Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Forward-looking statements are, by their very
nature, uncertain and risky. These risks and uncertainties include
international, national and local general economic and market conditions;
demographic changes; our ability to sustain, manage, or forecast growth; our
ability to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other risks that might be detailed from time to time in our
filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Statement reflect the
good faith judgment of our management, such statements can only be based on
facts and factors currently known by them. Consequently, and because
forward-looking statements are inherently subject to risks and uncertainties,
the actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. You are urged to carefully
review and consider the various disclosures made by us in this report and in our
other reports as we attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, and results of
operations and prospects.
The following discussion and analysis of financial condition and results of
operations of the Company is based upon, and should be read in conjunction with,
its unaudited financial statements and related notes elsewhere in this Form
10-Q, which have been prepared in accordance with accounting principles
generally accepted in the United States.
Summary Overview
We are a global beverage company with expertise in developing, from inception to
completion, alcoholic beverages for ourselves and third parties. We also market
and place products into national distribution through long standing industry
relationships. We engage in "Celebrity Branding" of beverages, procuring
products from around the world and branding products with internationally
recognized celebrities.
We intend to seek, investigate and, if such investigation warrants, acquire an
interest in one or more business opportunities presented to it by persons or
firms who or which desire to seek the perceived advantages of a publicly held
corporation.
Our Products
BiVi LLC, our subsidiary, is made up of BiVi 100 percent Sicilian Vodka. BiVi
LLC's mission is to promote and support the sales endeavors of the distribution
network through targeted and national marketing endeavors and working with
celebrity partner Chazz Palminteri.
Bellissima Spirits LLC, our subsidiary, entered into a License Agreement with
Christie Brinkley, Inc. an entity owned by Christie Brinkley, to use Brinkley's
endorsement, signature, and other intellectual property owned by Bellissima
Spirits LLC. Bellissima by Christie Brinkley is a line of Organic Prosecco. The
line includes a DOC Brut, Sparkling Rose and a Zero Sugar, Zero Carb option
which are All Natural and Gluten Free with all Certified Organic and Vegan.
Each of Bivi and Bellissima have granted United Spirits, a variable interest
entity of the Company, the exclusive right to sell their products globally.
United Spirits, a variable interest entity of the Company, entered into a Brand
Licensing Agreement with HI Limited Partnership to manufacture, market,
distribute and sell a line of alcoholic products using certain "Hooters" marks
throughout North America,, Europe, Asia and Australia. Hooters brand products
include a line of premium spirits designed by the Company's management,
currently consisting of Vodka, Gin, American Whiskey, Silver and Gold Tequila
products from Mexico, and light and dark rum products from Puerto Rico, as well
as a craft Cinnamon Whiskey. United Spirits has granted us the exclusive right
to market and distribute the Hooters brand products to (a) "Hooters" branded
restaurants, (b) liquor distributors and (c) off-premise, retail establishments.
Reverse Stock Split
Effective January 18, 2019, shares of our common stock were subject to a
1-for-250 reverse stock split which reduced the issued and outstanding shares of
common stock at December 31, 2018 from 1,359,941,153 shares to 5,440,312 shares.
The discussion below and the accompanying financial statements have been
retrospectively adjusted to reflect this reverse stock split.
Going Concern
As a result of our current financial condition, we have received a report from
our independent registered public accounting firm for our financial statements
for the years ended December 31, 2018 and 2017 that includes an explanatory
paragraph describing the uncertainty as to our ability to continue as a going
concern. In order to continue as a going concern we must effectively balance
many factors and generate more revenue so that we can fund our operations from
our sales and revenues. If we are not able to do this we may not be able to
continue as an operating company. Until we are able to grow revenues sufficient
to meet our operating expenses, we must continue to raise capital by issuing
debt or through the sale of our stock. There is no assurance that our cash flow
will be adequate to satisfy our operating expenses and capital requirements.
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Results of Operations for the Three months Ended September 30, 2019 and 2018
Introduction
We had sales of $267,619 for the three months ended September 30, 2019 and
$217,139 for the three months ended September 30, 2018, an increase of $50,480.
Our operating expenses were $1,150,998 for the three months ended September 30,
2019, compared to $712,358 for the three months ended September 30, 2018, an
increase of $438,640 or approximately 62%. Our net income (loss) was
$(1,004,169) for the three months ended September 30, 2019, compared to
$(319,908) for the three months ended September 30, 2018, an increase of
$684,261 or approximately 214%.
Revenues and Net Operating Loss
Our operations for the three months ended September 30, 2019 and 2018 were as
follows:
Three months Three months
September 30, September 30,
2019 2018
Sales $ 267,619 217,139
Cost of sales 120,790 125,304
Gross profit 146,829 91,835
Operating expenses:
Officers compensation 103,750 429,588
Professional and consulting fees 147,048 76,370
Royalties 25,243 21,074
Special promotion program with customer - -
Marketing and advertising 305,222 58,724
Occupancy costs 47,312 48,070
Travel and entertainment 92,400 34,683
Other 430,023 43,849
Total operating expenses 1,150,998 712,358
Income (loss) from operations (1,004,169 ) (620,523 )
Total Other income (expense) - net - 300,615
Net Income (loss) (1,004,169 ) (319,908 )
Net loss (income) attributable to noncontrolling
interests in subsidiaries and variable interest
entity 35,846 12,494
Net income (loss) attributable to Iconic Brands,
Inc. $ (968,823 ) (307,414 )
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Sales
Our sales are comprised of sales of BiVi Sicilian Vodka, Bellissima Prosecco and
Sparkling Wine, and the line of Hooters brand products introduced in August
2019. Sales were $267,619 for the three months ended September 30, 2019 and
$217,139 for the three months ended September 30, 2018, an increase of $50,480
or approximately 23%. The increase in sales was a result of primarily due to the
August 2019 introduction of Hooters brand products.
Cost of Sales
Cost of sales was $120,790, or approximately 45% of sales, for the three months
ended September 30, 2019 and $125,304, or approximately 58% of sales, for the
three months ended September 30, 2018. Cost of sales includes the cost of the
products purchased from our suppliers, freight-in costs and import duties.
Officers Compensation
Officers compensation was $103,750 for the three months ended September 30, 2019
and $429,588 for the three months ended September 30, 2018, a decrease of
$325,838. Officers compensation in 2018 includes a catch-up accrual of $207,500
relating to employment agreements executed April 1, 2018 with our two officers.
Professional and Consulting Fees
Professional and consulting fees were $147,048 for the three months ended
September 30, 2019 and $76,370 for the three months ended September 30, 2018, an
increase of $70,678. Professional and consulting fees consist primarily of legal
and accounting and auditing services. The increase was a result of costs
associated with getting our financial statements audited, filing a registration
statement, and becoming a fully-reporting issuer.
Royalties
Royalties were $25,243, or approximately 9% of sales, for the three months ended
September 30, 2019 and $21,074 for the three months ended September 30, 2018, an
increase of $4,169. Royalties increased primarily due to increased sales in
2019.
Marketing and Advertising
Marketing and advertising expenses were $305,222 for the three months ended
September 30, 2019 and $58,724 for the three months ended September 30, 2018, an
increase of $246,498 or approximately 420%. The increase was a result of a
one-time marketing fee of $250,000 incurred in August 2019 in connection with
the Hooters sponsorship of a Nascar event.
Occupancy Costs
Occupancy costs were $47,312 for the three months ended September 30, 2019 and
$48,070 for the three months ended September 30, 2018, a decrease of $758.
Travel and Entertainment
Travel and entertainment expenses were $92,400 for the three months ended
September 30, 2019 and $34,683 for the three months ended September 30, 2018, an
increase of $57,717 or approximately 166%. The increase was a result of travel
related to new product development.
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Other Operating Expenses
Other operating expenses were $430,023 for the three months ended September 30,
2019 and $43,849 for the three months ended September 30, 2018, an increase of
$386,174 or approximately 881%. The increase was primarily related to increased
investor relations expenses.
Income (Loss) from Operations
We had a (loss) from operations of ($1,004,169) for the nine months ended
September 30, 2019 and ($620,523) for the nine months ended September 30, 2018,
an increase of $383,646 or approximately 62%. Our loss from operations
increased, as set forth above, primarily because certain operating expenses,
marketing and advertising and other operating expenses, increased.
Other Income/Expense
Total other income was $0 for the nine months ended September 30, 2019 and
$300,615 for the three months ended September 30, 2018. The decrease was
primarily due to the absence in 2019 of any derivative liability income.
Our previously outstanding convertible notes contained variable conversion
features based on the future trading price of our common stock. Therefore, the
number of shares of common stock issuable upon conversion of the notes were
indeterminate. Accordingly, we recorded the fair value of the embedded
conversion features at December 31, 2017 and September 30, 2018 as a derivative
liability. The fair value of the derivative liability dropped to zero at
December 31, 2018 after we entered into Securities Exchange Agreements with the
holders of all convertible debt. For further details, see Note 8 of our
consolidated financial statements for the years ended December 31, 2018 and
2017.
Net Income (Loss)
We had a net (loss) of ($1,004,169) for the three months ended September 30,
2019 and ($319,908) for the three months ended September 30, 2018, an increase
of $684,261 or approximately 214%. Our net loss increased, as set forth above,
primarily because certain operating expenses, primarily marketing and
advertising and other operating expenses, increased, and because of the decrease
in our derivative liability income.
Net Loss attributable to Noncontrolling Interests in Subsidiaries and Variable
Interest Entity
The net loss attributable to noncontrolling interests in subsidiaries and
variable interest entity represents 49% of the net loss of Bellissima, BiVi and
Green Grow (which we own 51%) and 100% of United Spirits (which we own 0%) and
is accounted for as a reduction in the net loss attributable to the Company.
This net loss was $35,846 for the three months ended September 30, 2019 and
$12,494 for the three months ended September 30, 2018, an increase of $23,352.
Net Loss Attributable to Iconic Brands, Inc.
The net loss attributable to Iconic Brands, Inc. was ($968,323) for the three
months ended September 30, 2019 and ($307,414) for the three months ended
September 30, 2018, an increase of $660,909 or approximately 215%. The net loss
from Iconic Brands increased primarily as a result of higher marketing and
advertising expenses ($246,498), higher other operating expenses ($386,174), and
lower other income ($300,615), offset partially by lower officers compensation
($335,838).
Results of Operations for the Nine months Ended September 30, 2019 and 2018
Introduction
We had sales of $534,826 for the nine months ended September 30, 2019 and
$422,409 for the nine months ended September 30, 2018, an increase of $112,417
or approximately 27%. Our operating expenses were $3,029,831 for the nine months
ended September 30, 2019, compared to $1,861,110 for the nine months ended
September 30, 2018, an increase of $1,168,721 or approximately 63%. Our net loss
was $2,766,036 for the nine months ended September 30, 2019, compared to
$1,494,065 for the nine months ended September 30, 2018, an increase of
$1,271,971 or approximately 85%.
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Revenues and Net Operating Loss
Our operations for the nine months ended September 30, 2019 and 2018 were as
follows:
Nine months Nine months
September 30, September 30,
2019 2018
Sales $ 534,826 $ 422,409
Cost of sales 271,031 244,556
Gross profit 263,795 177,853
Operating expenses:
Officers compensation 393,250 432,795
Professional and consulting fees 1,014,133 147,777
Royalties 178,710 (47,338 )
Special promotion program with customer - 597,138
Marketing and advertising 389,103 310,779
Occupancy costs 102,867 128,564
Travel and entertainment 236,114 143,984
Other 715,654 147,411
Total operating expenses 3,029,831 1,861,110
Income (loss) from operations (2,766,036 ) (1,683,257 )
Total other income (expense) - net - 189,192
Net Income (loss) (2,766,036 ) (1,494,065 )
Net loss (income) attributable to noncontrolling
interests in subsidiaries and variable interest
entity 435,939 451,593
Net income (loss) attributable to Iconic Brands,
Inc. $ (2,330,097 ) $ (1,042,472 )
Sales
Our sales are comprised of sales of BiVi Sicilian Vodka, Bellissima Prosecco and
Sparkling Wine and the line of Hooters products introduced in August 2019. Sales
were $534,826 for the nine months ended September 30, 2019 and $422,409 for the
nine months ended September 30, 2018, an increase of $112,417 or approximately
27%. The increase in sales was a result of higher Bellissima volume in 2019 and
Hooters brand product sales commencing in August 2019.
Cost of Sales
Cost of sales was $271,031 , or approximately 51% of sales, for the nine months
ended September 30, 2019 and $244,556, or approximately 58% of sales, for the
nine months ended September 30, 2018. Cost of sales includes the cost of the
products purchased from our suppliers, freight-in costs and import duties.
Officers Compensation
Officers compensation was $393,250 for the nine months ended September 30, 2019
and $432,795 for the nine months ended September 30, 2018, a decrease of
$39,545.
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Professional and Consulting Fees
Professional and consulting fees were $1,014,133 for the nine months ended
September 30, 2019 and $147,777 for the nine months ended September 30, 2018, an
increase of $866,356. Professional and consulting fees consist primarily of
legal and accounting and auditing services. The increase was a result of costs
associated with getting our financial statements audited, filing a registration
statement, and becoming a fully-reporting issuer.
Royalties
Royalties were $178,710, or approximately 33% of sales, for the nine months
ended September 30, 2019 and $(47,338) for the nine months ended September 30,
2018, an increase of $226,048. Royalties increased primarily due to the minimum
royalty fees relating to the Hooters agreement signed July 23, 2018 and downward
royalty adjustments in the three months ended September 30, 2018 as a result of
Bellisima special promotion program expenses incurred in the three months ended
March 31, 2018.
Special Promotion Program with Customer
For the nine months ended September 30, 2018, we incurred an expense of $597,138
in connection with a product promotion with a large customer. We did not have a
similar expense for the nine months ended September 30, 2019, and do not expect
to incur such an expense in the foreseeable future.
Marketing and Advertising
Marketing and advertising expenses were $389,103 for the nine months ended
September 30, 2019 and $310,779 for the nine months ended September 30, 2018, an
increase of $78,324 or approximately 25%. The increase was a result of the
$250,000 one-time marketing fee incurred in August 2019 in connection with the
Hooters sponsorship of a Nascar event, offset partially by lower other marketing
in 2019.
Occupancy Costs
Occupancy costs were $102,867 for the nine months ended September 30, 2019 and
$128,564 for the nine months ended September 30, 2018, a decrease of $25,697 or
approximately 20%. The decrease was a result of lower warehouse rental costs.
Travel and Entertainment
Travel and entertainment expenses were $236,114 for the nine months ended
September 30, 2019 and $143,984 for the nine months ended September 30, 2018, an
increase of $92,130 or approximately 64%. The increase was a result of travel
related to new product development.
Other Operating Expenses
Other operating expenses were $715,654 for the nine months ended September 30,
2019 and $147,411 for the nine months ended September 30, 2018, an increase of
$568,243 or approximately 385%. The increase was a result of (i) increased
investor relations expenses and (ii) higher salaries due to increased head
count.
Income (Loss) from Operations
We had a (loss) from operations of ($2,766,036) for the nine months ended
September 30, 2019 and ($1,683,257) for the nine months ended September 30,
2018, an increase of $1,082,779 or approximately 64%. Our loss from operations
increased, as set forth above, primarily because certain operating expenses,
primarily professional and consulting fees and other operating expenses,
increased.
Other Income/Expense
Total other income was $0 for the nine months ended September 30, 2019 and
$189,192 for the nine months ended September 30, 2018. The decrease was
primarily due to reductions of our derivative liability income, offset by
increases in interest and amortization costs associated with our convertible
notes.
Our previously outstanding convertible notes contained variable conversion
features based on the future trading price of our common stock. Therefore, the
number of shares of common stock issuable upon conversion of the notes were
indeterminate. Accordingly, we recorded the fair value of the embedded
conversion features at December 31, 2017 and September 30, 2018 as a derivative
liability. The fair value of the derivative liability dropped to zero at
December 31, 2018 after we entered into Securities Exchange Agreements with the
holders of all convertible debt. For further details, see Note 8 of our
consolidated financial statements for the years ended December 31, 2018 and
2017.
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Net Income (Loss)
We had a net loss of ($2,766,036) for the nine months ended September 30, 2019
and ($1,494,065) for the nine months ended September 30, 2018, an increase of
$1,271,971 or approximately 85%. Our net loss increased, as set forth above,
primarily because certain operating expenses, primarily professional and
consulting fees and other operating expenses, increased, and because of the
decrease in our derivative liability income.
Net Loss attributable to Noncontrolling Interests in Subsidiaries and Variable
Interest Entity
The net loss attributable to noncontrolling interests in subsidiaries and
variable interest entity represents 49% of the net loss of Bellissima, BiVi and
Green Grow (which we own 51%) and 100% of United Spirits (which we own 0%) and
is accounted for as a reduction in the net loss attributable to the Company.
This net loss was $435,939 for the nine months ended September 30, 2019 and
$451,593 for the nine months ended September 30, 2018, a decrease of $15,654.
Net Loss Attributable to Iconic Brands, Inc.
The net loss attributable to Iconic Brands, Inc. was ($2,330,097) for the nine
months ended September 30, 2019 and ($1,042,472) for the nine months ended
September 30, 2019, an increase of $1,287,625 or approximately 124%.
Liquidity and Capital Resources
Introduction
During the nine months ended September 30, 2019 and September 30, 2018, we had
negative operating cash flows. Our cash on hand as of September 30, 2019 was
$1,370,302, which was derived from the sale of Series F preferred stock and
warrants. Our monthly cash flow burn rate for 2018 was approximately $146,000,
and our monthly burn rate through the nine months ended September 30, 2019 was
approximately $268,000. We have strong medium to long term cash needs. We
anticipate that these needs will be satisfied through the issuance of debt or
the sale of our securities until such time as our cash flows from operations
will satisfy our cash flow needs.
Our cash, current assets, total assets, current liabilities, and total
liabilities as of September 30, 2019 and December 31, 2018, respectively, were
as follows:
September 30, December 31,
2019 2018 Change
Cash $ 1,370,302 $ 191,463 $ 1,178,839
Total Current Assets 2,570,087 563,239 2,006,848
Total Assets 4,101,904 563,239 3,538,665
Total Current Liabilities 1,981,943 1,339,566 642,377
Total Liabilities $ 1,999,488 $ 3,600,605 $ (1,601,117 )
Our cash increased $1,178,839 and total current assets increased $2,006,848. Our
total current liabilities increased $642,377 as our accounts payable and accrued
expenses increased, reflecting our increase in professional and consulting fees.
Our total liabilities decreased $1,601,117. Our stockholders' (deficiency)
equity increased from ($3,037,366) to $2,102,416 due primarily to proceeds from
the sale of preferred stock.
In order to repay our obligations in full or in part when due, we will be
required to raise significant capital from other sources. There is no assurance,
however, that we will be successful in these efforts.
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Cash Requirements
Our cash on hand as of September 30, 2019 was $1,370,302. Based on our minimal
sales and annualized monthly burn rate of approximately $268,000 per month, we
will need to raise additional funding through strategic relationships, public or
private equity or debt financings. If such funding is not available, or not
available on terms acceptable to us, our current development plans may be
curtailed.
We have funded our operations from proceeds from the sale of equity and debt
securities. We will require significant additional capital to make the
investments we need to execute our longer-term business plan. Our ability to
successfully raise sufficient funds through the sale of debt or equity
securities when needed is subject to many risks and uncertainties and, even if
we are successful, future equity issuances would result in dilution to its
existing stockholders and any future debt securities may contain covenants that
limit our operations or ability to enter into certain transactions.
Sources and Uses of Cash
Operations
We had net cash used in operating activities for the nine months ended September
30, 2019 of $(2,408,872), compared to $(1,464,959) for the nine months ended
September 30, 2018. For the nine months ended September 30, 2019, the net cash
used in operating activities consisted primarily of our net loss of $(2,330,097)
plus a net loss attributable to non-controlling interests in our subsidiaries of
$(435,939) and inventories of increase ($460,878), offset primarily by
stock-based compensation of $775,700 and accounts payable and accrued expenses
increase of $359,473. For the nine months ended September 30, 2018, the net cash
used in operating activities consisted primarily of our net loss of $(1,042,472)
plus a net loss attributable to our subsidiaries of $(451,593), income from
derivative liabilities of $(314,072) and inventories increase of ($218,042),
offset partially by an increase in accounts payables and accrued expenses of
$235,487.
Investments
Except for $15,000 leasehold improvements incurred in 2019, we had no investing
activities for the nine months ended September 30, 2019 or September 30, 2018.
Financing
Our net cash provided by financing activities for the nine months ended
September 30, 2019 was $3,602,711, compared to $362,107 for the nine months
ended September 30, 2018, which consisted principally of proceeds from the sale
of our Series F preferred stock and warrants.
July 2019 Financing
On July 18, 2019, we entered into a Securities Purchase Agreements
(collectively, the "July 2019 Purchase Agreements") with the certain accredited
investors pursuant to which we sold an aggregate of 3,125 shares of our series F
convertible preferred stock (the "Series F Convertible Preferred Stock"), plus
warrants (the "July 2019 Warrants") to acquire 5,000,000 million shares of our
common stock for gross proceeds of $3,125,000, before deducting placement agent
and other offering expenses. Each share of Series F Convertible Preferred Stock
has a stated value of $1,000 per share (the "Stated Value"), and is convertible,
at any time and from time to time at the option of the holder, into such number
of shares of Common Stock (subject to certain limitations) determined by
dividing the Stated Value by $0.625 (the "Conversion Price"), subject to
adjustment.
The Warrants are exercisable for a period of five years from the date of
issuance at an exercise price of $0.625 per share, subject to adjustment
hereunder (the "Exercise Price"); provided, however, in the event that 90% of
the lowest VWAP (as defined in the Warrant) during the three (3) Trading Days
immediately following the Effective Date (as defined in the Warrant and such
price, the "Reset Price") is less than the then Exercise Price, then the
Exercise Price shall be reduced to equal the Reset Price; provided, further, if
the initial Registration Statement is declared effective by the Commission prior
to the Liquidity Date (as defined in the Warrant) and does not register all of
the Registrable Securities (as defined in the Registration Rights Agreement) for
resale by the Holders and in the event that 90% of the lowest VWAP during the
three (3) Trading Days immediately following the Liquidity Date (the "Liquidity
Market Price") is less than the then Exercise Price, then the Exercise Price
shall be further reduced to equal to Liquidity Market Price. The Investors may
exercise the Warrants on a cashless basis if the shares of common stock
underlying the Warrants are not then registered pursuant to an effective
registration statement.
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The Conversion Price of the Series F Convertible Preferred Stock and the
exercise price of the Warrants are subject to full ratchet anti-dilution
adjustment for subsequent lower price issuances by the Company, as well as
customary adjustments provisions for stock splits, stock dividends,
recapitalizations and the like; provided, however, that in no event shall the
Conversion Price or the Exercise Price be reduced to less than $0.25 (the "Floor
Price"), subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the date of the July 2019 Purchase Agreement, provided if the
Reset Price or Liquidity Market Price is less than the Floor Price, the Exercise
Price shall equal the Floor Price. In addition, in the event that either the
Effective Date or the Liquidity Date occurs, and thereafter for any reason the
Holder is unable to sell any of the Registrable Securities (as defined in the
Registration Rights Agreement) (assuming cashless exercise of the Warrants)
pursuant to a registration statement or exemption from registration under the
Securities Act for at least 30 consecutive Trading Days without limitation, then
additional resets shall occur under the Warrant following each resumption of the
investor's ability to resell the Registrable Securities (each, a "Resumption
Date") until such time that a 30 consecutive Trading Day period is maintained
and the Exercise Price shall be adjusted to equal the lesser of (i) the then
effective Exercise Price and (ii) the greater of (A) 90% of the lowest VWAP
during the three (3) Trading Days immediately following the applicable
Resumption Date and (B) the Floor Price.
Each of the Selling Stockholders have contractually agreed to restrict their
ability to exercise the Warrants and convert the Series F Convertible Preferred
Stock such that the number of shares of the Company common stock held by each of
them and their affiliates after such conversion or exercise does not exceed
4.99% or 9.99% (at the election of the Investor) of the Company's then issued
and outstanding shares of common stock. As a result, as of the date of this
Prospectus, a Selling Stockholder cannot own more than approximately 616,458
shares after giving effect to any issuance to the Selling Stockholder. If our
total number of outstanding shares of common stock increases, or if the Selling
Stockholder subsequently disposes of shares acquired from us in the open market,
then we would be able to sell more shares to the Selling Stockholder before
reaching the 4.99% threshold.
The July 2019 Purchase Agreements also provide that until the 18 month
anniversary of the Effective Date (as defined in the July 2019 Purchase
Agreements), in the event of a subsequent financing (except for certain exempt
issuances as provided in the July 2019 Purchase Agreements) by the Company, each
Investor that invested over $200,000 pursuant to the July 2019 Purchase
Agreements will have the right to participate in such subsequent financing up to
an amount equal to the Investor's proportionate share of the subsequent
financing based on such Investor's participation in this private placement on
the same terms, conditions and price provided for in the subsequent financing.
The July 2019 Purchase Agreements also provide that for as long as the Series F
Convertible Preferred Stock or Warrants are outstanding, if the Company effects
a subsequent financing, an Investor may elect, in its sole discretion, to
exchange all or a portion of the Series F Convertible Preferred Stock then held
by such Investor for any securities issued in a subsequent financing on a $1.00
for $1.00 basis, provided such subsequent financing is not a firm commitment
underwritten offering.
From the date of the July 2019 Purchase Agreements until the date that is the
earlier of (i) six (6) months following the Effective Date (as defined in the
July 2019 Purchase Agreements) and (ii) the date that the VWAP for 10
consecutive Trading Days following the Effective Date is greater than $1.25,
subject to adjustment, the Company shall issue, enter into any agreement to
issue or announce the issuance or proposed issuance of any shares of common
stock or Common Stock Equivalents (as defined in the July 2019 Purchase
Agreements).
We also entered into separate Registration Rights Agreements with the investors,
pursuant to which the Company agreed to undertake to file a registration
statement to register the resale of the shares underlying the Series F
Convertible Preferred Stock and Warrants within thirty (30) days following the
closing date (the "Filing Date"), to cause such registration statement to be
declared effective within 60 days following the earlier of (i) the date that the
registration statement is filed with the Securities and Exchange Commission and
(ii) the Filing Date, and to maintain the effectiveness of the registration
statement until all of such shares of Common Stock have been sold or are
otherwise able to be sold pursuant to Rule 144 under the Securities Act, without
any restrictions. If we fail to file the registration statement or have it
declared effective by the dates set forth above, among other things, the Company
is obligated to pay the investors liquidated damages in the amount of 1% of
their subscription amount, per month, until such events are satisfied.
Exchange of Series E Preferred Stock; Securities Exchange Agreements
Concurrently with the closing of the financing transaction described above, we
entered into Securities Exchange Agreements with certain holders of our Series E
Convertible Preferred Stock to exchange their Series E Convertible Preferred
Stock for an aggregate of 681.25 shares of our Series F Convertible Preferred
Stock.
Off-Balance Sheet Arrangements; Commitments and Contractual Obligations
As of September 30, 2019, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments
or contractual obligations.
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