Debentures, the May Warrants, the May Security Agreement,
the May Subsidiary Guarantee, the May Registration Rights Agreement, and the May Voting Agreements, respectively. On October 11,
2018, we filed with the SEC a Current Report on Form 8-K (the “Second 8-K”) that described the terms of the First
Amended May Debentures. We filed as Exhibit 4.1 to the Second 8-K the form of First Amended May Debentures. We refer you to the
First 8-K and the Second 8-K, and the exhibits thereto for a further description of the foregoing transactions.
Description
of the Second Amended May Debentures
The
Second Amended May Debentures contain a five percent (5%) original issue discount to the principal amounts contained therein.
Prior to the May Debentures Maturity Date (as defined below), the Second Amended May Debentures bear interest at 10% per annum,
with 12 months interest guaranteed. Interest shall be paid quarterly in cash on January 1, April 1, July 1, and October 1 beginning
on the first such date after the issuance of the Second Amended May Debentures, on each Conversion Date (as defined in the Second
Amended May Debentures), on each redemption date (as set forth in the Second Amended May Debentures), and on the May Debentures
Maturity Date (as defined below). The Second Amended May Debentures rank senior to the Company’s existing and future indebtedness
and are secured to the extent and as provided in the May Security Agreement and the May Subsidiary Guarantee.
The
Second Amended May Debentures are convertible at any time after their date of issuance at the option of the Majority Investors
into shares of Common Stock at $0.45 per share (the “May Conversion Price”). The Second Amended May Debentures mature
on September 30, 2019 (the “May Debentures Maturity Date”). Commencing on December 1, 2018, and continuing for each
fiscal month thereafter through the May Debentures Maturity Date, the Company will make payments of principal and interest as
Monthly Redemptions (as defined in the Second Amended May Debentures) to the Majority Investors in order to fully amortize the
Second Amended May Debentures. The May Conversion Price is subject to adjustment for Events of Default (as defined in the Second
Amended May Debentures) and upon stock splits, reverse stock splits, and similar capital changes.
At
any time after issuance of the Second Amended May Debentures, and subject to the certain Equity Conditions (as defined in the
Second Amended May Debentures) the Company may redeem any portion of the principal amount of the Second Amended May Debentures,
any accrued and unpaid, and any other amounts due under the Second Amended May Debentures. If the Company exercises its right
to prepay the Second Amended May Debentures, the Company will pay to the Majority Investors an amount in cash equal to the sum
of the then outstanding principal amount of the Second Amended May Debentures and guaranteed interest as follows: (i) from the
initial issuance date of the Second Amended May Debentures to the day prior to the 181-day anniversary of the issuance of the
Second Amended May Debentures, a 110% premium; and (ii) from the 181-day anniversary of the issuance of the Second Amended May
Debentures to the May Debentures Maturity Date, a 115% premium. The Majority Investors may continue to convert the Second Amended
May Debentures until the Optional Redemption Payment (as defined in the Second Amended May Debentures) is paid.
At
any time after issuance of the Second Amended May Debentures, in the event that the Company consummates a Subsequent Financing
(as defined in the Second Amended May Debentures), the Company must make a mandatory redemption in full of the Second Amended
May Debentures, in cash, to the Holders at the same premiums described with respect to the Optional Redemption (as defined in
the Second Amended May Debentures).
Until
the 60-day anniversary of the Second Amended May Debentures, the Company may not consummate a Subsequent Financing (as defined
in the Second Amended May Debentures). So long as the Second Amended May Debentures are outstanding, the Company is prohibited
from entering into any Variable Rate Transactions (as defined in the Second Amended May Debentures).
The conversion of the Second Amended May Debentures
are subject to beneficial ownership limitations such that a Majority Investor may not convert a Second Amended May Debenture
to the extent that such conversion would result in the Majority Investor being the beneficial owner in excess of 4.99%
(or, upon election of such Majority Investor, 9.99%), which beneficial ownership limitation may be increased or decreased
up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following
notice to the Company. Additionally, the Company may not issue shares of Common Stock underlying the Second Amended May Debentures
equal to more than 19.99% of the issued and outstanding shares of Common Stock as of May 29, 2018, without stockholder approval.
The
principal differences between the Original May Debentures that are still held by the May Investors who are not the Majority Investors,
and the Second Amended Debentures held by the Majority Investors are as follows:
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1.
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The
conversion price of the Original May Debentures is $1.00 per share;
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2.
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The
foregoing conversion price is not modified upon an Event of Default (as defined in the Original May Debentures), except for
the passing of the Maturity Date (as defined in the Original May Debentures);
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3.
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There
is no floor price of $0.20 contained in the Original May Debentures;
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4.
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Certain
negative covenants were added to the Second Amended Debentures;
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5.
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There
is no retroactive original issue discount contained in the Original May Debentures;
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6.
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Interest
is six percent (6%) under the Original May Debentures and is not guaranteed;
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7.
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The
Monthly Redemptions (as defined in the Original May Debentures) may only be paid in cash;
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8.
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The
commencement of the Monthly Redemptions (as defined in the Original May Debentures) is September 29, 2018;
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9.
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Certain
sections related to the other forms of redemptions were modified in the Second Amended May Debentures; and
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10.
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Certain
sections related to the equity conditions and events of default were modified in the Second Amended May Debentures.
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On
December 4, 2018, we filed with the SEC a Current Report on Form 8-K (the “Third 8-K”) that described the terms of
the Second Amended May Debentures. We filed as Exhibit 4.1 to the Third 8-K the form of Second Amended May Debentures. We refer
you to the Third 2018 Form 8-K, and the exhibit thereto for a further description of the Second Amended May Debentures.
December
2018 Private Placement
On
December 3, 2018, the Company closed a tranche of a December private placement (the “December Private Placement”)
of up to $3.5 million in principal amount of 10% Senior Secured Convertible Debentures (the “December Debentures”).
The December Debentures were issued pursuant to a Securities December Purchase Agreement, dated December 3, 2018 (the “December
Purchase Agreement”), by and among the Company and the Majority Investors. The initial closing of the December Private
Placement resulted in gross proceeds of $2 million before fees and other expenses associated with the transaction. The proceeds
will be used primarily for working capital and general corporate purposes.
The
December Debentures contain a five percent (5%) original issue discount to the principal amounts contained therein. Prior to the
December Debentures Maturity Date (as defined below), the December Debentures bear interest at 10% per annum, with 12 months interest
guaranteed. Interest shall be paid quarterly in cash on January 1, April 1, July 1, and October 1 beginning on the first such
date after the issuance of the December Debentures, on each Conversion Date (as defined in the December Debentures), on each redemption
date (as set forth in the December Debentures), and on the December Debentures Maturity Date (as defined below). The December
Debentures rank senior to the Company’s existing and future indebtedness (except with respect to the Second Amended May
Debentures) and are secured to the extent and as provided in that certain Security Agreement, dated December 3, 2018 (the “December
Security Agreement”), by and among the Company, its subsidiaries, and the Majority Investors, and that certain Subsidiary
Guarantee, dated December 3, 2018 (the “December Subsidiary Guarantee”), executed by each of the Company’s subsidiaries.
The
December Debentures are convertible at any time after their date of issuance at the option of the Majority Investors into shares
of Common Stock at $0.45 per share (the “December Conversion Price”). The December Debentures mature on September
30, 2019 (the “December Debentures Maturity Date”). Commencing on February 1, 2019, and continuing for each fiscal
month thereafter through the December Debentures Maturity Date, the Company will make payments of principal and interest as Monthly
Redemptions (as defined in the December Debentures) to the Majority Investors in order to fully amortize the December Debentures.
The December Conversion Price is subject to adjustment for Events of Default (as defined in the December Debentures) and upon
stock splits, reverse stock splits, and similar capital changes.
At
any time after issuance of the December Debentures, and subject to the certain Equity Conditions (as defined in the December Debentures)
the Company may redeem any portion of the principal amount of the December Debentures, any accrued and unpaid, and any other amounts
due under the December Debentures. If the Company exercises its right to prepay the December Debentures, the Company will pay
to the Majority Investors an amount in cash equal to the sum of the then outstanding principal amount of the December Debentures
and guaranteed interest as follows: (i) from the initial issuance date of the Debentures to the day prior to the 181-day anniversary
of the issuance of the December Debentures, a 110% premium; and (ii) from the 181-day anniversary of the issuance of the December
Debentures to the December Debentures Maturity Date, a 115% premium. The Majority Investors may continue to convert the December
Debentures until the Optional Redemption Payment (as defined in the December Debentures) is paid.
At
any time after issuance of the December Debentures, in the event that the Company consummates a Subsequent Financing (as defined
in the December Debentures), the Company must make a mandatory redemption in full of the December Debentures, in cash, to the
Holders at the same premiums described with respect to the Optional Redemption (as defined in the December Debentures).
Until
the 90-day anniversary of the December Debentures, the Company may not consummate a Subsequent Financing (as defined in the December
Debentures). So long as the December Debentures are outstanding, the Company is prohibited from entering into any Variable Rate
Transactions (as defined in the December Debentures).
The conversion of the December Debentures
are subject to beneficial ownership limitations such that a Majority Investor may not convert a December Debenture to the
extent that such conversion would result in the Majority Investor being the beneficial owner in excess of 4.99% (or, upon
election of such Majority Investor, 9.99%), which beneficial ownership limitation may be increased or decreased up to 9.99%
upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice
to the Company. Additionally, the Company may not issue (i) shares of Common Stock underlying the (a) Original May Debentures
(as applicable), (b) the May Warrants, (c) the Placement Agent Warrants, (d) the Second Amended May Debentures, (e)
the December Debentures, and (ii) the Compensatory Shares, in the aggregate, equal to more than 19.99% of the issued and outstanding
shares of Common Stock as of May 29, 2018, without stockholder approval.
Pursuant
to the terms of the December Security Agreement, the Company’s obligations under the December Debentures and the subsidiary
companies’ obligations under the December Subsidiary Guarantee, are secured by all of the assets of the Company and the
subsidiary companies, including without limitation all right, title and interest of the Company in and to all trademarks, patents
and copyrights and applications and licenses therefore and products and proceeds thereof.
Pursuant to the Registration Rights Agreement,
dated December 3, 2018 (the “December Registration Rights Agreement”), by and among the Company and the Majority Investors,
the Company was require within ten (10) days of the initial closing date to file with the SEC a registration statement
on Form S-3 (or other applicable registration statement under the Securities Act) covering the resale of all shares of Common
Stock issuable upon conversion of the December Debentures. Such registration statement was filed with the SEC on Form S-3 (File
No. 333- 333-228793).
In
connection with the foregoing, the Company obtained from the Majority Investors Voting Agreements, dated December 3, 2018 (each,
a “December Voting Agreement”), whereby the Majority Investors agree to vote all shares of Common Stock over which
they have voting control in favor of any resolution presented to the stockholders of the Company to approve the issuance, in the
aggregate, of more than 19.99% of the number of shares of Common Stock outstanding on May 29, 2018.
AGP
served as the placement agent for the Company. The Placement Agent received cash commissions of seven percent (7%) of the
aggregate subscription amount paid by the Majority Investors.
We
filed as exhibits 10.1, 4.2, 10.2, 10.3, 10.4, and 10.5, to the Third 8-K the forms of the December Purchase Agreement, the December
Debentures, the December Security Agreement, the December Subsidiary Guarantee, the December Registration Rights Agreement, and
the December Voting Agreements. We refer you to the Third 8-K and exhibits there for a further description of the December Private
Placement.
NASDAQ
Listing Rules
Because
our Common Stock is traded on the Nasdaq Capital Market (“NASDAQ”), we are subject to the NASDAQ Listing Rules, including
Rules 5635(b) and 5635(d). Pursuant to Listing Rule 5635(b), stockholder approval is required prior to the issuance of securities
when the issuance or potential issuance may result in a change of control of the issuer. Under NASDAQ rules and policies, a change
of control may be deemed to occur when, as a result of an issuance, an investor or a group would own, or have the right to acquire,
20% or more of the outstanding shares of common stock or voting power of the issuer, and such ownership or voting power would
be the largest ownership position of the issuer. Conversion of the May Debentures, exercise of the May Warrants, exercise of the
Placement Agent Warrants, issuance of the Compensatory Shares, and conversion of the December Debentures, could result in the
May Investors owning in excess of 20% of our outstanding shares of Common Stock. Pursuant to Listing Rule 5635(d), stockholder
approval is required for a transaction other than a public offering that involves the sale, issuance, or potential issuance by
a company of its common stock (or securities convertible into or exercisable for its common stock) equal to 20% or more of its
common stock, or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value
of such stock. The book value of the Company’s Common Stock is $0.57 per share.
Accordingly, to comply with NASDAQ Listing
Rules 5635(b) and 5635(d), we are seeking stockholder approval as required by Nasdaq Rule 5635(d) (as described above) to enable
the us to issue a number of shares our Common Stock in connection with the May Private Placement and December Private
Placement that exceeds 20% of the number of shares of our Common Stock that were outstanding before the May Private
Placement, which shares include the shares issuable upon conversion of the May Debentures, exercise of the May Warrants, exercise
of the Placement Agent Warrants, issuance of the Compensatory Shares, and conversion of the December Debentures, consisting of:
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a
total of 25,178,338 shares issuable upon exercise of the May Debentures;
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a
total of 3,000,000 shares issuable upon exercise of the May Warrants;
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total
of 200,000 shares issuable upon exercise of the Placement Agent Warrants;
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a
total of 302,655 Compensatory Shares; and
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a
total of 12,736,853 shares issuable upon conversion of the December Debentures.
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Additionally,
if we close on the remaining $1.5 million of December Debentures in connection with the December Private Placement, an additional
9,552,632 shares would be issuable upon conversion of such December Debentures.
Effect
of Issuance of Common Stock
The issuance of the 41,417,846 shares of Common
Stock (plus the additional 9,552,632 shares of Common Stock issuable upon conversion of December Debentures in the event that
we close on the remaining $1.5 million of December Debentures in connection with the December Private Placement) that are
the subject of this Proposal No. 1 will result in an increase in the number of shares of Common Stock outstanding, and our stockholders
will incur further dilution of their percentage ownership in the Company to the extent that the holders of the May Debentures,
the May Warrants, the Placement Agent Warrants, and the December Debentures convert or exercise their May Debentures, May
Warrants, Placement Agent Warrants, and the December Debentures, respectively.
In addition, in connection with the May Registration
Rights Agreement and December Registration Rights Agreement, we are required to register the securities issued in the May Private
Placement and December Private Placement, which includes a total of 41,217,846 shares of Common Stock, consisting of a maximum
of 25,178,338 shares of Common Stock issuable pursuant to the May Debentures, 3,000,000 shares of Common Stock that could become
issuable upon exercise of the May Warrants, 200,000 shares of Common Stock that could become issuable upon exercise of the Placement
Agent Warrants, a total of 302,655 Compensatory Shares, and 12,736,853 shares of Common Stock issuable pursuant to the December
Debentures. The release of up to 41,217,846 freely traded shares of Common Stock onto the market (plus up to an additional
9,552,632 shares of Common Stock issuable upon conversion of December Debentures in the event that we close on the remaining $1.5
million of December Debentures in connection with the December Private Placement), or the perception that such shares will
or could come onto the market, has had and could have an adverse effect on the trading price of our Common Stock.
Consequences
if Stockholder Approval is Not Obtained
If we do not obtain stockholder approval,
neither the conversion of the May Debentures and the December Debentures into Common Stock nor the exercise of May Warrants
and Placement Agent Warrants into Common Stock will be permitted, and the holders of such May Debentures, May Warrants, Placement
Agent Warrants, and the December Debentures will continue to hold such securities.
Vote
Required and Recommendation
We
are seeking your approval of this Proposal No. 1 in order to satisfy the stockholder approval requirements of NASDAQ, including
NASDAQ Listing Rules 5635(b) and 5635(d), with respect to the issuance of the Common Stock to the holders of the May Debentures,
the May Warrants, the Placement Agent Warrants, the Compensatory Shares, and the December Debentures, upon the conversion of the
May Debentures, the exercise of the May Warrants, the exercise of the Placement Agent Warrants, the issuance of the Compensatory
Shares, and the conversion of the December Debentures, which collectively represents more than 19.99% of the Company’s outstanding
Common Stock.
In
accordance with applicable NASDAQ Rules, holders of the securities that were purchased in the May Private Placement and December
Private Placement that are issuable upon conversion or exercise, as applicable, into shares of our Common Stock are not entitled
to vote such shares on Proposal No. 1.
In
connection with the May Private Placement and the December Private Placement, the Company obtained from the May Investors certain
Voting Agreements, whereby the signatories thereto agree to vote all shares of Common Stock over which they have voting control
in favor of any resolution presented to the stockholders of the Company to approve the issuance, in the aggregate, of more than
19.99% of the number of shares of Common Stock outstanding on May 29, 2018.
Our By-laws, as amended, provide that,
on all matters (other than the election of directors and except to the extent otherwise required by our Certificate of Incorporation,
as amended, or applicable Delaware law), the affirmative vote of a majority of the shares outstanding and entitled to vote
on the matter will be required for approval. Accordingly, the affirmative vote of a majority of the shares outstanding on the
Record Date, in person or by proxy, and entitled to vote on the matter will be required to approve the issuance of up more than
19.99% of the Company’s outstanding Common Stock pursuant to the terms of the May Debentures, the May Warrants, the Placement
Agent Warrants, the December Debentures, and in connection with the issuance of the Compensatory Shares.
At
the Special Meeting a vote will be taken on a proposal to approve the issuance of more than 19.99% of outstanding shares of Common
Stock (i) upon conversion of the May Debentures, (ii) upon the exercise of the May Warrants, (iii) upon the exercise of the Placement
Agent Warrants, (iv) upon the issuance of the Compensatory Shares, and (v) upon conversion of the December Debentures.
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF PROPOSAL NO. 1.