Item 1.01 Entry into a Material Definitive Agreement.
Securities Purchase Agreement
On February 25, 2022 (the “Effective Date”), nDivision Inc., a Nevada corporation (the “Company”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with AJB Capital Investments, LLC, a Delaware limited liability company (the “Investor”), with respect to the sale and issuance to the Investor of (i) a promissory note in the principal amount of $600,000 with an original issue discount of $60,000 for a purchase price of $540,000 (the “Note”); (ii) a common stock purchase warrant (the “Warrant”) with an exercise price of $0.40 per share (the “Exercise Price”) to purchase up to 500,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”); and (iii) a commitment fee of $150,000 (the “Initial Commitment Fee”) in the form of 1,000,000 shares of Common Stock (the “Initial Commitment Fee Shares”), and (iv) an additional commitment fee of $150,000 (the “Extension Commitment Fee” and, together with the Initial Commitment Fee, the “Commitment Fee”) in the form of 1,000,000 shares of the Common Stock to be issued upon the extension of the Note’s maturity date (the “Extension Commitment Fee Shares” and, together with the Initial Commitment Fee Shares, the “Commitment Fee Shares”). The note can be extended six months at the sole discretion of the Company.
The Company received the aggregate net cash proceeds of $527,500 from the Investor due to a $12,500 reduction in purchase price for legal fees and due diligence expenses of the Investor. The Purchase Agreement provides that the Company may use the proceeds from the sale and issuance of the Note only for working capital and other general corporate purposes. The Purchase Agreement further provides for an adjustment mechanism with respect to the Commitment Fee Shares, which allows the Investor to recuperate any shortfall amount resulting from the sale of the Commitment Fee Shares if the net proceeds from such sale do not at least equal the Commitment Fee.
The Purchase Agreement also contains representations and warranties, other covenants, and other provisions customary for transactions of this nature.
The Note, the Warrant, and the Initial Commitment Fee Shares were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
The foregoing summary is not a complete description of all of the terms of the Purchase Agreement and is qualified in its entirety by reference to the full text of the Purchase Agreement filed as Exhibit 10.1 hereto, which is incorporated by reference into this Item 1.01.
The Note
The Note matures on August 25, 2022, and provides for interest to accrue at a rate of ten percent (10%) per annum, or, upon an event of default, the lesser of (i) eighteen percent (18%) per annum, and (ii) the maximum amount permitted under law. The Note may be prepaid at any time, without penalty. The maturity date of the Note may be extended at the sole discretion of the Company up to six months following the date of the original maturity date of the Note. The Note includes customary events of default, including, among other things, payment defaults, covenant breaches, breaches of representations and warranties, certain events of bankruptcy, liquidation and suspension of the Common Stock from trading. If such an event of default occurs, the holders of the Notes may be entitled to take various actions, which may include the acceleration of amounts due under the Note and accrual of interest as described above, as well as the conversion of the Note.
Pursuant to the terms of the Note, the Investor has the right, only following an event of default, to convert all amounts outstanding under the Note into the shares of Common Stock (the “Conversion Shares”). The initial conversion price, following and during an event of default, for the principal and interest of the Note equals the lowest trading price (i) during the previous twenty (20) trading day period ending on the Note issuance date, or (ii) during the previous twenty (20) trading day period ending on date of conversion of the Note, subject to adjustment as provided in the Note.
The Note also contains certain negative covenants, including, among other things, prohibitions on incurrence of indebtedness, sales of assets, stock repurchases, and distributions. So long as the Company has any obligation under the Note, the Company may not, without the Investor’s written consent, pay or declare any dividend or other distribution on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock. The Investor may not convert the Note into an amount of shares of Common Stock that would result in the beneficial ownership by the Investor and its affiliates of greater than 4.99% of the number of shares of Common Stock outstanding.
The foregoing summary is not a complete description of all of the terms of the Note and is qualified in its entirety by reference to the full text of the Note filed as Exhibit 10.2 hereto, which is incorporated by reference into this Item 1.01.
The Warrant
Under the Warrant, the Investor is entitled to exercise the Warrant at the Exercise Price subject to certain adjustments and for a period of three (3) years after the date of the Warrant issuance. The Warrant is exercisable for shares of Common Stock upon the payment in cash of the Exercise Price. The Exercise Price is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Common Stock and also upon any distribution of assets, including cash, stock or other property to the Company’s stockholders. The Exercise Price is also subject to anti-dilution adjustment if the Company sells or grants any warrant or option to purchase Common Stock or Common Stock equivalents at a purchase price per share lower than the Exercise Price with the exception for certain exempted issuances and subject to certain limitations as provided in the Warrant.
In the event of certain fundamental transactions, the Investor is entitled to receive a number of shares of Common Stock of a successor entity or of the Company and any additional consideration. The Investor will not have the right to exercise any portion of the Warrant if the Investor would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the Warrant.
The foregoing summary is not a complete description of all of the terms of the Warrant and is qualified in its entirety by reference to the full text of the Warrant filed as Exhibit 4.1 hereto, which is incorporated by reference into this Item 1.01.
Security Agreement
On February 25, 2022, the Company entered into a Security Agreement (the “Security Agreement”) with the Investor to induce the Investor to purchase the Note. Under the Security Agreement, the Company granted to the Investor an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Note and the Purchase Agreement the other documents executed in connection with the Purchase Agreement. The Investor is also authorized to file one or more UCC financing statements with respect to the security interests on the collateral granted under the Security Agreement as may be requested or desired by the Investor.
The Security Agreement contains representations and warranties, other covenants, indemnification obligations, and other provisions customary for transactions of this nature, including, among others, maintenance of existence, maintenance of liens and security interests in the collateral in favor of the Investor, preservation of properties and insurance, compliance with laws, and notice to the Investor upon the occurrence of certain events materially affecting the value of the collaterals. The Security Agreement includes customary events of default, including, among other things, payment and obligation defaults, covenant breaches, breaches of representations and warranties, certain events of bankruptcy, adverse change in financial condition, and adverse change in value of collateral. If such an event of default occurs, subject to the applicable minimum cure period, the Investor may exercise its rights and remedies under the Security Agreement and as a secured party under the Uniform Commercial Code as in effect from time to time in the State of Nevada.
This summary is not a complete description of all of the terms of the Security Agreement and is qualified in its entirety by reference to the full text of the Security Agreement filed as Exhibit 10.3 hereto, which is incorporated by reference into this Item 1.01.