UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED - JUNE 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 33-22142
MIDNIGHT HOLDINGS GROUP, INC. F/K/A REDOX TECHNOLOGY CORPORATION
Delaware 55-0681106
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
22600 Hall Road, Suite 205, Clinton Twp. MI 48036
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (586) 468-8741
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that Registrant was required to file such
reports) and (2) has been subject to such filing requirements for at least the
past 90 days. Yes [__] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [_] No [X]
Registrant had 477,350,001 issued and outstanding shares of common stock, par
value $.00005 per share, as of March 15, 2007.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
TABLE OF CONTENTS
HEADING PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 2
Balance Sheets - March 31, 2006 and December 31, 2005........ 2
Statements of Operation and Comprehensive Loss - Three
months ended March 31, 2006 and 2005.......................... 3
Statements of Cash Flow - Three months ended March 31, 2005
and 2005...................................................... 4
Notes to Financial Statements ................................ 5
Item 2. Management's Discussion and Analysis or Plan of Operations........ 8
Item 3. Controls and Procedures........................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 16
Item 3. Defaults Upon Senior Securities................................... 32
Item 4. Submission of Matters to a Vote of Securities Holders............. 32
Item 5. Other Information................................................. 32
Item 6. Exhibits and Reports on Form 8-K.................................. 37
Signatures........................................................ 45
PART I -FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
MIDNIGHT HOLDINGS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
DECEMBER 31,
JUNE 30, 2005
2006 (RESTATED)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 37,032 $ 29,844
Accounts receivable 207,462 76,371
Marketable securities 9,073 8,894
Inventories 30,623 29,063
Prepaid expenses and other current assets 16,406 9,627
Current portion of deferred financing costs 111,562 111,562
Current portion of capital leases receivable 59,308 59,308
------------ ------------
Total current assets 471,466 324,669
------------ ------------
Property and equipment - net of $233,790 and $196,689
accumulated depreciation, respectively 481,075 506,070
Intangible asset 30,000 30,000
Investment in and advances to equity method investee 89,647 118,926
Long term portion of deferred financing costs 167,343 223,124
Long term portion of capital leases receivable 43,932 71,495
Accrued rental income 58,711 34,540
Deposits 18,510 14,860
------------ ------------
Total assets $ 1,360,684 $ 1,323,684
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,105,112 $ 1,265,473
Current portion of long-term debt 46,229 44,923
Current portion of capital lease obligations 11,361 11,361
Convertible notes payable 695,198 399,279
Accrued convertible debt non-compliance costs 673,750 1,041,046
Accrued expenses and other current liabilities 317,268 124,411
Income taxes payable 16,356 24,971
Accrued director's fees 95,000 90,000
Notes payable, stockholders 110,000 110,000
Derivative financial instruments 30,727,928 12,039,667
------------ ------------
Total current liabilities 33,798,202 15,151,131
LONG-TERM LIABILITIES:
Line of credit payable, bank 99,095 94,168
Long-term debt, less current portion 95,752 119,150
Capitalized lease obligation, less current portion 22,531 28,129
Deferred rent 103,566 42,963
------------ ------------
Total liabilities 34,119,146 15,435,541
------------ ------------
MINORITY INTEREST -- 15,905
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT
Common stock, $0.00005 par value; 1,000,000,000 shares
authorized; 470,033,692 and 468,733,692 shares issued and
outstanding at June 30, 2006 and December 31, 2005,
respectively 23,502 23,437
Additional paid-in capital 404,263 205,563
Accumulated deficit (33,174,620) (14,344,976)
Other comprehensive loss (11,607) (11,786)
------------ ------------
Total stockholders' deficit (32,758,462) (14,127,762)
------------ ------------
Total liabilities and stockholder's deficit $ 1,360,684 $ 1,323,684
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
2
MIDNIGHT HOLDIMGS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES
Sales and service income $ 568,652 $ 516,398 $ 1,149,903 $ 888,428
Franchise fees -- 19,000 -- 87,500
Royalty income 22,873 20,545 31,933 43,236
------------ ------------ ------------ ------------
Total revenues 591,525 555,943 1,181,836 1,019,164
COST OF SALES 677,566 359,875 1,399,236 702,804
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (86,041) 196,068 (217,400) 316,360
OPERATING EXPENSES 911,333 612,160 1,764,324 1,073,275
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (997,374) (416,092) (1,981,724) (756,915)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Equity in net losses of equity method investee (48,761) (29,701) (98,261) (34,159)
Derivative instrument expense 89,873,432 -- (16,565,647) --
Interest expense (118,708) (25,950) (204,443) (37,573)
Interest income 2,127 8,408 4,525 12,699
------------ ------------ ------------ ------------
89,708,090 (47,243) (16,863,826) (59,033)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST 88,710,716 (463,335) (18,845,550) (815,948)
INCOME (LOSS) ATTRIBUTABLE TO MINORITY INTEREST -- -- 15,905 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) 88,710,716 (463,335) (18,829,645) (815,948)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Unrealized gain on marketable security (502) -- 179 --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 88,710,214 $ (463,335) $(18,829,466) $ (815,948)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted $ 0.19 $ (0.00) $ (0.04) $ (0.00)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted 469,100,176 371,524,431 468,917,946 369,534,327
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
3
MIDNIGHT HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD OF SIX MONTHS ENDED
JUNE 30,
---------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,829,645) $ (815,948)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 37,101 20,771
Amortization of deferred financing costs 55,781 7,008
Derivative instrument expense 16,565,647 --
Gain on sale of equipment -- (29,432)
Equity in losses of equity method investee 98,261 34,159
Loss attributable to minority interest (15,905) --
Changes in assets and liabilities:
Accounts receivable (131,091) (8,037)
Inventories (1,560) 4,605
Prepaid expenses and other current assets (30,950) 22,349
Deposits (3,650) --
Accounts payable (160,361) 155,642
Accrued expenses and other current liabilities 249,849 551,707
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,166,523) (57,176)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Payments received on capital lease 27,561 16,090
Purchase of property and equipment (12,106) (112,214)
Purchase of intangilble asset -- (15,000)
Notes receivable, stockholders -- (293,240)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,455 (404,364)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving credit agreements 4,927 --
Deferred financing costs -- (107,094)
Principal payments made on capital lease (5,597) (3,536)
Advances to joint ventures (68,982) (148,374)
Repayment of term loan (22,092) (20,879)
Repayment of note payable, stockholder -- (14,000)
Proceeds from notes payable 2,250,000 750,000
Proceeds from issuance of common shares -- 16,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,158,256 472,117
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,188 10,577
CASH AND EQUIVALENTS - beginning of period 29,844 39,035
------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 37,032 $ 49,612
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 10,927 $ 12,796
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Comprehensive income $ 179 $ --
Conversion of convertible notes to equity (10,528) --
Fair value of derivative instrument liability 25,899,031 --
Carrying value of convertible notes 306,447 --
Debt non-compliance costs (367,296) --
Capitalized lease receivable -- 172,279
Capital lease payable -- 48,462
The accompanying notes are an integral part
of these consolidated financial statements.
4
MIDNIGHT HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Midnight
Holdings Group, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in Midnight's
Annual Report filed with the SEC on Form 10-KSB for the year ended December 31,
2005. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for 2005 as reported in the 10-KSB
for the year ended December 31, 2005 have been omitted.
NOTE 2 - GOING CONCERN
As set forth in the accompanying financial statements, Midnight incurred
recurring net losses of $18,829,645 for the six months ended June 30, 2006 which
included non-cash items of $55,781 for amortization of deferred financing costs
and $16,565,647 for loss in the fair value of derivative instrument liabilities,
has an accumulated deficit of $32,969,058 and a working capital deficit of
$33,326,736 as of June 30, 2006. These conditions raise substantial doubt as to
Midnight's ability to continue as a going concern. Management has raised funds
through the sale of convertible notes and continues to seek financing to fund
its operating losses and revenue growth plans (See Note 3). The financial
statements do not include any adjustments that might be necessary if Midnight is
unable to continue as a going concern.
NOTE 3 - ADDITIONAL BORROWINGS
During the six months ended June 30, 2006, Midnight issued 10% callable secured
convertible notes to four investors with 4,100,000 common stock purchase
warrants, for an aggregate of $2,250,000. The new notes, together with accrued
and unpaid interest, are convertible at any time at the option of the holder
into shares of common stock of Midnight at the lesser of $.02 per share or 25%
of the average of the lowest 3 trading days from the last 20 trading days ending
one day prior to the date of conversion. Interest is due at the end of each
quarter. The face amounts of the notes are due three years from the date of
issuance. The due dates range from December 31, 2008 to June 7, 2009. The
warrants have a five year life and are exercisable at $.08 per share.
In connection with the long term notes and the warrants, the Company entered
into Registration Rights Agreements with the investors, requiring the Company to
file a registration statement registering 200% of the shares of common stock
issuable upon conversion of the notes and the shares of common stock issuable
upon repayment of the principal amount of the notes, including any interest
accrued thereon, and 100% of the shares of common stock issuable upon exercise
of the warrants. The required registration statements have not yet been filed.
5
As long as the notes are outstanding, if the Company enters into any subsequent
financing on terms more favorable than the terms governing the notes, then the
holders of the notes have the option to exchange the notes, valued at their
stated value, together with accrued but unpaid interest for the securities to be
issued in the subsequent financing. Additionally, if Midnight issues common
stock or other securities convertible into common stock at a price per share
lower than the conversion price of the notes, the conversion price of the notes
will be reduced to that lower conversion price.
All of the warrants require that, if Midnight issues common stock or other
securities convertible into common stock at a price per share lower than the
market price, the exercise price of the warrants will be reduced to that lower
price.
NOTE 4 - DERIVATIVE LIABILITY
Midnight evaluated the application of SFAS 133 and EITF 00-19 for the conversion
options on the debentures and the warrants. Based on the guidance in SFAS 133
and EITF 00-19, Midnight concluded both the conversion option and the warrants
were required to be accounted for as derivatives. Existing agreements as well as
the convertible debentures issued in the first quarter of 2006 have variable
conversion prices resulting in an indeterminate number of shares to potentially
be issued. This creates the possibility that Midnight will not have enough
available shares to settle all outstanding common stock equivalents. SFAS 133
and EITF 00-19 require Midnight to bifurcate and separately account for the
conversion option as an embedded derivative and the warrants as freestanding
derivatives. Midnight is required to record the fair value of the conversion
options and the warrants on its balance sheet at fair value with changes in the
values of these derivatives reflected in the consolidated statement of
operations as "Gain (loss) on derivative liability."
Midnight used the Black Scholes pricing model to determine the fair values of
the embedded conversion options derivatives and the warrants. The model uses
market sourced inputs such as interest rates, stock prices, and option
volatilities, the selection of which requires management's judgment, and which
may impact net income or loss. Midnight uses volatility rates based upon the
closing stock price of industry competitors due to Midnight's lack of historical
trading history. Midnight uses a risk free interest rate which is the U. S.
Treasury bill rate for securities with a maturity that approximates the
estimated expected life of a derivative or security. Midnight uses the closing
market price of the common stock on the date of issuance of a derivative or at
the end of a quarter when a derivative is valued at fair value. The volatility
factor used in the Black Scholes pricing model has a significant effect on the
resulting valuation of the derivative liabilities on the balance sheet. Midnight
used the following assumptions for the Black Scholes pricing model: market price
on date of issuance; no expected dividend yield; expected volatility of 60%;
risk-free interest rates of 3.93% to 4.83%; and option terms equal to the term
of the warrant or term of the debenture for conversion options.
A summary of the convertible notes and derivative liability is as follows:
6
12/31/2005 Changes 6/30/2006
------------ ------------ ------------
Proceeds of notes less unamortized discount $ 3,009,279 $ -- $ 3,009,279
Proceeds of the 2006 notes 2,250,000 2,250,000
Less: Amounts attributable to embedded derivatives (2,610,000) (1,954,081) (4,564,081)
------------ ------------ ------------
Carrying value of the notes $ 399,279 $ 295,919 $ 695,198
============ ============ ============
Amounts attributable to derivative instrument liability $ 12,039,667 $ 18,688,261 $ 30,727,928
============ ============ ============
Amounts attrributable to accrued debt non-compliance costs $ 1,041,046 $ 360,902 $ 1,401,948
============ ============ ============
The proceeds from the issuance of the debentures and warrants were first
allocated to the warrant derivatives based on their fair values and then to the
embedded derivatives based on their fair values. To the extent that the fair
values of the derivatives exceeded the proceeds a loss on derivatives was
recognized at issuance date in the Consolidated Statements of Operations. The
discount to the debentures created by the allocation of the proceeds to the
derivatives will be amortized over the life of the debentures using the
effective interest method.
NOTE 5 - COMMON STOCK
During the six months ended June 30, 2006, Midnight converted $10,528 of its
convertible debt and $188,238 of associated embedded derivatives to 1,300,000
shares of common stock.
NOTE 6 - RESTATEMENT
During the 1st quarter of 2007, Midnight discovered errors in previously
calculated amounts for Midnight's derivative liability accrued convertible debt
non-compliance costs as of December 31, 2005. The errors resulted in an increase
to the derivative liability and loss on Midnight's derivative instruments in the
amount of $3,858,710 and a decrease in accrued debt non-compliance costs of
$208,954.
NOTE 7 - ACCRUED CONVERTIBLE DEBT NON-COMPLIANCE COSTS
As of June 30, 2006, Midnight's accrued debt non-compliance costs had decreased
by $367,296 to $673,750 from $1,041,046 as of December 31, 2005. On June 13,
2006, the holders of Midnight's convertible notes agreed to waive all penalties
accrued on all notes issued prior to that date and to waive all such penalties
on those notes through March 31, 2007. This was the reason for the decrease in
accrued convertible debt non-compliance costs during the six months ended June
30, 2006.
NOTE 8 - SUBSEQUENT EVENT
During the 4th quarter of 2006, Midnight entered into an agreement with a third
party investor to acquire ownership in a service center. This investor consists
of two LLC's and Midnight Auto Franchise Corp. (MAFC). MAFC will have a 20.74%
ownership in the new entity and is a Class B member, and has entered into a
management agreement with the new entity. Among other provisions of the
operating agreement, the Class A member has been granted the right and option to
sell to the Class B member (MAFC) all or any part of the Class A Member's
Membership Interest in the new entity on or after the date on which the entity
incurs a cumulative net operating loss of $150,000 or more. The put purchase
price shall be equal to the sum of the Class
7
A Member's original Capital Contribution (reduced by any prior return of capital
to the Class A Member and any accrued but unpaid Preferred Return Amount (17% of
the weighted average of the Capital Contribution). No determinations have been
made regarding the profitability of the entity.
On January 12, 2007, the Company entered into an employment agreement with its
Chief Executive Officer which provides for an annual base salary of $275,000 in
the first year, $355,000 in the second year and $395,000 in the third year. The
agreement automatically renews annually at the end of the initial term unless
terminated by the Company or the executive upon not less than 90 days notice
prior to any renewal period.
The agreement provides for various performance bonuses at the end of the first
year which could reach 125% of the executives' base salary. The bonuses in
future years are to be based on performance criteria, but the amounts have not
been established.
The agreement also grants a stock option of 90,000,000 shares which vest equally
over the initial three years of the agreement and are exercisable at 110% of the
fair market value per share on the date of grant.
On January 12, 2007, the Company entered into an employment agreement with its
Executive Vice-president and Chief Financial Officer which provides for an
annual base salary of $200,000, subject to review at the end of each year of the
agreement. The agreement automatically renews annually at the end of the initial
term unless terminated by the Company or the executive upon not less than 90
days notice prior to any renewal period.
The agreement also grants a stock option of 12,000,000 shares which vest equally
over the initial three years of the agreement and are exercisable at 110% of the
fair market value per share on the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
--------------------------
THIS QUARTERLY REPORT ON FORM 10-QSB AND ANY DOCUMENTS INCORPORATED HEREIN
CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT") WE CLAIM THE
PROTECTION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS CONTAINED IN THE
REFORM ACT. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS QUARTERLY REPORT, STATEMENTS
THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "PLAN",
"INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD," "ANTICIPATE," "ESTIMATE,"
OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER VARIATIONS OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT AS REQUIRED BY LAW, THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
8
ANY REFERENCE TO THE "COMPANY, "MIDNIGHT," THE "REGISTRANT", THE "SMALL BUSINESS
ISSUER", "WE", "OUR" OR "US" MEANS MIDNIGHT HOLDINGS GROUP, INC.
The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements as of June 30, 2006 and for the
three and six month periods ended June 30, 2006 and 2005, and the notes thereto,
all of which financial statements are included elsewhere in this Form 10-QSB.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial statements and the results
of our operations are based upon our financial statements and the data used to
prepare them. The Company's financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
On an ongoing basis we reevaluate our judgments and estimates including those
related to revenues, bad debts, long-lived assets, and derivative financial
instruments. We base our estimates and judgments on our historical experience,
knowledge of current conditions and our beliefs of what could occur in the
future considering available information. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting policies are disclosed in the Notes to our
consolidated financial statements. The following discussion describes our most
critical accounting policies, which are those that are both important to the
presentation of our financial condition and results of operations and that
require significant judgment or use of complex estimates.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with SEC Staff Accounting
Bulletin ("SAB) No. 104, "Revenue Recognition", which superseded SAB No. 101,
"Revenue Recognition in Financial Statements". Accordingly, revenues are
recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company's prices to buyers are
fixed or determinable, and collectability is reasonably assured.
The Company derives a majority of its revenues from a combination of
direct sales of automotive products and services to retail, commercial and fleet
clients through Company owned service center/retail outlets as well as through
services provided to our joint-venture partnerships and franchisees.
The Company receives revenue from services provided to our joint-venture
partnerships and franchisees that include sales of purchased automotive tools,
equipment, retail products, facility lease rents, supplies, marketing and a
percentage of their sales. In addition, the Company is reimbursed for
expenditures related to property operating expenses, real estate taxes,
maintenance, repairs and specialty services.
Revenues also include franchise royalties based upon a percentage of the
gross revenue generated by each franchised location as well as other franchise
related fees for services provided to franchisees under the terms of their
franchise agreements (including, but not limited to, the initial franchise
service fees and training fees).
9
ASSOCIATED AND DERIVATIVE FINANCIAL INSTRUMENTS
We may include options or warrants to purchase our common stock with
issuance of debt or equity securities. In certain instances, these options or
warrants may be classified as liabilities rather than equity. Additionally, the
debt or equity securities may contain embedded derivative instruments, such as
conversions options that must be separately accounted for as a free standing
instrument.
The identification of, and accounting for, derivative instruments is
complex. All of our derivative instruments are re-valued at the end of each
reporting period, with changes in the fair value of the derivative liability
recorded as charges or credits to income, in the period in which the changes
occur. The fair value of options, warrants and bifurcated conversion options are
determined using the Black-Scholes pricing model or the Cox-Rose-Rubenstein
binomial Model (essentially the same results as the Black-Scholes Model). The
model requires the input of the remaining term of the instrument, the risk-free
rate of return (based on U.S. Government securities rates), our current common
stock price and expected dividend yield, and the expected volatility of our
common stock price over the life of the option. We estimate the future
volatility of our common stock price based on the history of our competitors'
stock price. The identification of, and accounting for, derivative instruments
and the assumptions used to value them, can significantly affect our financial
statements.
INCOME TAXES
We have a history of losses. These losses have generated sizable federal
net operating loss (NOL) carry forwards, which approximated $2,620,000 at
December 31, 2005.
Generally accepted accounting principles require that we record a
valuation allowance against the deferred income tax asset associated with these
NOL and other deferred tax assets if it is "more likely than not" that we will
not be able to utilize them to offset future income taxes. Due to our history of
unprofitable operations, we have recorded a valuation allowance that fully
offsets our deferred tax assets. We currently provide for income taxes only to
the extent that we expect to pay cash taxes on current income.
The achievement of profitable future operations at levels sufficient to
begin using the NOL carry forwards could cause management to conclude that it is
more likely than not that we will realize all of the remaining NOL carry
forwards and other deferred tax assets. The NOL carry forwards could be limited
in accordance with the Internal Revenue Code based on certain changes in
ownership that occur or could occur in the future. Upon achieving profitable
operations, we would immediately record the estimated net realizable value of
the deferred tax assets at the time and would then provide for income taxes at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax assets could
cause our provision for income taxes to vary significantly from period to
period.
RESULTS OF OPERATIONS: COMPARISON OF SIX MONTHS ENDED JUNE 30, 2006 TO SIX
MONTHS ENDED JUNE 30, 2005
10
SIGNIFICANT TRANSACTIONS:
The following significant transactions impacted the consolidated results
of operations for the six month period ended June 30, 2006 as compared to the
six month period ended June 30, 2005, and for the calendar quarter ended June
30, 2006 compared to the calendar quarter ended June 30, 2005:
The Company was in the initial stages of opening additional service
centers in 2006, and as such was increasing the operating expenses to provide
the infrastructure to do so. As these newly opened service centers were in their
infancy, they had not yet reach the level of attaining profitable operations.
The Company has obtained significant additional funding in the form of
convertible callable secured notes, which has resulted in a considerable
increase in the amount of interest expense incurred compared to the year ago
period. This was necessary to fund the infrastructure to enable the Company to
execute its business plan.
The following discussion compares and discusses for each item below, the
Company's performance year to date, with the Company's year to date performance
as of the same date in 2005 ("Year to Date"), and the Company's performance for
the calendar quarter covered by this Report, with the performance for the same
calendar quarter in 2005 ("Quarter to Quarter").
REVENUES:
During the current fiscal year to date, revenues increased by $162,700
or 16% to $1,181,800 compared to the same six months performance in the prior
fiscal year. Service center revenue increased $97,100 as the result of
additional store openings in the 4th quarter of 2005 and the 1st quarter of
2006. Sales to our Joint Venture partners in the 2006 period increased by
$164,400. This is attributable to the Joint Ventures being in operation for the
full six month period in 2006 while in the 2005 period, they were only open a
small portion of the period. The Company did not add any new joint venture
partners in the current six month which resulted in a decrease of fees derived
from that source. Revenue from royalties on franchise operating sales decreased
by $11,300 partially due to one of the franchisees converting to a Joint
Venture.
The Company's revenues for the quarter ended June 30, 2006 increased by
$35,600 or 6% to $591,500 compared to revenues for the quarter ended June 30,
2005. Service center revenue increased $4,400, while sales to our Joint Venture
partners increased by $47,900. The Company did not add any new joint venture
partners in the current quarter which resulted in a decrease of fees derived
from that source. Revenue from royalties on franchise operating sales increased
by $2,300.
COST OF SALES:
During the current fiscal year to date, cost of sales increased by
$696,400 or 99% to $1,399,200 compared to the same year to date cost of sales in
the prior fiscal year. The increase in cost of sales was primarily attributable
to an increase in labor costs during the initial startup of new service center
openings.
The Company's cost of sales for the quarter ended June 30, 2006
increased by $317,700 or 88% to $677,500 compared to its cost of sales for the
quarter ended June 30, 2005. The increase in cost of sales was primarily
attributable to an increase in labor costs during the initial
11
startup of new service center openings as well as an increase in service center
sales volume and increased sales volume to our Joint Ventures partners.
GROSS PROFIT:
During the current fiscal year to date, gross profit decreased by
$533,800 or 169 % to $(217,400) compared to the same year to date gross profit
in the prior fiscal year. The decrease in gross profit was primarily
attributable to the increased labor costs in the current period as mentioned
above.
During the current fiscal quarter, gross profit decreased by $282,100 or
144 % to $(86,000) compared to the same quarter gross profit in the prior fiscal
year. The decrease in gross profit was primarily attributable to the increased
labor costs in the current period .
OPERATING EXPENSES
During the current fiscal year to date, operating expenses increased by
$691,000 or 64% to $1,764,300 compared to the same year to date operating
expenses in the prior fiscal year. The increase in operating expenses was
primarily attributable to an increase in the Company's infrastructure to execute
its business plan.
During the current fiscal quarter, operating expenses increased by
$299,200 or 49% to $911,300 compared to the same quarter operating expenses in
the prior fiscal year. The increase in operating expenses was primarily
attributable to an increase in the Company's infrastructure to execute its
business plan.
OTHER INCOME AND EXPENSES
The Company incurred an increase in interest expense of $166,900 to
$204,400 for the six months ended June 30, 2006 compared to the corresponding
six month period of the prior year. This was due primarily to increased
borrowing under convertible secured notes payable obtained to finance the
Company's business plan.
For the period of six months ended June 30, 2006, the Company recognized
its minority equity in the losses of its joint ventures. These losses were
$(98,300) as compared to $(34,200) for the period of six months ended June 30,
2005. During the six months ended June 30, 2005, one of the joint ventures was
in operation for approximately four months and the other was in operation for
approximately one month as opposed to two joint ventures in the six months ended
June 30, 2006.
Derivative instrument expense is explained in the discussion of critical
accounting issues and further in the notes to the financial statements. The
identification of, and accounting for, derivative instruments is complex. Our
derivative instruments are re-valued at the end of each reporting period, with
changes in the fair value of the derivative liability recorded as charges or
credits to income, in the period in which the changes occur. The identification
of, and accounting for, derivative instruments and the assumptions used to value
them can significantly affect our financial statements. For the quarter ended
June 30, 2006, the derivative instrument expenses totaled $16,565,600. The
Company had no derivative instrument expense for the six months ended June 30,
2005
12
During 2005, we substantially increased our operating expenses and grew
our infrastructure to support our business plan. As we continue to execute our
business plan, these expenses are not expected to increase at the same rate as
they did in 2005. As this is a forward looking statement, it involves risks and
uncertainties. The time period involved may differ materially from that
indicated as a result of a number of factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $37,000 as of June 30, 2006, an
increase of $7,200 from December 31, 2005. We had a working capital deficit of
$33,326,700 as of June 30, 2006 as compared to $14,826,500 as of December 31,
2005. A total of $30,727,900 of this was attributable to our derivative
liabilities. Cash flows from operations and credit lines from banks are used to
fund short-term liquidity and capital needs such as service center parts,
salaries and capital expenditures. For longer-term liquidity needs such as
acquisitions, new developments, renovations and expansions, we currently rely on
asset leasing, loans from our investor group, term loans, revolving lines of
credit, sale of common stock, and joint venture investors.
We remain optimistic about our long term business prospects. However, we
still face significant obstacles to achieve profitability. We anticipate that
because of our expansion efforts we will experience substantial increases in
revenue that will help the Company reach profitability during 2006 or 2007. We
have invested a significant amount of our working capital, technical
infrastructure and personnel time in preparing the Company for the anticipated
revenue increases.
We believe that cash generated from operations and additional financing,
either in the form of additional borrowings or the equity market will be
sufficient to meet our working capital requirements for the next 12 months. Our
current business plan anticipates that new service center growth will be funded
through "Launch Investors". It is anticipated that such Launch Investors will
fund the start up of new (A) service center operations each in the approximate
amount of $200,000; (B) service center operations with the infrastructure to
sell retail products in each in the approximate amount of $550,000; and/or (C)
the start up of a new hub and spoke retail mall/remote service center operations
each in the approximate amount of $775,000. They will earn an estimated annual
return between 15% and 18% on their investment plus principal repayment over the
term of the investment - a minimum of one year and a maximum of three years.
This estimate is a forward-looking statement that involves risks and
uncertainties.
EQUITY
During the six months ended June 30, 2006, the Company converted $10,528
of its convertible debt and $188,238 of associated embedded derivatives to
1,300,000 shares of common stock. No such conversions took place in the prior
quarter.
During the quarter ended June 30, 2006, no dividends were paid to
holders of our common stock and we did not issue any preferred stock.
As a publicly traded company, we expect to have access to capital
through both the public equity and debt markets. We expect to have an effective
registration statement authorizing us to
13
publicly issue shares of preferred stock, common stock and warrants to purchase
shares of common stock that will allow us to raise additional capital as
necessary to fund expansion and growth activities in 2007. We anticipate that
this combination of equity and debt sources will provide adequate liquidity to
the Company so that we can continue to fund our growth needs and expansion
activities.
Our goal is to develop and implement a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private.
CAPITAL EXPENDITURES
We expect to continue to have access to the capital resources necessary
to expand and develop our business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. We will continue
to pursue these activities unless adequate sources of financing are not
available or if we cannot achieve satisfactory returns on our investments.
An annual capital budget is prepared for each service and retail center
that is intended to provide for all necessary recurring and non-recurring
capital expenditures. We believe that operating cash flows from mature
operations will provide the necessary funding for these expenditures.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were not effective to enable us to record, process, summarize and
report information required to be included in our periodic filings with the
Securities and Exchange Commission within the required time period and in that
some of the accounting entries relating to debt and equity instruments required
adjustment upon review by our independent auditors. We intend to take measures
to remedy this situation by increasing the accounting staff, engaging
independent auditors to provide us with accounting advice and implementing
internal procedures including the distribution of documents. These deficiencies
have been reported to our Board of Directors and we intend to improve and
strengthen our controls and procedures.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls since the most
recent evaluation of such controls.
On September 15, 2006, Malone & Bailey resigned as the Registrant's
independent auditors. Malone & Bailey submitted audit reports on the
Registrant's financial statements for the years ended December 31, 2003 and
2004. On September 15, 2006, the Board of Directors ratified the engagement of
Miller, Ellin & Company, LLP as the Registrant's independent auditors.
14
On November 22, 2006, Miller, Ellin resigned as the Registrant's
independent auditors. Miller, Ellin submitted an audit report on the
Registrant's financial statements for the year ended December 31, 2005. On
November 22, 2006, the Board of Directors ratified the engagement of Malone &
Bailey as the Registrant's independent auditors.
PART II - - OTHER INFORMATION
-----------------------------
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business the Company may be subject to
litigation from time to time. There is no past, pending or, to the Company's
knowledge, threatened litigation or administrative action (including litigation
or action involving the Company's officers, directors or other key personnel)
which in the Company's opinion has or is expected to have, a material adverse
effect upon its business, prospects financial condition or operations other
than:
The following lawsuit is being reported here because it was pending as
of December 31, 2005. All Night Auto, Inc., a corporation owned by the Company's
subsidiary, All Night Auto(R) Stores, Inc., is currently a defendant in a law
suit brought by Meineke Reality, Inc., in the Mecklenburg County Superior Court,
State of North Carolina, being case No. 05-CVS-13194. The complaint filed by
Meineke Realty, Inc., on July 21, 2005, alleged that the previous management of
All Night Auto, Inc., failed to pay rents due under a sublease for premises
located at 3872 Rochester Road, Troy, Michigan. The plaintiff alleged damages
against All Night Auto, Inc., in the amount of $81,800. All Night Auto, Inc.,
retained the law firm of Hamilton Fay Moon Stephens & Martin, PLLC, 201 South
College Street, Suite 2020, Charlotte, NC 28244, as local counsel in the case.
On September 29, 2005, local counsel filed a Motion to dismiss the case alleging
that the North Carolina Court lacked jurisdiction and Meineke Realty's claim was
barred by the Statute of Limitations. The motion was granted and an appeal was
pending until September 26, 2006 when the suit was dismissed. Pursuant to a
settlement agreement entered into between the parties on September 20, 2006, the
Company is to pay the Meineke Realty $50,000 over a ten month period, which will
be treated as an additional rent expense over such ten month period.
On March 28, 2006, a Complaint was filed in the Oakland County Circuit
Court entitled DENNIS SPENCER V MIDNIGHT AUTO HOLDINGS, INC., Case No.
06-73504-CK. Plaintiff sought a declaratory judgment and ruling from the Court
regarding his February 27, 2006 termination and the parties' March 10, 2004
employment agreement as well as damages in the amount of $92,500 and an
unspecified amount in excess of $25,000 for breach of contract. The Company's
answers have been filed. On December 7, 2006, the parties settled this matter by
way of an agreement by the Company to pay the Plaintiff $15,000 and to defend
and indemnify Plaintiff in the Doren Litigation (described below); the Company
has paid Plaintiff the $15,000 sum, and the case was dismissed with prejudice on
December 18, 2006.
On October 3, 2006, The Mark Doren Revocable Trust and Mark Doren filed
a suit against Midnight Holdings Group, Inc., All Night Auto - Grosse Pointe,
Inc., Midnight Auto Franchise Corp., All Night Auto Stores, Inc. Richard J. Kohl
and Dennis Spencer in the Circuit Court of Wayne County, Michigan (the "Doren
Litigation"). The Doren Trust was the former landlord of All Night Auto - Grosse
Pointe, Inc. with respect to an All Night Auto store located in Grosse Pointe
Park, Michigan. That store was closed on or about September, 2005. The
15
lawsuit attempts to collect rent due under the lease for the remaining term from
October, 2005 through June, 2007 (allegedly $158,000). The Company has answered
the Complaint. The Company has asserted defenses to the claims made in the
complaint but at this time is unable to evaluate the likely outcome.
On November 11, 2006, the Company was served with a Complaint in the
matter of Brian Unlimited Distribution Company (a/k/a BUDCO) v. Midnight Auto
Franchise Corp., Oakland County Circuit Court Case No. 06-078275-CK. In its
Complaint, BUDCO sought damages of $153,800 plus interest and attorney fees. On
January 10, 2007, the parties settled this matter through an agreement to pay an
aggregate amount of $136,600 (without interest), through monthly payments of
$4,000 each commencing on February 18, 2007; the Company has the right to prepay
the balance due at any time (provided it has not defaulted in the payment of any
monthly installment) for 90% of the then-balance due. Upon any default in making
monthly installments due under the settlement agreement, BUDCO has the right to
reinstate the legal proceedings and enter a consent judgment in the amount of
$153,800, plus interest (accruing at the rate of 13% per annum from December 4,
2006), plus attorney fees of $4,800, less the amount of monthly installments
made to the date of the default. This settlement was placed on the record in
open court; the parties have also settled an order confirming the above terms.
Pursuant to a November 27, 2006 demand letter, Mr. Prasad Pothini
(through his counsel), demanded the sum of $39,200 from the Company in
rescission of a Franchise Agreement entered into between Mr. Pothini and the
Company on April 1, 2004. The amount demanded represents the $29,500 franchise
fee paid by Mr. Pothini, plus accrued interest. Additionally, Mr. Pothini's
demand letter contends that if the Company rejected his rescission demand, he
would be entitled to lost profits of $276,800. Mr. Pothini never opened a
franchise location, because - as the Company contends - he never identified a
suitable location for his franchise. Additionally, the Company contends that Mr.
Pothini was unable to obtain the necessary third party financing to open and
operate a franchise location. Mr. Pothini contends that he could have obtained
such financing, and that the Company improperly rejected potential locations
proposed by him. Counsel for the Company and Mr. Pothini have discussed Mr.
Pothini's claims and the allegations and defenses asserted by each side, but the
Company has not offered any sum in settlement. The Company is still evaluating
Mr. Pothini's claims but at this time it is unable to evaluate the likely
outcome of this demand.
On March 2, 2007, Imperial Marketing, Inc. filed a suit against Midnight
Auto Franchise Corp. in the Circuit Court for Oakland County, Michigan, Case no.
07-081205-CZ (Langford-Morris, J.) (the "Imperial Litigation"). Imperial
provided marketing services to Midnight Auto Franchise Corp. but has since been
replaced. The Imperial Litigation attempts to recover $67,324.62 "plus costs,
interest and attorney fees" representing amounts allegedly owed to Imperial for
marketing services. The Company has defenses to the claims made in the complaint
which it plans to assert in an answer, but at this time is unable to evaluate
the likely outcome.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
16
April 2006 Financing (the "April 2006 Financing")
- -------------------------------------------------
On April 4, 2006, the Company entered into a Securities Purchase
Agreement (the "April 2006 Financing Agreement") with a number of purchasers
(whose identities are set forth in the Exhibits to this Form 10-QSB) (the
"Purchasers") whereby the Purchasers agreed to purchase and the Company agreed
to issue and sell, upon the terms and conditions set forth therein, (i)Callable
Convertible Promissory Notes of the Company in the aggregate principal amount of
$400,000 (the "April 2006 Financing Notes"), convertible into shares of common
stock, par value $.00005 per share, of the Company (the "Common Stock"), and
(ii) Stock Purchase Warrants exercisable for an aggregate of 800,000 shares of
Common Stock (the "April 2006 Financing Warrants").
Each of the April 2006 Financing Notes accrues interest at a rate of 10%
per annum and matures on April 4, 2009. Any amount of principal or interest on
the April 2006 Financing Notes which is not paid when due will bear interest at
the rate of 15% per annum from the due date of the April 2006 Financing Notes
until such principal and interest is paid. Each of the April 2006 Financing
Notes is convertible, at the option of the holder, into shares of Common Stock
at a conversion ratio which reflects a discount, initially 25% (which may
increase upon the occurrence of certain events), to the average of the three
lowest trading prices of the Common Stock for the 20 trading days immediately
preceding conversion.
Each of the April 2006 Financing Warrants is exercisable, at the option
of the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.08: provided, that if the
Company defaults under an obligation to register the shares of Common Stock for
which the April 2006 Financing Warrants are exercisable pursuant to the
Securities Act of 1933, as amended (the "Securities Act") at the time of
exercise (as discussed below), the April 2006 Financing Warrants may be
exercised on cashless basis.
Contemporaneous with the execution and delivery of the April 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "April 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
April 2006 Financing Notes and exercise of the April 2006 Financing Warrants
("April 2006 Financing Conversion Shares"). The Company is under an obligation
to register such April 2006 Financing Conversion Shares pursuant to the
Securities Act within 120 days of the closing of the above-referenced
transaction. The Company is currently in default of its obligation under the
April 2006 Financing Registration Agreement to register the April 2006 Financing
Conversion Shares, as it endeavors to achieve compliance with its reporting
obligations under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), prior to registering such April 2006 Financing Conversion
Shares, and intends to register such April 2006 Financing Conversion Shares
promptly upon achieving compliance under the Exchange Act.
In order to induce the Purchasers to purchase the April 2006 Financing
Notes and the April 2006 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated April 4, 2006 (the
"April 2006 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated April 4, 2006 (the "April 2006 Financing Intellectual
Property Security Agreement"), granting the Purchasers a security interest in
the intellectual property of the Company.
17
The Company sold and issued the April 2006 Financing Notes and the April
2006 Financing Warrants in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act and the rules and regulations promulgated
pursuant thereto. In relying on such exemption, the Company considered that the
transaction was the result of non-public offering (for which no advertisements
or solicitations were made) to an affiliated group of four "accredited
investors" (as defined in Rule 501(a) of Regulation D under the Securities Act),
with sophistication in investments of the same type as the Securities.
May 2006 Financing (the "May 2006 Financing")
- ---------------------------------------------
On May 8, 2006, the Company entered into a Securities Purchase Agreement
(the "May 2006 Financing Agreement") with the Purchasers whereby the Purchasers
agreed to purchase and the Company agreed to issue and sell, upon the terms and
conditions set forth therein, (i) Callable Convertible Promissory Notes of the
Company in the aggregate principal amount of $350,000 (the "May 2006 Financing
Notes"), convertible into shares of Common Stock, and (ii) Stock Purchase
Warrants exercisable for an aggregate of 700,000 shares of Common Stock (the
"May 2006 Financing Warrants").
Each of the May 2006 Financing Notes accrues interest at a rate of 10%
per annum and matures on May 8, 2009. Any amount of principal or interest on the
May 2006 Financing Notes which is not paid when due will bear interest at the
rate of 15% per annum from the due date of the May 2006 Financing Notes until
such principal and interest is paid. Each of the May 2006 Financing Notes is
convertible, at the option of the holder, into shares of Common Stock at a
conversion ratio which reflects a discount, initially 25% (which may increase
upon the occurrence of certain events), to the average of the three lowest
trading prices of the Common Stock for the 20 trading days immediately preceding
conversion.
Each of the May 2006 Financing Warrants is exercisable, at the option of
the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.06 provided, that if the
Company defaults under an obligation to register the shares of Common Stock for
which the May 2006 Financing Warrants are exercisable pursuant to the Securities
Act Securities Act at the time of exercise (as discussed below), the May 2006
Financing Warrants may be exercised on cashless basis.
Contemporaneous with the execution and delivery of the May 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "May 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
May 2006 Financing Notes and exercise of the May 2006 Financing Warrants ("May
2006 Financing Conversion Shares"). The Company is under an obligation to
register such May 2006 Financing Conversion Shares pursuant to the Securities
Act within 45 days of the closing of the above-referenced transaction. The
Company is currently in default of its obligation under the May 2006 Financing
Registration Agreement to register the May 2006 Financing Conversion Shares, as
it endeavors to achieve compliance with its reporting obligations under the
Exchange Act prior to registering such May 2006 Financing Conversion Shares, and
intends to register such May 2006 Financing Conversion Shares promptly upon
achieving compliance under the Exchange Act.
In order to induce the Purchasers to purchase the May 2006 Financing
Notes and the May 2006 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a
18
Security Agreement, dated May 8, 2006 (the "May 2006 Financing Security
Agreement"), granting the Purchasers a security interest in the property of the
Company, and (ii) an Intellectual Property Security Agreement, dated May 8, 2006
(the "May 2006 Financing Intellectual Property Security Agreement"), granting
the Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the May 2006 Financing Notes and the May
2006 Financing Warrants in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act and the rules and regulations promulgated
pursuant thereto. In relying on such exemption, the Company considered that the
transaction was the result of non-public offering (for which no advertisements
or solicitations were made) to an affiliated group of four "accredited
investors" (as defined in Rule 501(a) of Regulation D under the Securities Act),
with sophistication in investments of the same type as the Securities.
June 2006 Financing (the "June 2006 Financing")
- -----------------------------------------------
On June 7, 2006, the Company entered into a Securities Purchase
Agreement (the "June 2006 Financing Agreement") with the Purchasers whereby the
Purchasers agreed to purchase and the Company agreed to issue and sell, upon the
terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $300,000 (the "June
2006 Financing Notes"), convertible into shares of Common Stock, and (ii) Stock
Purchase Warrants exercisable for an aggregate of 600,000 shares of Common Stock
(the "June 2006 Financing Warrants").
Each of the June 2006 Financing Notes accrues interest at a rate of 10%
per annum and matures on June 7, 2009. Any amount of principal or interest on
the June 2006 Financing Notes which is not paid when due will bear interest at
the rate of 15% per annum from the due date of the June 2006 Financing Notes
until such principal and interest is paid. Each of the June 2006 Financing Notes
is convertible, at the option of the holder, into shares of Common Stock at a
conversion ratio which reflects a discount, initially 25% (which may increase
upon the occurrence of certain events), to the average of the three lowest
trading prices of the Common Stock for the 20 trading days immediately preceding
conversion.
Each of the June 2006 Financing Warrants is exercisable, at the option
of the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.04; provided, that if the
Company defaults under an obligation to register the shares of Common Stock for
which the June 2006 Financing Warrants are exercisable pursuant to the
Securities Act Securities Act at the time of exercise (as discussed below), the
June 2006 Financing Warrants may be exercised on cashless basis.
Contemporaneous with the execution and delivery of the June 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "June 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
June 2006 Financing Notes and exercise of the June 2006 Financing Warrants
("June 2006 Financing Conversion Shares"). The Company is under an obligation to
register such June 2006 Financing Conversion Shares pursuant to the Securities
Act within 45 days of the closing of the above-referenced transaction. The
Company is currently in default of its obligation under the June 2006 Financing
Registration Agreement to register the June 2006 Financing Conversion Shares, as
it endeavors to achieve compliance with its reporting
19
obligations under the Exchange Act prior to registering such June 2006 Financing
Conversion Shares, and intends to register such June 2006 Financing Conversion
Shares promptly upon achieving compliance under the Exchange Act.
In order to induce the Purchasers to purchase the June 2006 Financing
Notes and the June 2006 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated June 7, 2006 (the
"June 2006 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated June 7, 2006 (the "June 2006 Financing Intellectual
Property Security Agreement"), granting the Purchasers a security interest in
the intellectual property of the Company.
The Company sold and issued the June 2006 Financing Notes and the June
2006 Financing Warrants in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act and the rules and regulations promulgated
pursuant thereto. In relying on such exemption, the Company considered that the
transaction was the result of non-public offering (for which no advertisements
or solicitations were made) to an affiliated group of four "accredited
investors" (as defined in Rule 501(a) of Regulation D under the Securities Act),
with sophistication in investments of the same type as the Securities.
July 2006 Financing (the "July 2006 Financing")
- -----------------------------------------------
On July 5, 2006, the Company entered into a Securities Purchase
Agreement (the "July 2006 Financing Agreement") with the Purchasers whereby the
Purchasers agreed to purchase and the Company agreed to issue and sell, upon the
terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $300,000 (the "July
2006 Financing Notes"), convertible into shares of Common Stock, and (ii) Stock
Purchase Warrants exercisable for an aggregate of 600,000 shares of Common Stock
(the "July 2006 Financing Warrants").
Each of the July 2006 Financing Notes accrues interest at a rate of 10%
per annum and matures on July 5, 2009. Any amount of principal or interest on
the July 2006 Financing Notes which is not paid when due will bear interest at
the rate of 15% per annum from the due date of the July 2006 Financing Notes
until such principal and interest is paid. Each of the July 2006 Financing Notes
is convertible, at the option of the holder, into shares of Common Stock at a
conversion ratio which reflects a discount, initially 25% (which may increase
upon the occurrence of certain events), to the average of the three lowest
trading prices of the Common Stock for the 20 trading days immediately preceding
conversion.
Each of the July 2006 Financing Warrants is exercisable, at the option
of the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.04 provided, that if the
Company defaults under an obligation to register the shares of Common Stock for
which the July 2006 Financing Warrants are exercisable pursuant to the
Securities Act Securities Act at the time of exercise (as discussed below), the
July 2006 Financing Warrants may be exercised on cashless basis.
Contemporaneous with the execution and delivery of the July 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "July 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain
20
registration rights under the Securities Act with respect to the Common Stock
issuable upon conversion of the July 2006 Financing Notes and exercise of the
July 2006 Financing Warrants ("July 2006 Financing Conversion Shares"). The
Company is under an obligation to register such July 2006 Financing Conversion
Shares pursuant to the Securities Act within 45 days of the closing of the
above-referenced transaction. The Company is currently in default of its
obligation under the July 2006 Financing Registration Agreement to register the
July 2006 Financing Conversion Shares, as it endeavors to achieve compliance
with its reporting obligations under the Exchange Act prior to registering such
July 2006 Financing Conversion Shares, and intends to register such July 2006
Financing Conversion Shares promptly upon achieving compliance under the
Exchange Act.
In order to induce the Purchasers to purchase the July 2006 Financing
Notes and the July 2006 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated July 5, 2006 (the
"July 2006 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated July 5, 2006 (the "July 2006 Financing Intellectual
Property Security Agreement"), granting the Purchasers a security interest in
the intellectual property of the Company.
The Company sold and issued the July 2006 Financing Notes and the July
2006 Financing Warrants in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act and the rules and regulations promulgated
pursuant thereto. In relying on such exemption, the Company considered that the
transaction was the result of non-public offering (for which no advertisements
or solicitations were made) to an affiliated group of four "accredited
investors" (as defined in Rule 501(a) of Regulation D under the Securities Act),
with sophistication in investments of the same type as the Securities.
August 2006 Financing (the "August 2006 Financing")
- ---------------------------------------------------
On August 15, 2006, the Company entered into a Securities Purchase
Agreement (the "August 2006 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $300,000 (the "August
2006 Financing Notes"), convertible into shares of Common Stock, and (ii) Stock
Purchase Warrants exercisable for an aggregate of 600,000 shares of Common Stock
(the "August 2006 Financing Warrants").
Each of the August 2006 Financing Notes accrues interest at a rate of
10% per annum and matures on August 15, 2009. Any amount of principal or
interest on the August 2006 Financing Notes which is not paid when due will bear
interest at the rate of 15% per annum from the due date of the August 2006
Financing Notes until such principal and interest is paid. Each of the August
2006 Financing Notes is convertible, at the option of the holder, into shares of
Common Stock at a conversion ratio which reflects a discount, initially 25%
(which may increase upon the occurrence of certain events), to the average of
the three lowest trading prices of the Common Stock for the 20 trading days
immediately preceding conversion.
Each of the August 2006 Financing Warrants is exercisable, at the option
of the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.04: provided, that if the
Company defaults under an obligation to register
21
the shares of Common Stock for which the August 2006 Financing Warrants are
exercisable pursuant to the Securities Act Securities Act at the time of
exercise (as discussed below), the August 2006 Financing Warrants may be
exercised on cashless basis.
Contemporaneous with the execution and delivery of the August 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "August 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
August 2006 Financing Notes and exercise of the August 2006 Financing Warrants
("August 2006 Financing Conversion Shares"). The Company is under an obligation
to register such August 2006 Financing Conversion Shares pursuant to the
Securities Act within 45 days of the closing of the above-referenced
transaction. The Company is currently in default of its obligation under the
August 2006 Financing Registration Agreement to register the August 2006
Financing Conversion Shares, as it endeavors to achieve compliance with its
reporting obligations under the Exchange Act prior to registering such August
2006 Financing Conversion Shares, and intends to register such August 2006
Financing Conversion Shares promptly upon achieving compliance under the
Exchange Act.
In order to induce the Purchasers to purchase the August 2006 Financing
Notes and the August 2006 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated August 15, 2006 (the
"August 2006 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated August 15, 2006 (the "August 2006 Financing
Intellectual Property Security Agreement"), granting the Purchasers a security
interest in the intellectual property of the Company.
The Company sold and issued the August 2006 Financing Notes and the
August 2006 Financing Warrants in reliance upon an exemption from registration
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated pursuant thereto. In relying on such exemption, the Company
considered that the transaction was the result of non-public offering (for which
no advertisements or solicitations were made) to an affiliated group of four
"accredited investors" (as defined in Rule 501(a) of Regulation D under the
Securities Act), with sophistication in investments of the same type as the
Securities.
September 2006 Financing (the "September 2006 Financing")
- ---------------------------------------------------------
On September 15, 2006, the Company entered into a Securities Purchase
Agreement (the "September 2006 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $300,000 (the
"September 2006 Financing Notes"), convertible into shares of Common Stock, and
(ii) Stock Purchase Warrants exercisable for an aggregate of 600,000 shares of
Common Stock (the "September 2006 Financing Warrants").
Each of the September 2006 Financing Notes accrues interest at a rate of 10% per
annum and matures on September 15, 2009. Any amount of principal or interest on
the September 2006 Financing Notes which is not paid when due will bear interest
at the rate of 15% per annum from the due date of the September 2006 Financing
Notes until such principal and interest is paid. Each of the September 2006
Financing Notes is convertible, at the option of the holder, into
22
shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion.
Each of the September 2006 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04; provided,
that if the Company defaults under an obligation to register the shares of
Common Stock for which the September 2006 Financing Warrants are exercisable
pursuant to the Securities Act Securities Act at the time of exercise (as
discussed below), the September 2006 Financing Warrants may be exercised on
cashless basis.
Contemporaneous with the execution and delivery of the September 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "September 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
September 2006 Financing Notes and exercise of the September 2006 Financing
Warrants ("September 2006 Financing Conversion Shares"). The Company is under an
obligation to register such September 2006 Financing Conversion Shares pursuant
to the Securities Act within 45 days of the closing of the above-referenced
transaction. The Company is currently in default of its obligation under the
September 2006 Financing Registration Agreement to register the September 2006
Financing Conversion Shares, as it endeavors to achieve compliance with its
reporting obligations under the Exchange Act prior to registering such September
2006 Financing Conversion Shares, and intends to register such September 2006
Financing Conversion Shares promptly upon achieving compliance under the
Exchange Act.
In order to induce the Purchasers to purchase the September 2006
Financing Notes and the September 2006 Financing Warrants, the Company agreed to
execute and deliver to the Purchasers (i) a Security Agreement, dated September
15, 2006 (the "September 2006 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated September 15, 2006 (the
"September 2006 Financing Intellectual Property Security Agreement"), granting
the Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the September 2006 Financing Notes and the
September 2006 Financing Warrants in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act and the rules and
regulations promulgated pursuant thereto. In relying on such exemption, the
Company considered that the transaction was the result of non-public offering
(for which no advertisements or solicitations were made) to an affiliated group
of four "accredited investors" (as defined in Rule 501(a) of Regulation D under
the Securities Act), with sophistication in investments of the same type as the
Securities.
October 4, 2006 Financing (the "October 4, 2006 Financing")
- -----------------------------------------------------------
On October 4, 2006, the Company entered into a Securities Purchase
Agreement (the "October 4, 2006 Financing Agreement") with the Purchasers
whereby the Purchasers agreed to purchase and the Company agreed to issue and
sell, upon the terms and conditions set forth therein, (i) Callable Convertible
Promissory Notes of the Company in the aggregate principal amount of $300,000
(the "October 4, 2006 Financing Notes"), convertible into shares of
23
Common Stock, and (ii) Stock Purchase Warrants exercisable for an aggregate of
600,000 shares of Common Stock (the "October 4, 2006 Financing Warrants").
Each of the October 4, 2006 Financing Notes accrues interest at a rate
of 10% per annum and matures on October 4, 2009. Any amount of principal or
interest on the October 4, 2006 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the October 4,
2006 Financing Notes until such principal and interest is paid. Each of the
October 4, 2006 Financing Notes is convertible, at the option of the holder,
into shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion.
Each of the October 4, 2006 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04 provided, that
if the Company defaults under an obligation to register the shares of Common
Stock for which the October 4, 2006 Financing Warrants are exercisable pursuant
to the Securities Act Securities Act at the time of exercise (as discussed
below), the October 4, 2006 Financing Warrants may be exercised on cashless
basis.
Contemporaneous with the execution and delivery of the October 4, 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "October 4, 2006 Financing Registration Rights
Agreement"), pursuant to which the Company granted certain registration rights
under the Securities Act with respect to the Common Stock issuable upon
conversion of the October 4, 2006 Financing Notes and exercise of the October 4,
2006 Financing Warrants ("October 4, 2006 Financing Conversion Shares"). The
Company is under an obligation to register such October 4, 2006 Financing
Conversion Shares pursuant to the Securities Act within 45 days of the closing
of the above-referenced transaction. The Company is currently in default of its
obligation under the October 4, 2006 Financing Registration Agreement to
register the October 4, 2006 Financing Conversion Shares, as it endeavors to
achieve compliance with its reporting obligations under the Exchange Act prior
to registering such October 4, 2006 Financing Conversion Shares, and intends to
register such October 4, 2006 Financing Conversion Shares promptly upon
achieving compliance under the Exchange Act.
In order to induce the Purchasers to purchase the October 4, 2006
Financing Notes and the October 4, 2006 Financing Warrants, the Company agreed
to execute and deliver to the Purchasers (i) a Security Agreement, dated October
4, 2006 (the "October 4, 2006 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated October 4, 2006 (the "October 4,
2006 Financing Intellectual Property Security Agreement"), granting the
Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the October 4, 2006 Financing Notes and the
October 4, 2006 Financing Warrants in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act and the rules and
regulations promulgated pursuant thereto. In relying on such exemption, the
Company considered that the transaction was the result of non-public offering
(for which no advertisements or solicitations were made) to an affiliated group
of four "accredited investors" (as defined in Rule 501(a) of Regulation D under
the Securities Act), with sophistication in investments of the same type as the
Securities.
24
October 16, 2006 Financing (the "October 16, 2006 Financing")
- -------------------------------------------------------------
On October 16, 2006, the Company entered into a Securities Purchase
Agreement (the "October 16, 2006 Financing Agreement") with the Purchasers
whereby the Purchasers agreed to purchase and the Company agreed to issue and
sell, upon the terms and conditions set forth therein, (i) Callable Convertible
Promissory Notes of the Company in the aggregate principal amount of $150,000,
(the "October 16, 2006 Financing Notes"), convertible into shares of Common
Stock, and (ii) Stock Purchase Warrants exercisable for an aggregate of 300,000
shares of Common Stock (the "October 16, 2006 Financing Warrants").
Each of the October 16, 2006 Financing Notes accrues interest at a rate
of 10% per annum and matures on October 16, 2009. Any amount of principal or
interest on the October 16, 2006 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the October 16,
2006 Financing Notes until such principal and interest is paid. Each of the
October 16, 2006 Financing Notes is convertible, at the option of the holder,
into shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion .
Each of the October 16, 2006 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04 provided, that
if the Company defaults under an obligation to register the shares of Common
Stock for which the October 16, 2006 Financing Warrants are exercisable pursuant
to the Securities Act Securities Act at the time of exercise (as discussed
below), the October 16, 2006 Financing Warrants may be exercised on cashless
basis.
Contemporaneous with the execution and delivery of the October 16, 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "October 16, 2006 Financing Registration Rights
Agreement"), pursuant to which the Company granted certain registration rights
under the Securities Act with respect to the Common Stock issuable upon
conversion of the October 16, 2006 Financing Notes and exercise of the October
16, 2006 Financing Warrants ("October 16, 2006 Financing Conversion Shares").
The Company is under an obligation to register such October 16, 2006 Financing
Conversion Shares pursuant to the Securities Act within 45 days of the closing
of the above-referenced transaction. The Company is currently in default of its
obligation under the October 16, 2006 Financing Registration Agreement to
register the October 16, 2006 Financing Conversion Shares, as it endeavors to
achieve compliance with its reporting obligations under the Exchange Act prior
to registering such October 16, 2006 Financing Conversion Shares, and intends to
register such October 16, 2006 Financing Conversion Shares promptly upon
achieving compliance under the Exchange Act.
In order to induce the Purchasers to purchase the October 16, 2006
Financing Notes and the October 16, 2006 Financing Warrants, the Company agreed
to execute and deliver to the Purchasers (i) a Security Agreement, dated October
16, 2006 (the "October 16, 2006 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated October 16, 2006 (the "October
16, 2006 Financing Intellectual Property Security Agreement"), granting the
Purchasers a security interest in the intellectual property of the Company.
25
The Company sold and issued the October 16, 2006 Financing Notes and the
October 16, 2006 Financing Warrants in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act and the rules and
regulations promulgated pursuant thereto. In relying on such exemption, the
Company considered that the transaction was the result of non-public offering
(for which no advertisements or solicitations were made) to an affiliated group
of four "accredited investors" (as defined in Rule 501(a) of Regulation D under
the Securities Act), with sophistication in investments of the same type as the
Securities.
November 2006 Financing (the "November 2006 Financing")
- -------------------------------------------------------
On November 14, 2006, the Company entered into a Securities Purchase
Agreement (the "November 2006 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $450,000 (the
"November 2006 Financing Notes"), convertible into shares of Common Stock, and
(ii) Stock Purchase Warrants exercisable for an aggregate of 900,000 shares of
Common Stock (the "November 2006 Financing Warrants").
Each of the November 2006 Financing Notes accrues interest at a rate of
10% per annum and matures on November 14, 2009. Any amount of principal or
interest on the November 2006 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the November
2006 Financing Notes until such principal and interest is paid. Each of the
November 2006 Financing Notes is convertible, at the option of the holder, into
shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion.
Each of the November 2006 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04; provided,
that if the Company defaults under an obligation to register the shares of
Common Stock for which the November 2006 Financing Warrants are exercisable
pursuant to the Securities Act Securities Act at the time of exercise (as
discussed below), the November 2006 Financing Warrants may be exercised on
cashless basis.
Contemporaneous with the execution and delivery of the November 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "November 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
November 2006 Financing Notes and exercise of the November 2006 Financing
Warrants ("November 2006 Financing Conversion Shares"). The Company is under an
obligation to register such November 2006 Financing Conversion Shares pursuant
to the Securities Act within 45 days of the closing of the above-referenced
transaction. The Company is currently in default of its obligation under the
November 2006 Financing Registration Agreement to register the November 2006
Financing Conversion Shares, as it endeavors to achieve compliance with its
reporting obligations under the Exchange Act prior to registering such November
2006 Financing Conversion Shares, and intends to register such November 2006
Financing Conversion Shares promptly upon achieving compliance under the
Exchange Act.
26
In order to induce the Purchasers to purchase the November 2006
Financing Notes and the November 2006 Financing Warrants, the Company agreed to
execute and deliver to the Purchasers (i) a Security Agreement, dated November
14, 2006 (the "November 2006 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated November 14, 2006 (the "November
2006 Financing Intellectual Property Security Agreement"), granting the
Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the November 2006 Financing Notes and the
November 2006 Financing Warrants in reliance upon an exemption from registration
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated pursuant thereto. In relying on such exemption, the Company
considered that the transaction was the result of non-public offering (for which
no advertisements or solicitations were made) to an affiliated group of four
"accredited investors" (as defined in Rule 501(a) of Regulation D under the
Securities Act), with sophistication in investments of the same type as the
Securities.
December 2006 Financing (the "December 2006 Financing")
- -------------------------------------------------------
On December 11, 2006, the Company entered into a Securities Purchase
Agreement (the "December 2006 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $450,000 (the
"December 2006 Financing Notes"), convertible into shares of Common Stock, and
(ii) Stock Purchase Warrants exercisable for an aggregate of 900,000 shares of
Common Stock (the "December 2006 Financing Warrants").
Each of the December 2006 Financing Notes accrues interest at a rate of
10% per annum and matures on December 11, 2009. Any amount of principal or
interest on the December 2006 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the December
2006 Financing Notes until such principal and interest is paid. Each of the
December 2006 Financing Notes is convertible, at the option of the holder, into
shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion.
Each of the December 2006 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04; provided,
that if the Company defaults under an obligation to register the shares of
Common Stock for which the December 2006 Financing Warrants are exercisable
pursuant to the Securities Act Securities Act at the time of exercise (as
discussed below), the December 2006 Financing Warrants may be exercised on
cashless basis.
Contemporaneous with the execution and delivery of the December 2006
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "December 2006 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
December 2006 Financing Notes and exercise of the December 2006 Financing
Warrants ("December 2006 Financing Conversion Shares"). The Company is under an
obligation to register such December 2006 Financing Conversion Shares pursuant
to the
27
Securities Act within 45 days of the closing of the above-referenced
transaction. The Company is currently in default of its obligation under the
December 2006 Financing Registration Agreement to register the December 2006
Financing Conversion Shares, as it endeavors to achieve compliance with its
reporting obligations under the Exchange Act prior to registering such December
2006 Financing Conversion Shares, and intends to register such December 2006
Financing Conversion Shares promptly upon achieving compliance under the
Exchange Act.
In order to induce the Purchasers to purchase the December 2006
Financing Notes and the December 2006 Financing Warrants, the Company agreed to
execute and deliver to the Purchasers (i) a Security Agreement, dated December
11, 2006 (the "December 2006 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated December 11, 2006 (the "December
2006 Financing Intellectual Property Security Agreement"), granting the
Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the December 2006 Financing Notes and the
December 2006 Financing Warrants in reliance upon an exemption from registration
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated pursuant thereto. In relying on such exemption, the Company
considered that the transaction was the result of non-public offering (for which
no advertisements or solicitations were made) to an affiliated group of four
"accredited investors" (as defined in Rule 501(a) of Regulation D under the
Securities Act), with sophistication in investments of the same type as the
Securities.
December 31, 2006 Interest Conversion (the "Interest Conversion")
- -----------------------------------------------------------------
On December 31, 2006, in consideration for the waiver of certain
interest obligations owed to the Purchasers, the Company agreed to convert such
interest owed to the Purchasers into Callable Promissory Notes of the Registrant
in the aggregate principal amount of $500,574.21 (the "Interest Notes"),
convertible into shares of Common Stock. Each Purchaser is an "accredited
investor" as defined in Rule 501(a) of Regulation D under the Securities Act of
1933, as amended (the "Securities Act").
Each of the Interest Notes accrues interest at a rate of 2% per annum
and matures on December 31, 2009. Any amount of principal or interest on the
Interest Note which is not paid when due will bear interest at the rate of 15%
per annum from the due date of the Interest Note until such principal and
interest is paid. Each of the Interest Notes is convertible, at the option of
the holder, into shares of Common Stock at a conversion ratio which reflects a
discount, initially 25% (which may increase upon the occurrence of certain
events), to the average of the three lowest trading prices of the Common Stock
for the 20 trading days immediately preceding conversion.
January 2007 Financing (the "January 2007 Financing")
- -----------------------------------------------------
On January 18, 2007, the Company entered into a Securities Purchase
Agreement (the "January 2007 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $450,000 (the "January
2007 Financing Notes"), convertible into shares of Common
28
Stock, and (ii) Stock Purchase Warrants exercisable for an aggregate of 900,000
shares of Common Stock (the "January 2007 Financing Warrants").
Each of the January 2007 Financing Notes accrues interest at a rate of
10% per annum and matures on January 18, 2010. Any amount of principal or
interest on the January 2007 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the January 2007
Financing Notes until such principal and interest is paid. Each of the January
2007 Financing Notes is convertible, at the option of the holder, into shares of
Common Stock at a conversion ratio which reflects a discount, initially 25%
(which may increase upon the occurrence of certain events), to the average of
the three lowest trading prices of the Common Stock for the 20 trading days
immediately preceding conversion.
Each of the January 2007 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04; provided,
that if the Company defaults under an obligation to register the shares of
Common Stock for which the January 2007 Financing Warrants are exercisable
pursuant to the Securities Act Securities Act at the time of exercise (as
discussed below), the January 2007 Financing Warrants may be exercised on
cashless basis.
Contemporaneous with the execution and delivery of the January 2007
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "January 2007 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
January 2007 Financing Notes and exercise of the January 2007 Financing Warrants
("January 2007 Financing Conversion Shares"). The Company is under an obligation
to register such January 2007 Financing Conversion Shares pursuant to the
Securities Act within 45 days of the closing of the above-referenced
transaction.
In order to induce the Purchasers to purchase the January 2007 Financing
Notes and the January 2007 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated January 18, 2007 (the
"January 2007 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated January 18, 2007 (the "January 2007 Financing
Intellectual Property Security Agreement"), granting the Purchasers a security
interest in the intellectual property of the Company.
The Company sold and issued the January 2007 Financing Notes and the
January 2007 Financing Warrants in reliance upon an exemption from registration
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated pursuant thereto. In relying on such exemption, the Company
considered that the transaction was the result of non-public offering (for which
no advertisements or solicitations were made) to an affiliated group of four
"accredited investors" (as defined in Rule 501(a) of Regulation D under the
Securities Act), with sophistication in investments of the same type as the
Securities.
February 2007 Financing (the "February 2007 Financing")
- -------------------------------------------------------
On February 13, 2007, the Company entered into a Securities Purchase
Agreement (the "February 2007 Financing Agreement") with the Purchasers whereby
the Purchasers agreed to purchase and the Company agreed to issue and sell, upon
the terms and conditions set forth
29
therein, (i) Callable Convertible Promissory Notes of the Company in the
aggregate principal amount of $300,000 (the "February 2007 Financing Notes"),
convertible into shares of Common Stock, and (ii) Stock Purchase Warrants
exercisable for an aggregate of 600,000 shares of Common Stock (the "February
2007 Financing Warrants").
Each of the February 2007 Financing Notes accrues interest at a rate of
10% per annum and matures on February 13, 2010. Any amount of principal or
interest on the February 2007 Financing Notes which is not paid when due will
bear interest at the rate of 15% per annum from the due date of the February
2007 Financing Notes until such principal and interest is paid. Each of the
February 2007 Financing Notes is convertible, at the option of the holder, into
shares of Common Stock at a conversion ratio which reflects a discount,
initially 25% (which may increase upon the occurrence of certain events), to the
average of the three lowest trading prices of the Common Stock for the 20
trading days immediately preceding conversion.
Each of the February 2007 Financing Warrants is exercisable, at the
option of the holder, for a period of 5 years from the date of issuance, at an
exercise price per share of Common Stock purchased equal to $0.04; provided,
that if the Company defaults under an obligation to register the shares of
Common Stock for which the February 2007 Financing Warrants are exercisable
pursuant to the Securities Act at the time of exercise (as discussed below), the
February 2007 Financing Warrants may be exercised on cashless basis.
Contemporaneous with the execution and delivery of the February 2007
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "February 2007 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
February 2007 Financing Notes and exercise of the February 2007 Financing
Warrants ("February 2007 Financing Conversion Shares"). The Company is under an
obligation to register such February 2007 Financing Conversion Shares pursuant
to the Securities Act within 45 days of the closing of the above-referenced
transaction.
In order to induce the Purchasers to purchase the February 2007
Financing Notes and the February 2007 Financing Warrants, the Company agreed to
execute and deliver to the Purchasers (i) a Security Agreement, dated February
13, 2007 (the "February 2007 Financing Security Agreement"), granting the
Purchasers a security interest in the property of the Company, and (ii) an
Intellectual Property Security Agreement, dated February 13, 2007 (the "February
2007 Financing Intellectual Property Security Agreement"), granting the
Purchasers a security interest in the intellectual property of the Company.
The Company sold and issued the February 2007 Financing Notes and the
February 2007 Financing Warrants in reliance upon an exemption from registration
pursuant to Section 4(2) of the Securities Act and the rules and regulations
promulgated pursuant thereto. In relying on such exemption, the Company
considered that the transaction was the result of non-public offering (for which
no advertisements or solicitations were made) to an affiliated group of four
"accredited investors" (as defined in Rule 501(a) of Regulation D under the
Securities Act), with sophistication in investments of the same type as the
Securities.
30
March 2007 Financing (the "March 2007 Financing")
On March 13, 2007, the Company entered into a Securities Purchase
Agreement (the "March 2007 Financing Agreement") with the Purchasers whereby the
Purchasers agreed to purchase and the Company agreed to issue and sell, upon the
terms and conditions set forth therein, (i) Callable Convertible Promissory
Notes of the Company in the aggregate principal amount of $350,000 (the "March
2007 Financing Notes"), convertible into shares of Common Stock, and (ii) Stock
Purchase Warrants exercisable for an aggregate of 700,000 shares of Common Stock
(the "March 2007 Financing Warrants").
Each of the March 2007 Financing Notes accrues interest at a rate of 10%
per annum and matures on March 13, 2010. Any amount of principal or interest on
the March 2007 Financing Notes which is not paid when due will bear interest at
the rate of 15% per annum from the due date of the March 2007 Financing Notes
until such principal and interest is paid. Each of the March 2007 Financing
Notes is convertible, at the option of the holder, into shares of Common Stock
at a conversion ratio which reflects a discount, initially 25% (which may
increase upon the occurrence of certain events), to the average of the three
lowest trading prices of the Common Stock for the 20 trading days immediately
preceding conversion.
Each of the March 2007 Financing Warrants is exercisable, at the option
of the holder, for a period of 5 years from the date of issuance, at an exercise
price per share of Common Stock purchased equal to $0.08; provided, that if the
Company defaults under an obligation to register the shares of Common Stock for
which the March 2007 Financing Warrants are exercisable pursuant to the
Securities Act at the time of exercise (as discussed below), the March 2007
Financing Warrants may be exercised on cashless basis.
Contemporaneous with the execution and delivery of the March 2007
Financing Agreement, the parties thereto executed and delivered a Registration
Rights Agreement (the "March 2007 Financing Registration Rights Agreement"),
pursuant to which the Company granted certain registration rights under the
Securities Act with respect to the Common Stock issuable upon conversion of the
March 2007 Financing Notes and exercise of the March 2007 Financing Warrants
("March 2007 Financing Conversion Shares"). The Company is under an obligation
to register such March 2007 Financing Conversion Shares pursuant to the
Securities Act within 120 days of the closing of the above-referenced
transaction.
In order to induce the Purchasers to purchase the March 2007 Financing
Notes and the March 2007 Financing Warrants, the Company agreed to execute and
deliver to the Purchasers (i) a Security Agreement, dated March 13, 2007 (the
"March 2007 Financing Security Agreement"), granting the Purchasers a security
interest in the property of the Company, and (ii) an Intellectual Property
Security Agreement, dated March 13, 2007 (the "March 2007 Financing Intellectual
Property Security Agreement"), granting the Purchasers a security interest in
the intellectual property of the Company.
The Company sold and issued the March 2007 Financing Notes and the March
2007 Financing Warrants in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act and the rules and regulations promulgated
pursuant thereto. In relying on such exemption, the Company considered that the
transaction was the result of non-public offering (for which no advertisements
or solicitations were made) to an affiliated group of four "accredited
investors" (as defined in Rule 501(a) of Regulation D under the Securities Act),
with sophistication in investments of the same type as the Securities.
31
Equity Conversion
- -----------------
As of March 20, 2007 the Purchasers have elected to convert an aggregate
amount of $39,614.55 of principal due to the Purchasers pursuant to the terms of
callable convertible notes, dated April 28, 2004 (the "April 2004 Notes"), into
an aggregate of 10,150,000 shares of Common Stock.
The Company issued such shares of Common Stock upon the partial
conversion of the April 2004 Notes in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act and the rules and
regulations promulgated pursuant thereto. In relying on such exemption, the
Company considered that the transaction was the result of non-public offering
(for which no advertisements or solicitations were made) to the Purchasers, who
are an affiliated group of four "accredited investors" (as defined in Rule
501(a) of Regulation D under the Securities Act), with sophistication in
investments of the same type as the Securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On December 31, 2006 the Purchasers forgave the Company for any accrued
penalties or liquidated damages owed to the Purchasers as of such date pursuant
to any of the Callable Secured Convertible Notes sold to the Purchasers by the
Company and waived any of its rights under such Callable Secured Convertible
Note with respect to any penalties or liquidated damages until June 30, 2007.
The Purchasers did not forgive any accrued penalties or liquidated damages which
are due or may become due pursuant to the Interest Notes nor did the Purchasers
waive their rights under such Interest Notes with respect to such penalties or
liquidated damages with respect to such Interest Notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the six
months ended June 30, 2006.
ITEM 5. OTHER INFORMATION
Cocco Employment Agreement
- --------------------------
On January 12, 2007, the Company entered into an employment agreement
with Mr. Nicolas A. Cocco ("COCCO"), its President and Chief Executive Officer
(the "COCCO Agreement"). The Cocco Agreement has an initial term of three years,
subject to automatic one-year renewals unless terminated by Cocco or the Company
upon at least 90 days notice prior to the end of the then scheduled expiration
date.
The Cocco Agreement provides for a base annual salary of (a) $275,000
during the first year of the Cocco Agreement (the "FIRST YEAR BASE SALARY"), (b)
$355,000 during the second year of the Cocco Agreement, and (c) $395,000 during
the third year of the Cocco Agreement and for the remainder of the term of the
Cocco Agreement. In addition, Cocco's base salary shall be subject to review
annually by the Company's Board of Directors (the "BOARD") and may be increased
(but not decreased) based upon: (i) salaries being paid to executives at
companies comparable to the Company and (ii) achievement of gross sales targets
established by the Board. The Company shall also provide to Cocco a
Company-owned or leased vehicle suitable and
32
appropriate for Cocco to perform his duties under the Cocco Employment
Agreement. Cocco is permitted to use the Company-owned or leased vehicle for
personal use so long as it is not used for any purpose that violates applicable
law or is detrimental to the Company. In lieu of a Company-owned or leased
vehicle, but only with the consent of Cocco, the Company may pay an automobile
allowance to Cocco in an amount sufficient to provide Cocco with such
Company-owned or leased vehicle.
The Cocco Agreement provides for the payment of a cash bonus of:
1. 50% of the First Year Base Salary in the first year of the Cocco
Agreement (in addition to other cash bonuses that may be earned
under the Cocco Agreement) if the Company has Overall System
Wide Sales (as defined in the Cocco Agreement) of at least
$5,800,000 for the fiscal year ended December 31, 2007.
2. 50% of the First Year Base Salary in the first year of the Cocco
Agreement (in addition to other cash bonuses that may be earned
under the Cocco Agreement) if each of the following objectives
are met by the Company by the end of fiscal year ending December
31, 2007:
a. Establishment of new relationships or maintenance of
existing relationships necessary to finance the current
operations of the company;
b. Increase of the number of All Night Auto branded facility
operations by a minimum of 30%; and
c. Increase of Overall System Wide Sales by a minimum of 25%.
3. 25% of the First Year Base Salary in the first year of the Cocco
Agreement (in addition to other cash bonuses that may be earned
under the Cocco Agreement) if the Company meets each of the
following objectives by the end of the fiscal year ended
December 31, 2007:
a. Increase of the gross revenues of the Company by at least
20%; and
b. Increase of the Midnight Auto Franchise Corp. Revenues (as
defined in the Cocco Agreement) by at least 15%.
The Cocco Agreement provides for payment of a discretionary bonus
following the end of each fiscal year of the Company. In addition, the Cocco
Agreement provides that cash bonuses for fiscal years ending December 31, 2008
and December 31, 2009 shall be based upon certain financial and business
milestones as established by the Company's board of directors (or committee
thereof) after consultation with Cocco prior to each anniversary of the Cocco
Agreement.
The Cocco Agreement provides for the grant under the a stock option plan
to be adopted by the Company to Cocco of stock options to acquire shares of
common stock, par value $0.00005 (the "COMMON STOCK"), in an aggregate amount
equal to 18.9% of the Company's issued and outstanding capital stock as of the
date of the Cocco Agreement. The stock options vest, if at all, in equal annual
installments, over the initial three year term of the Cocco
33
Agreement. The stock options shall be exercisable for 5 years and have an
exercise price equal to 110% of the fair market value per share of the Common
Stock as of the date of grant. In connection with such grant, Cocco has agreed
to enter into the Company's standard stock option agreement which will
incorporate the foregoing vesting schedule. The stock options may not be
assigned or otherwise transferred by Cocco, except as provided in such stock
option plan or by law.
The Cocco Agreement provides that if the Company terminates Cocco's
employment without Good Cause (as defined in the Cocco Agreement), Cocco is
entitled to the following severance: (a) his base salary for the remainder of
the initial term of the Cocco Agreement or the then current renewal term; (b) an
amount equal to three months of Cocco's then current base annual salary, which
is payable in cash within 30 days of his termination without Good Cause; (c) his
employee benefit plans, if any, for the remainder of the initial term of the
Cocco Agreement or the then current renewal term; and (d) all stock options that
are scheduled to vest during the initial term of the Cocco Agreement shall be
accelerated and deemed to have vested as of the date of Cocco's termination
without Good Cause. All stock options that have vested (or been deemed to have
vested) as of the date of Cocco's termination without Good Cause will remain
exercisable for a period of 90 days.
The Cocco Agreement provides that if Cocco's employment is terminated
due to his death or Total Disability (as defined in the Cocco Agreement), Cocco
is entitled to the following severance: (a) his then current base salary through
the date of death or Total Disability and for the six-month period immediately
following the date of death or Total Disability as well as any other accrued and
unpaid benefits and (b) any stock options that are scheduled to vest on the next
succeeding anniversary of the Cocco Agreement shall be accelerated and deemed to
have vested as of the date of Cocco's death or Total Disability. Stock options
that have not vested, if any, after the vesting described in the preceding
sentence, will be forfeited to the Company. Stock Options that have vested (or
been deemed to have vested) as of the date of Cocco's death or Total Disability
will remain exercisable for one year following such date.
The Cocco Agreement provides that if the Company terminates Cocco's
employment due to a Termination Without Cause Pursuant to a Merger (as defined
in the Cocco Agreement), Cocco is entitled to the following severance: (a) his
base salary through the date of the Termination Without Cause Pursuant to a
Merger and for a period of 6 months thereafter; (b) an amount equal to the pro
rata portion (based upon a 365 day year) of any cash bonuses which Cocco is
entitled to receive under the Cocco Agreement, if any; and (c) all stock options
that are scheduled to vest during the initial term of the Cocco Agreement shall
be accelerated and deemed to have vested as of the date of Cocco's Termination
Without Cause Pursuant to Merger. Stock Options that have vested (or been deemed
to have vested) as of the date of such termination shall remain exercisable for
a period of ninety (90) days.
As partial consideration for the severance provisions contained in the
Cocco Agreement, Cocco has also agreed to certain non-competition and
non-solicitation provisions contained in the Cocco Agreement.
To the extent that it becomes necessary for Cocco to make personal
guarantees to various customers, clients, vendor, suppliers or other persons or
entities in order to induce such persons or entities to initiate or continue
relations with the Company, the Company has agreed to indemnify Cocco for, and
hold him harmless against, any personal guarantee made to any such
34
customer, client, vendor, supplier or other person or entity. In addition, if
Cocco's employment is terminated for any reason, the Company has further agreed
to cause any customer, client, vendor, supplier or other person or entity
receiving such personal guarantee to release Cocco from such personal guarantee.
The Company has also agreed, subject to compliance with procedures of
the Company, to reimburse Cocco for all reasonable, ordinary and necessary
travel, entertainment, meal and lodging expenses incurred by Cocco on behalf of
the Company during the term of the Cocco Agreement. Cocco is entitled to
participate under any pension, salary deferral or profit sharing plan now
existing or hereafter created for employees of the Company upon terms and
conditions equivalent to those which the Company may provide for other key
management employees.
Kohl Employment Agreement
- -------------------------
On January 12, 2007, the Company entered into an employment agreement
with Mr. Richard J. Kohl ("KOHL"), its Vice President and Chief Financial
Officer (the "KOHL Agreement"). The Kohl Agreement has an initial term of three
years, subject to automatic one-year renewals unless terminated by Cocco or the
Company upon at least 90 days notice prior to the end of the then scheduled
expiration date.
The Kohl Agreement provides for a base annual salary of $200,000, which
is subject to review annually by the Company and may be increased or decreased
based on: (a) salaries being paid to executives at companies comparable to the
Company and (b) achievement of gross and net profit management as established by
the Company. The Kohl Agreement has an initial term of three years, subject to
automatic one-year renewals unless terminated by Kohl or the Company upon at
least 90 days notice prior to the end of the then scheduled expiration date.
The Kohl Agreement provides for payment of a discretionary bonus
following the end of each fiscal year of the Company of up to 50% of Kohl's then
current base annual alary.
The Kohl Agreement provides for the grant under the a stock option plan
to be adopted by the Company to Kohl of stock options to acquire shares of
Common Stock in an aggregate amount equal to 2.5% of the Company's issued and
outstanding capital stock as of the date of the Kohl Agreement. The stock
options vest, if at all, in equal annual installments, over the initial three
year term of the Kohl Agreement. The stock options shall be exercisable for 5
years and have an exercise price equal to 110% of the fair market value per
share of the Common Stock as of the date of grant. In connection with such
grant, Kohl has agreed to enter into the Company's standard stock option
agreement which will incorporate the foregoing vesting schedule. The stock
options may not be assigned or otherwise transferred by Kohl, except as provided
in such stock option plan or by law.
The Kohl Agreement provides that if the Company terminates Kohl's
employment without Good Cause (as defined in the Kohl Agreement), Kohl is
entitled to the following severance: (a) his base salary for the remainder of
the initial term of the Kohl Agreement or the then current renewal term; (b) an
amount equal to three months of Kohl's then current base annual salary, which is
payable in cash within 30 days of his termination without Good Cause; (c) his
employee benefit plans, if any, for the remainder of the initial term of the
Kohl Agreement or the then current renewal term; and (d) all stock options that
are scheduled to vest during the initial term of the Kohl Agreement shall be
accelerated and deemed to have vested as of the date
35
of Kohl's termination without Good Cause. All stock options that have vested (or
been deemed to have vested) as of the date of Kohl's termination without Good
Cause will remain exercisable for a period of 90 days.
The Kohl Agreement provides that if Kohl's employment is terminated due
to his death or Total Disability (as defined in the Kohl Agreement), Kohl is
entitled to the following severance: (a) his then current base salary through
the date of death or Total Disability and for the six-month period immediately
following Kohl's death or Total Disability as well as any other accrued and
unpaid benefits and (b) any stock options that are scheduled to vest on the next
succeeding anniversary of the Kohl Agreement shall be accelerated and deemed to
have vested as of the date of Kohl's death or Total Disability. Stock Options
that have vested (or been deemed to have vested) as of the date of Kohl's death
or Total Disability will remain exercisable for one year following such date.
Any stock options that have not vested (or been deemed to have vested) as of the
date of Kohl's death or Total Disability shall be forfeited to the Company as of
such date.
The Kohl Agreement provides that if the Company terminates Kohl's
employment due to a Termination Without Cause Pursuant to a Merger (as defined
in the Kohl Agreement), Kohl is entitled to the following severance: (a) his
base salary through the date of the Termination Without Cause Pursuant to a
Merger and for a period of 6 months thereafter; (b) an amount equal to the pro
rata portion (based upon a 365 day year) of any cash bonuses which Kohl is
entitled to receive under the Kohl Agreement, if any; and (c) all stock options
that are scheduled to vest during the initial term of the Kohl Agreement shall
be accelerated and deemed to have vested as of the date of Kohl's Termination
Without Cause Pursuant to Merger. Stock Options that have vested (or been deemed
to have vested) as of the date of such termination shall remain exercisable for
a period of ninety (90) days.
As partial consideration for the severance provisions contained in the
Kohl Agreement, Kohl has also agreed to certain non-competition and
non-solicitation provisions contained in the Kohl Agreement.
To the extent that it becomes necessary for Kohl to make personal
guarantees to various customers, clients, vendor, suppliers or other persons or
entities in order to induce such persons or entities to initiate or continue
relations with the Company, the Company has agreed to indemnify Kohl for, and
hold him harmless against, any personal guarantee made to any such customer,
client, vendor, supplier or other person or entity. In addition, if Kohl's
employment is terminated for any reason, the Company has further agreed to cause
any customer, client, vendor, supplier or other person or entity receiving such
personal guarantee to release Kohl from such personal guarantee.
The Company has also agreed, subject to compliance with procedures of
the Company, to reimburse Kohl for all reasonable, ordinary and necessary
travel, entertainment, meal and lodging expenses incurred by Kohl on behalf of
the Company during the term of the Kohl Agreement. Kohl is entitled to
participate under any pension, salary deferral or profit sharing plan now
existing or hereafter created for employees of the Company upon terms and
conditions equivalent to those which the Company may provide for other key
management employees.
36
Restatement of December 31, 2005 Financial Statements
- -----------------------------------------------------
During the first quarter of 2007, Midnight discovered errors in its
calculation of its derivative liability accrued convertible debt non-compliance
costs which was previously disclosed on the Company's audited financial
statements for the year ended December 31, 2005 contained in its Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2005 which was filed with
the SEC on November 17, 2006. The errors resulted in an increase to the
derivative liability and loss on derivative in the amount of $3,858,710 and a
decrease in accrued debt non-compliance costs of $208,954.
ITEM 6. EXHIBITS AND INDEX OF EXHIBITS.
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B. The Exhibits below are
required by Item 601 of Regulation S-B.
Exhibit
No. Description
4.1 Form of Common Stock Purchase Warrant issued in the April 2006
Financing, incorporated by reference as Exhibit 4.1 to the Form 10QSB
filed with the SEC on March 28, 2007.
4.2 Form of Common Stock Purchase Warrant issued in the May 2006 Financing,
incorporated by reference as Exhibit 4.1 to the Form 8K filed with the
SEC on May 16, 2006.
4.3 Form of Common Stock Purchase Warrant issued in the June 2006 Financing,
incorporated by reference as Exhibit 4.1 to the Form 8K filed with the
SEC on June 12, 2006.
4.4 Form of Common Stock Purchase Warrant issued in the July 2006 Financing,
incorporated by reference as Exhibit 4.4 to the Form 10QSB filed with
the SEC on March 28, 2007.
4.5 Form of Common Stock Purchase Warrant issued in the August 2006
Financing, incorporated by reference as Exhibit 4.1 to the Form 8K filed
with the SEC on August 21, 2006.
4.6 Form of Common Stock Purchase Warrant issued in the September 2006
Financing, incorporated by reference as Exhibit 4.1 to the Form 8K filed
with the SEC on September 20, 2006.
4.7 Form of Common Stock Purchase Warrant issued in the October 4, 2006
Financing, incorporated by reference as Exhibit 4.1 to the Form 8K filed
with the SEC on October 11, 2006.
4.8 Form of Common Stock Purchase Warrant issued in the October 16, 2006
Financing, incorporated by reference as Exhibit 4.8 to the Form 10QSB
filed with the SEC on March 28, 2007.
37
4.9 Form of Common Stock Purchase Warrant issued in the November 2006
Financing, incorporated by reference as Exhibit 4.9 to the Form 10QSB
filed with the SEC on March 28, 2007.
4.10 Form of Common Stock Purchase Warrant issued in the December 2006
Financing, incorporated by reference as Exhibit 4.10 to the Form 10QSB
filed with the SEC on March 28, 2007.
4.11 Form of Common Stock Purchase Warrant issued in the January 2007
Financing, incorporated by reference as Exhibit 4.1 to the Form 8K files
with the SEC on January 24, 2007.
4.12 Form of Common Stock Purchase Warrant issued in the February 2007
Financing, incorporated by reference as Exhibit 4.12 to the Form 10QSB
filed with the SEC on March 28, 2007.
4.13 Form of Common Stock Purchase Warrant issued in the March 2007
Financing, incorporated by reference as Exhibit 4.13 to the Form 10QSB
filed with the SEC on March 28, 2007.
10.1 Securities Purchase Agreement, dated April 4, 2006, as part of the April
2006 Financing, incorporated by reference as Exhibit 10.1 to the Form
10QSB filed with the SEC on March 28, 2007.
10.2 Security Agreement, dated April 4, 2006, as part of the April 2006
Financing, incorporated by reference as Exhibit 10.2 to the Form 10QSB
filed with the SEC on March 28, 2007.
10.3 Intellectual Property Security Agreement, dated April 4, 2006, as part
of the April 2006 Financing, incorporated by reference as Exhibit 10.3
to the Form 10QSB filed with the SEC on March 28, 2007.
10.4 Registration Rights Agreement, dated April 4, 2006, as part of the April
2006 Financing, incorporated by reference as Exhibit 10.4 to the Form
10QSB filed with the SEC on March 28, 2007.
10.5 Form of Callable Secured Note issued in the April 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.6 Securities Purchase Agreement, dated as of May 8, 2006 in connection
with the May 2006 Financing, incorporated by reference as Exhibit 10.1
to the Form 8K filed with the SEC on May 16, 2006.
10.7 Security Agreement, dated May 8, 2006, as part of the May 2006
Financing, incorporated by reference as Exhibit 10.2 to the Form 8K
filed with the SEC on May 16, 2006.
38
10.8 Intellectual Property Security Agreement, dated May 8, 2006, as part of
the May 2006 Financing, incorporated by reference as Exhibit 10.3 to the
Form 8K filed with the SEC on May 16, 2006.
10.9 Registration Rights Agreement, dated May 8, 2006, as part of the May
2006 Financing, incorporated by reference as Exhibit 10.4 to the Form 8K
filed with the SEC on May 16, 2006.
10.10 Form of Callable Secured Note issued in the May 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 8K filed with the
SEC on May 16, 2006.
10.11 Securities Purchase Agreement, dated as of June 7, 2006 in connection
with the June 2006 Financing, incorporated by reference as Exhibit 10.1
to the Form 8K filed with the SEC on June 12, 2006.
10.12 Security Agreement, dated June 7, 2006, as part of the June 2006
Financing, incorporated by reference as Exhibit 10.2 to the Form 8K
filed with the SEC on June 12, 2006.
10.13 Intellectual Property Security Agreement, dated June 7, 2006, as part of
the June 2006 Financing, incorporated by reference as Exhibit 10.3 to
the Form 8K filed with the SEC on June 12, 2006.
10.14 Registration Rights Agreement, dated June 7, 2006, as part of the June
2006 Financing, incorporated by reference as Exhibit 10.4 to the Form 8K
filed with the SEC on June 12, 2006.
10.15 Form of Callable Secured Note issued in the June 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 8K filed with the
SEC on June 12, 2006.
10.16 Securities Purchase Agreement, dated July 5, 2006, as part of the July
2006 Financing, incorporated by reference as Exhibit 10.16 to the Form
10QSB filed with the SEC on March 28, 2007.
10.17 Security Agreement, dated July 5, 2006, as part of the July 2006
Financing, incorporated by reference as Exhibit 10.17 to the Form 10QSB
filed with the SEC on March 28, 2007.
10.18 Intellectual Property Security Agreement, dated July 5, 2006, as part of
the July 2006 Financing, incorporated by reference as Exhibit 10.18 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.19 Registration Rights Agreement, dated July 5, 2006, as part of the July
2006 Financing, incorporated by reference as Exhibit 10.19 to the Form
10QSB filed with the SEC on March 28, 2007.
39
10.20 Form of Callable Secured Note issued in the July 2006 Financing,
incorporated by reference as Exhibit 10.20 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.21 Securities Purchase Agreement, dated as of August 15, 2006 in connection
with the August 2006 Financing, incorporated by reference as Exhibit
10.1 to the Form 8K filed with the SEC on August 21, 2006.
10.22 Security Agreement, dated August 15, 2006, as part of the August 2006
Financing, incorporated by reference as Exhibit 10.2 to the Form 8K
filed with the SEC on August 21, 2006.
10.23 Intellectual Property Security Agreement, dated August 15, 2006, as part
of the August 2006 Financing, incorporated by reference as Exhibit 10.3
to the Form 8K filed with the SEC on August 21, 2006.
10.24 Registration Rights Agreement, dated August 15, 2006, as part of the
August 2006 Financing, incorporated by reference as Exhibit 10.4 to the
Form 8K filed with the SEC on August 21, 2006.
10.25 Form of Callable Secured Note issued in the August 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 8K filed with the
SEC on August 21, 2006.
10.26 Securities Purchase Agreement, dated as of September 15, 2006 in
connection with the September 2006 Financing, incorporated by reference
as Exhibit 10.1 to the Form 8K filed with the SEC on September 20, 2006.
10.27 Security Agreement, dated September 15, 2006, as part of the September
2006 Financing, incorporated by reference as Exhibit 10.2 to the Form 8K
filed with the SEC on September 20, 2006.
10.28 Intellectual Property Security Agreement, dated September 15, 2006, as
part of the September 2006 Financing, incorporated by reference as
Exhibit 10.3 to the Form 8K filed with the SEC on September 20, 2006.
10.29 Registration Rights Agreement, dated September 15, 2006, as part of the
September 2006 Financing, incorporated by reference as Exhibit 10.4 to
the Form 8K filed with the SEC on September 20, 2006.
10.30 Form of Callable Secured Note issued in the September 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 8K filed with the
SEC on September 20, 2006.
40
10.31 Securities Purchase Agreement, dated as of October 4, 2006 in connection
with the October 4, 2006 Financing, incorporated by reference as Exhibit
10.1 to the Form 8K filed with the SEC on October 11, 2006.
10.32 Security Agreement, dated October 4, 2006, as part of the October 4,
2006 Financing, incorporated by reference as Exhibit 10.2 to the Form 8K
filed with the SEC on October 11, 2006.
10.33 Intellectual Property Security Agreement, dated October 4, 2006, as part
of the October 4, 2006 Financing, incorporated by reference as Exhibit
10.3 to the Form 8K filed with the SEC on October 11, 2006.
10.34 Registration Rights Agreement, dated October 4, 2006, as part of the
October 4, 2006 Financing, incorporated by reference as Exhibit 10.4 to
the Form 8K filed with the SEC on October 11, 2006.
10.35 Form of Callable Secured Note issued in the October 4, 2006 Financing,
incorporated by reference as Exhibit 10.5 to the Form 8K filed with the
SEC on October 11, 2006.
10.36 Securities Purchase Agreement, dated October 16, 2006, as part of the
October 16, 2006 Financing, incorporated by reference as Exhibit 10.36
to the Form 10QSB filed with the SEC on March 28, 2007.
10.37 Security Agreement, dated October 16, 2006, as part of the October 16,
2006 Financing, incorporated by reference as Exhibit 10.37 to the Form
10QSB filed with the SEC on March 28, 2007.
10.38 Intellectual Property Security Agreement, dated October 16, 2006, as
part of the October 16, 2006 Financing, incorporated by reference as
Exhibit 10.38 to the Form 10QSB filed with the SEC on March 28, 2007.
10.39 Registration Rights Agreement, dated October 16, 2006, as part of the
October 16, 2006 Financing, incorporated by reference as Exhibit 10.39
to the Form 10QSB filed with the SEC on March 28, 2007.
10.40 Form of Callable Secured Note issued in the October 16, 2006 Financing,
incorporated by reference as Exhibit 10.40 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.41 Securities Purchase Agreement, dated November 14, 2006, as part of the
November 2006 Financing, incorporated by reference as Exhibit 10.41 to
the Form 10QSB filed with the SEC on March 28, 2007.
41
10.42 Security Agreement, dated November 14, 2006, as part of the November
2006 Financing, incorporated by reference as Exhibit 10.42 to the Form
10QSB filed with the SEC on March 28, 2007.
10.43 Intellectual Property Security Agreement, dated November 14, 2006, as
part of the November 2006 Financing, incorporated by reference as
Exhibit 10.43 to the Form 10QSB filed with the SEC on March 28, 2007.
10.44 Registration Rights Agreement, dated November 14, 2006, as part of the
November 2006 Financing, incorporated by reference as Exhibit 10.44 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.45 Form of Callable Secured Note issued in the November 2006 Financing,
incorporated by reference as Exhibit 10.45 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.46 Securities Purchase Agreement, dated December 11, 2006, as part of the
December 2006 Financing, incorporated by reference as Exhibit 10.46 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.47 Security Agreement, dated December 11, 2006, as part of the December
2006 Financing, incorporated by reference as Exhibit 10.47 to the Form
10QSB filed with the SEC on March 28, 2007.
10.48 Intellectual Property Security Agreement, dated December 11, 2006, as
part of the December 2006 Financing, incorporated by reference as
Exhibit 10.48 to the Form 10QSB filed with the SEC on March 28, 2007.
10.49 Registration Rights Agreement, dated December 11, 2006, as part of the
December 2006 Financing, incorporated by reference as Exhibit 10.49 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.50 Form of Callable Secured Note issued in the December 2006 Financing,
incorporated by reference as Exhibit 10.50 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.51 Securities Purchase Agreement, dated as of January 18, 2007 in
connection with the January 2007 Financing, incorporated by reference as
Exhibit 10.4 to the Form 8K filed with the SEC on January 24, 2007.
10.52 Security Agreement, dated January 18, 2007, as part of the January 2007
Financing, incorporated by reference as Exhibit 10.5 to the Form 8K
filed with the SEC on January 24, 2007.
42
10.53 Intellectual Property Security Agreement, dated January 18, 2007, as
part of the January 2007 Financing, incorporated by reference as Exhibit
10.6 to the Form 8K filed with the SEC on January 24, 2007.
10.54 Registration Rights Agreement, dated January 18, 2007, as part of the
January 2007 Financing, incorporated by reference as Exhibit 10.7 to the
Form 8K filed with the SEC on January 24, 2007.
10.55 Form of Callable Secured Note issued in the January 2007 Financing,
incorporated by reference as Exhibit 10.8 to the Form 8K filed with the
SEC on January 24, 2007.
10.56 Securities Purchase Agreement, dated February 13, 2007, as part of the
February 2007 Financing, incorporated by reference as Exhibit 10.56 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.57 Security Agreement, dated February 13, 2007, as part of the February
2007 Financing, incorporated by reference as Exhibit 10.57 to the Form
10QSB filed with the SEC on March 28, 2007.
10.58 Intellectual Property Security Agreement, dated February 13, 2007, as
part of the February 2007 Financing, incorporated by reference as
Exhibit 10.58 to the Form 10QSB filed with the SEC on March 28, 2007.
10.59 Registration Rights Agreement, dated February 13, 2007, as part of the
February 2007 Financing, incorporated by reference as Exhibit 10.59 to
the Form 10QSB filed with the SEC on March 28, 2007.
10.60 Form of Callable Secured Note issued in the February Financing,
incorporated by reference as Exhibit 10.60 to the Form 10QSB filed with
the SEC on March 28, 2007.
10.61 Form of Bloomington/Normal, LLC incorporated by reference as Exhibit
10.3 to the Form 8K filed with the SEC on November 7, 2006.
10.62 Form of Forgiveness of Penalties, dated December 31, 2007, executed by
New Millennium Capital Partners II, LLC. , incorporated by reference as
Exhibit 10.62 to the Form 10QSB filed with the SEC on March 28, 2007.
10.63 Form of Forgiveness of Penalties, dated December 31, 2007, executed by
AJW Qualified Partners, LLC. , incorporated by reference as Exhibit
10.63 to the Form 10QSB filed with the SEC on March 28, 2007.
43
10.64 Form of Forgiveness of Penalties, dated December 31, 2007, executed by
AJW Offshore, Ltd. , incorporated by reference as Exhibit 10.64 to the
Form 10QSB filed with the SEC on March 28, 2007.
10.65 Form of Forgiveness of Penalties, dated December 31, 2007, executed by
AJW Partners, LLC. , incorporated by reference as Exhibit 10.65 to the
Form 10QSB filed with the SEC on March 28, 2007.
10.66 Employment Agreement, dated January 12, 2007, between the Company and
Nicolas A. Cocco, incorporated by reference as Exhibit 10.1 to the Form
8K filed with the SEC on January 24, 2007.
10.67 Employment Agreement, dated January 12, 2007, between the Company and
Richard J. Kohl, incorporated by reference as Exhibit 10.2 to the Form
8K filed with the SEC on January 24, 2007.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 29, 2007
MIDNIGHT HOLDINGS GROUP, INC.
By: /s/ NICHOLAS A. COCCO
---------------------------
Nicholas A. Cocco
Chief Executive Officer
By: /s/ RICHARD KOHL
---------------------------
Richard Kohl
Chief Financial Officer
45