<![CDATA[ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
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On September 26, 2006, XA, Inc. (the "Company," "we," and "us") entered into
Securities Purchase Agreements with G. Chris Andersen and Paul M. Higbee, two
individuals ("Andersen" and "Higbee"). Pursuant to the Securities Purchase
Agreements, we sold each of Andersen and Higbee $100,000 in fifteen month, 11%
Senior Subordinated Secured Convertible Promissory Notes (the "Andersen and
Higbee Notes"), and granted each of them fifteen thousand (15,000) five year
warrants to purchase shares of our common stock at an exercise price of $1.10
per share (the "Andersen and Higbee Warrants").
On October 23, 2006, we entered into a Securities Purchase Agreement with Vision
Opportunity Master Fund, Ltd. ("Vision" and collectively with Andersen and
Higbee, the "Purchasers," with each individually referred to herein as a
"Purchaser"). Pursuant to the Securities Purchase Agreement with Vision
(collectively with the Andersen and Higbee Securities Purchase Agreements, the
"Purchase Agreements"), we sold Vision $1,250,000 in fifteen month, 11% Senior
Subordinated Secured Convertible Promissory Notes (the "Vision Notes," and
collectively with the Andersen and Higbee Notes, the "Notes" or the "Senior
Notes") and granted Vision one hundred thousand (100,000) five year warrants to
purchase shares of our common stock at $0.30 per share, and one hundred and
eighty seven thousand five hundred (187,500) five year warrants to purchase
shares of our common stock at an exercise price of $1.10 per share (collectively
the "Vision Warrants" and with the Andersen and Higbee Warrants, the "Purchasers
Warrants").
The sale of the Senior Notes closed our fund raising activities which we began
in August 2006, in connection with the sale of $1,250,000 in fifteen month 11%
Senior Subordinated Secured Convertible Promissory Notes to five entities (the
"August 2006 Notes" and the "August 2006 Purchasers") to repay monies previously
owed under our June and September 2004 6% Convertible Promissory Notes (the "6%
Notes"), as described in greater detail below.
Although as originally executed, the Higbee and Andersen Notes had similar
provisions to the August 2006 Notes (which did not have an Optional Conversion
Right as defined and described below, among other less material differences not
discussed herein), we later agreed to conform both the Higbee and Andersen
closing documents to the Vision Notes and documents described herein and may
conform the closing documents for the August 2006 Notes in the future. As such,
the Higbee Notes and the Andersen Notes have substantially similar terms as
those described below (other than the dates contained therein and the amount of
each Purchaser's investment).
Our repayment of the Notes and any accrued interest thereon is secured by a
security interest in substantially all of our assets, which we granted to the
Purchasers pursuant to Security Agreements entered into with each of the
Purchasers (the "Security Agreement"). The security interest granted to the
Purchasers pursuant to the Security Agreement, gives such Purchasers a first
priority security interest in substantially all of our assets, which security
interest is shared pari passu with the August 2006 Purchasers, and is subject
only to the first priority security interest of LaSalle Bank National
Association ("LaSalle"), whom we currently owe $800,000 pursuant to a revolving
line of credit. The sale of the Senior Notes to the Purchasers was waived by
LaSalle, in connection with each Purchaser executing a Subordination Agreement
with LaSalle, whereby they subordinated their first priority security interest
which they were granted pursuant to the Security Agreement to secure the
repayment of the Senior Notes, to LaSalle, to secure LaSalle's repayment of the
revolving line of credit.
We also granted the Purchasers registration rights in connection with the shares
of common stock issuable in connection with the conversion of the Senior Notes
and the exercise of the Purchasers Warrants (collectively the "Underlying
Shares"), pursuant to our entry into Registration Rights Agreements with each of
the Purchasers (the "Registration Rights Agreements").
Additionally, pursuant to the Purchase Agreements, we agreed to grant the
Purchasers the right to appoint one Director to our Board of Directors (or a
Board Advisory Seat to observe at all board meetings), which right shall be
shared with the August 2006 Purchasers.
SENIOR NOTES
The $1,450,000 in Senior Notes bear interest at the rate of 11% per annum until
paid, and have a maturity date of the earlier of one (1) year from the sale of
such Senior Notes (September 26, 2007 in connection with the Andersen and Higbee
Notes and October 23, 2007 in connection with the Vision Note) or upon the
consummation by us of a merger, combination or sale of substantially all of our
assets or the purchase by a single entity or person or group of affiliated
entities or persons of more than fifty (50%) percent of our voting stock, of
which there are no current plans, and/or within ten (10) days of the Purchasers
failure to exercise their Optional Conversion Right, as defined below. Interest
on the Senior Notes is payable upon maturity, repayment or upon conversion of
the Senior Notes into shares of our common stock as described below. The Senior
Notes may not be prepaid prior to their maturity date. Any amount not paid under
the Senior Notes when due will bear interest at the rate of eighteen percent
(18%) per annum until paid in full (the "Default Interest").
The Senior Notes are secured by the Security Agreement, which we entered into
with the Purchasers at the closings, pursuant to which we granted the Purchasers
a security interest in substantially all of our assets.
Pursuant to the Senior Notes, we agreed that we would not undertake any of the
events below without the prior written consent of all of the Purchasers:
o liquidate or dissolve, consolidate with, or merge into or with,
any other corporation or other entity, except that any wholly-owned
subsidiary may merge with another wholly-owned subsidiary or with us;
o will not sell, transfer, lease or otherwise dispose of, or grant
options, warrants or other rights with respect to, all or a
substantial part of our properties or assets to any person or entity
outside of the ordinary course of business, unless specifically
excluded in the Purchase Agreement;
o will not redeem or repurchase any of our outstanding securities; and
o will not create, incur or assume any indebtedness other than in
the ordinary course of business.
"Events of Default" under the Senior Notes include but are not limited to the
following:
o our failure to pay any amounts due under the Senior Notes when
due, and such failure continues for five (5) days;
o our failure to comply with any covenants we made pursuant to the
Purchase Agreements and such failure continues for a period of five
(5) business days in connection with our affirmative covenants and two
(2) business days in connection with our negative covenants;
o our entry into bankruptcy or insolvency;
o our default in the payment of any other obligation in connection
with money borrowed in excess of $50,000, which default continues for
three (3) business days;
o if a judgment is rendered against us or any of our subsidiaries
which exceeds in aggregate $50,000, which judgment is not vacated or
satisfied within twenty (20) days; or
o our violation of any material representation of any of the
documents entered into in connection with the fundings.
If an Event of Default occurs under the Senior Notes, in addition to the Default
Interest which will accrue on the Senior Notes, the Purchasers may seek specific
performance of any covenant or agreement contained in the Senior Notes and/or
enforce their security interest over substantially all of our assets.
The Senior Notes are convertible, at the option of the Purchasers, at any time
into shares of our common stock at the Conversion Price then in affect (as
defined below); provided however, that if we (a) complete a private offering of
our securities in the future, whereby we receive no less than $3,000,000 in
total funding (the "Private Offering"), (b) the effective purchase price of the
securities sold in the offering is at least $1.50 per share, and (c) the
Commission has declared effective the Registration Statement we are required to
file in connection with the Purchaser's Registration Rights Agreement, such
Purchaser shall have thirty (30) days to exercise its right to convert its
Senior Note into shares of our common stock or it will forfeit such right (the
"Optional Conversion Right"). Assuming the above events occur, and any
Purchaser fails to exercise its Optional Conversion Right within thirty (30)
days of the later of (a) the effectiveness of the Registration Statement and/or
(b) the consummation by us of at least $3,000,000 in funding through a private
offering (which has an effective price per share of at least $1.50), such
Optional Conversion Right shall be waived by the Purchaser, the Purchaser shall
forfeit any rights to the Warrants they hold, and we will have ten (10) days to
repay such Purchaser's Senior Note in full, along with any accrued and unpaid
interest.
The "Conversion Price" of the Notes will be equal to the lesser of $0.75 or 50%
of the effective price per share of the shares of common stock sold in the
Private Offering, provided that such Conversion Price shall never be less than
$0.30 per share.
The Senior Notes also contain certain anti-dilution provisions in connection
with the Underlying Shares, which provide that if we issue or sell any
additional shares of common stock (including convertible shares of common stock
and/or options or warrants to purchase shares of common stock) other than as a
dividend or other distribution (a "Dilutive Issuance") at less than the
Conversion Price then in effect, the Conversion Price shall be automatically
reduced to the lower Effective Price (as defined in the Senior Notes) of the
issuance and/or sale. However, the Purchasers have agreed to waive such
anti-dilution provision in connection with the issuance of up to 250,000 shares
for professional services, of which 50,000 shares have been issued to date as
well as warrants to purchase 25,000 shares at $.30 per share, as well those
issuances in connection with the Private Offering (collectively the "Excepted
Issuances").
WARRANTS
The 187,500 Warrants granted to Vision and the 15,000 Warrants granted to both
Andersen and Higbee are exercisable at an exercise price of $1.10 per share
(subject to adjustment in the Warrants), at any time prior to 5:00 P.M. EST on
the fifth anniversary of the date they were granted (September 26, 2011 for the
Andersen and Higbee warrants and October 23, 2011 for the Vision warrants). The
additional 100,000 Warrants granted to Vision are exercisable at an exercise
price of $0.30 per share, at any time prior to 5:00 P.M. on October 23, 2011.
The Warrants are exercisable in connection with the payment of cash, or if such
Warrants are exercised on a date when a registration statement covering the
Underlying Shares has not been declared effective with the Securities and
Exchange Commission or such registration statement is no longer in effect, the
Warrants include a cashless feature, whereby the number of shares of common
stock issuable to the Purchasers in connection with any exercise is equal to the
product of the number of shares to which the Warrants are being exercised
multiplied by a fraction, the numerator of which is the exercise price then in
effect and the denominator of which is the Fair Market Value of our common stock
(as defined in the Warrants).
The Warrants contain anti-dilution rights identical to those provided in the
Senior Notes, as described above, which provide that if we affect any Dilutive
Issuance at an Effective Price less than the exercise price then in effect, the
exercise price of the Warrants shall automatically reset to the lower Effective
Price of the Dilutive Issuance, as described in the Warrants, other than those
issuances in connection with the Excepted Issuances (as described above).
In addition to the Warrants we granted to Vision in connection with the funding,
Mastodon Ventures, Inc. ("Mastodon"), which was issued 666,667 warrants to
purchase shares of our common stock at $0.30 per share, assigned 100,000 of such
warrants to Vision, and the August 2006 Purchasers, who were granted an
aggregate of 333,333 warrants to purchase shares of our common stock at $0.30
per share, assigned 133,333 of such warrants to Vision.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to the Registration Rights Agreements, we agreed to register the
Underlying Shares on a Form SB-2 registration statement with the Securities and
Exchange Commission (the "Commission" and the "Registration Statement"). We
agreed that in the event that the Private Offering has not occurred within six
(6) months of the August 2006 Note funding date (February 8, 2006), we will file
a Registration Statement with the Commission within forty-five (45) days of such
six (6) month anniversary of the prior August 2006 closing (March 25, 2007) and
that we would obtain effectiveness of such Registration Statement no more than
ninety (90) days after the date we are required to file such Registration
Statement (June 23, 2007)(the "Mandatory Filing Deadlines"). Provided that the
Private Offering does occur within six (6) months of the closings, the
Purchasers have demand registration rights pursuant to the Registration Rights
Agreement, whereby they can demand that we file the Registration Statement at
any time beginning on the nine (9) month anniversary date of the closings (June
26, 2007 in connection with Andersen and Higbee closing and July 23, 2007 in
connection with Vision closing). If the Purchasers demand that we file a
Registration Statement, we are required to file the Registration Statement with
the Commission regarding the shares their Senior Notes are convertible into and
the shares their Warrants are exercisable for, such Registration Statement is
required to be file within forty-five days of the date such demand is given, and
we are required to obtain effectiveness of such Registration Statement no more
than ninety (90) days after the date we are required to file such Registration
Statement (collectively with the Mandatory Filing Deadlines the "Registration
Deadlines").
If we fail to file or obtain effectiveness of any Registration Statement by the
applicable Registration Deadlines or after such effectiveness the Purchasers are
unable to sell the Underlying Shares, we are obligated, pursuant to the
Registration Rights Agreements, to pay the Purchasers an amount in cash equal to
two percent (2%) of the total principal amount of the Senior Notes, for each
thirty (30) day period which the Registration Deadlines are not met or the
Purchasers are unable to sell the Underlying Shares. If we fail to pay such
damages within five (5) days of the date payable, we are required to pay
interest on the amount payable at the rate of eighteen percent (18%) per annum,
accruing daily until such amounts are paid in full.
We also agreed to provide the Purchasers piggy-back registration rights in
connection with any registration agreement we may choose to file prior to the
six (6) or nine (9) month anniversary of the closings, when the Purchasers'
mandatory and demand registration rights kick in, respectively.
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We immediately used $1,030,575 of the funds received through the September and
October fundings to repay the amount due under our outstanding 6% Convertible
Notes and interest on such amount as of October 18, 2006, which we sold to
certain purchasers in September 2004 (the "6% Notes" and the "6% Note
Purchasers"). The 6% Note Purchasers had originally purchased $2,500,000 in 6%
Notes from us in two tranches, one tranche of $1,250,000 on June 30, 2004 (the
"June 2004" tranche") and $1,250,000 on September 13, 2004 (the "September 2004"
tranche"). We previously repaid the 6% Note Purchasers the full amount due
under the June 2004 tranche in connection with our August 8, 2006, sale of
Senior Notes in the amount of $1,250,000, as previously disclosed in our Form
8-K filings. We owed approximately $1,012,434 in principal on the September 2004
portion of the 6% Notes, which notes were due and payable on September 13, 2006,
but which due date was later extended to October 18, 2006, pursuant to a Waiver
of Rights Agreement entered into in October 2006, with the 6% Note purchasers.
The total amount of principal and interest at 6% per annum which was due under
the 6% Notes as of October 18, 2006, was approximately $1,030,575. Due to our
repayment of the September 2004 tranche of the 6% Notes, we no longer owe the 6%
Note Purchasers any money, however, such 6% Note Purchasers still hold 250,000
warrants to purchase shares of our common stock at an exercise price of $9.60
per share. The 6% Note Purchasers have however, pursuant to the Waiver of
Rights Agreement, agreed to waive their reset rights to their warrants in
connection with our Private Offering.
Additionally, $165,000 of the remaining amount of the amounts received through
the September and October fundings were used to pay various closing costs and
legal fees, including $80,000 paid to Laidlaw & Company (UK) Ltd. ("Laidlaw") in
connection with finders fees and consulting fees in connection with the October
funding and amounts paid to Vision's legal counsel in attorney's fees and due
diligence fees in connection with the October closing.
CONSULTING AGREEMENT
Additionally in October 2006, we entered into a Consulting Agreement with
Mastodon Ventures, Inc., a Texas corporation ("Mastodon"), whereby we engaged
Mastodon to act as a non-exclusive strategic advisor in connection with our
fundings, including our Private Offering. Pursuant to the Consulting Agreement,
Mastodon agreed to assist us in all facets of the Private Offering; provided
however that they are not required under the Consulting Agreement to render any
services which involve the raising of capital for or on behalf of us, and agreed
that any such capital raising activities will only be affected through
registered broker dealers. We agreed to pay Mastodon's actual expenses in
connection with the Consulting Agreement, provided such expenses are
pre-approved in writing by us, and agreed to issue Mastodon warrants to purchase
666,667 shares of our common stock at an exercise price of $0.30 (which warrants
were issued on or about August 8, 2006, and were previously reported in our Form
8-K filing, filed with the Commission on August 15, 2006) (the "First Mastodon
Warrant") and a warrant to purchase 1,000,000 shares of our common stock (the
"Second Mastodon Warrant") during a five (5) year period as described below,
which is only exercisable by Mastodon if within one year of the parties entry
into the consulting agreement, we consummate the Offering or a Change in Control
(as defined in the Consulting Agreement) occurs (each a "Vesting Event").
The five year exercise period of the Second Mastodon Warrant commences upon the
occurrence of a Vesting Event. The Second Mastodon Warrant is exercisable at an
exercise price equal to the lesser of $1.10 per share or 125% of the effective
offering price of the Private Offering, or in the event of a Change in Control,
such warrant shall be exercisable at an exercise price of $1.10 per share.
Mastodon has informed us that that it plans to transfer the right to purchase
certain shares of common stock pursuant to the First Mastodon Warrant and Second
Mastodon Warrants to various parties including, the right to purchase 82,400
shares under the First Mastodon Warrant and 150,000 shares under the Second
Mastodon Warrant to Gusrae Kaplan Bruno & Nusbaum, PLLC, the attorney for the
August 2006 Purchasers and the right to purchase 54,933 shares under the First
Mastodon Warrant and the right to purchase 100,000 shares under the Second
Mastodon Warrant to our legal counsel, David M. Loev, Attorney at Law.
Furthermore, we agreed pursuant to the Consulting Agreement, that Mastodon has
the right, at its election to sell all or a portion of the shares of our common
stock then owned by Mastodon as a result of Mastodon's exercise of the First
Mastodon Warrant to the future purchasers of the Private Offering, assuming that
we have previously sold at least $3,000,000 in securities pursuant to such
Private Offering.
Mastodon agreed pursuant to the Consulting Agreement that it would not own 5% or
more of our shares of common stock at any one time (except in the event of a
Change of Control) in connection with the exercise of either of the Warrants.
The Second Mastodon Warrants and the rights provided thereunder will expire if a
Vesting Event has not occurred within one (1) year from the date of the
Consulting Agreement.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
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On September 26, 2006, we entered into Subscription Agreements with two (2)
individuals, whereby we sold each of the individuals (i) $100,000 in fifteen
(15) month 11% Senor Secured Convertible Promissory Notes (for $200,000 in total
Notes sold) which can be converted into approximately 133,333 shares of common
stock each, not including any accrued and unpaid interest, and assuming a
conversion price of $0.75 per share (which conversion price and therefore the
number of shares the Notes are convertible into are subject to change pursuant
to the Notes); and (ii) five year Warrants to purchase one hundred and fifteen
thousand (15,000) shares of our common stock each (for the total issuance of
30,000 warrants) at an exercise price of $1.10 per share. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 for the
above, since the foregoing did not involve a public offering, the recipients
took the securities for investment and not resale and we took appropriate
measures to restrict transfer.
On October 23, 2006, we entered into a Subscription Agreement with Vision
Opportunity Master Fund, Ltd. ("Vision"), whereby we sold Vision (i) $1,250,000
in fifteen (15) month 11% Senor Secured Convertible Promissory Notes which can
be converted into approximately 1,666,667 shares of common stock, not including
any accrued and unpaid interest, and assuming a conversion price of $0.75 per
share (which conversion price and therefore the number of shares the Notes are
convertible into are subject to change pursuant to the Notes); and (ii) five
year Warrants to purchase 187,500 shares of our common stock at an exercise
price of $1.10 per share and 100,000 shares of our common stock at an exercise
price of $0.30 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above, since the foregoing
did not involve a public offering, the recipients took the securities for
investment and not resale and we took appropriate measures to restrict transfer.
In October 2006, we entered into a Consulting Agreement with Mastodon Ventures,
Inc., a Texas corporation ("Mastodon"), and agreed to issue Mastodon warrants to
purchase 666,667 shares of our common stock at an exercise price of $0.30 (which
warrants were issued on or about August 8, 2006, the "First Mastodon Warrant")
and a warrant to purchase 1,000,000 shares of our common stock during a five (5)
year period (the "Second Mastodon Warrant"), which warrants are only exercisable
by Mastodon if within one year of the parties entry into the consulting
agreement, we consummate a private offering of at least $3,000,000 (the
"Offering") or a Change in Control (as defined in the Consulting Agreement)
occurs (each a "Vesting Event"). The five year exercise period of the Second
Mastodon Warrant commences upon the occurrence of a Vesting Event. The Second
Mastodon Warrant is exercisable at an exercise price equal to the lesser of
$1.10 per share or 125% of the effective offering price of the Offering, or in
the event of a Change in Control, such warrant shall be exercisable at an
exercise price of $1.10 per share. We claim an exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 for the above, since the
foregoing did not involve a public offering, the recipient took the securities
for investment and not resale and we took appropriate measures to restrict
transfer.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
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Exhibit Number Description
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10.1(1)* Securities Purchase Agreement Effective
September 26, 2006 with G. Chris Andersen
10.2(1)* 11% Senior Secured Convertible Promissory Note
with G. Chris Andersen
10.3(1)* Warrant with G. Chris Andersen
($1.10 initial exercise price)
10.4(1)* Registration Rights Agreement with G. Chris Andersen
10.5(1)* Security Agreement with G. Chris Andersen
10.6* Securities Purchase Agreement Dated
October 23, 2006 with Vision
Opportunity Master Fund, Ltd.
10.7* 11% Senior Secured Convertible Promissory Note with
Vision Opportunity Master Fund, Ltd. (1)
10.8* Warrant with Vision Opportunity
Master Fund, Ltd. ($1.10 initial exercise price)
10.9* Warrant with Vision Opportunity
Master Fund, Ltd. ($0.30 initial exercise price)
10.10* Registration Rights Agreement with
Vision Master Fund, Ltd.
10.11* Security Agreement with Vision Master Fund, Ltd.
10.12* Waiver of Rights Agreement with the 6% Purchasers
10.13* Consulting Agreement
* Filed herewith.
(1) The closing documents including the Securities Purchase Agreement, 11%
Senior Secured Convertible Promissory Note, Registration Rights Agreement
and Security Agreement with G. Chris Andersen and Paul M. Higbee are
identical except for their respective names and addresses, and as such, we
have only included those documents relating to Mr. Andersen. Both the
closing documents with Mr. Andersen and Mr. Higbee, including the
Securities Purchase Agreements, Registration Rights Agreements, Senior
Notes and Warrants (but not the Security Agreement), were re-executed by
Mr. Andersen and Mr. Higbee on October 25, 2006, to be effective as of
September 26, 2006, to conform to the Vision Opportunity Master Fund, Ltd.
closing documents, which October 2006 closing documents replaced and
superseded the prior executed September 2006 documents.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XA, INC.
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/s/ Joseph Wagner
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Joseph Wagner,
Chief Executive Officer
November 1, 2006]]>
