UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
x SEMIANNUAL REPORT PURSUANT TO REGULATION A
or
¨ SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A
For the fiscal semiannual period ended: June 30, 2020
NowRx, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 47-4054162 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2224 Old Middlefield Way
Mountain View, California 94043
(Mailing Address of principal executive offices)
(650) 386-5761
Issuer’s telephone number, including area code
In this report, the term “NowRx,” ”we,” “us” or “the company” refers to NowRx, Inc.
This report may contain forward-looking statements and information relating to, among other things, the company, its business plan and strategy, and its industry. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to the company’s management. When used in this report, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements, which constitute forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those contained in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company does not undertake any obligation to revise or update these forward-looking statements to reflect events or circumstances after such date or to reflect the occurrence
Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in Item 3 of this report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Unless otherwise indicated, latest results discussed below are as of June 30, 2020. The financial statements included in this filing as of and for the six months ended June 30, 2020 are unaudited, and may not include year-end adjustments necessary to make those financial statements comparable to audited results, although in the opinion of management all adjustments necessary to make interim statements of operations not misleading have been included.
Overview
The company is an on-demand pharmacy, leveraging the latest in software technology, artificial intelligence, robotics and logistics to provide free same-day delivery of prescription medications, thereby avoiding the need to ever visit the pharmacy. NowRx was founded in February 2015 and commenced operations and revenue generation in January 2016. In 2015 the company was focused on obtaining its pharmacy licenses, developing the technology for the pharmacy platform and the mobile app, and establishing its first pharmacy location.
The company’s service has taken on more significance as a result of the coronavirus pandemic. Patients with underlying health conditions, many of them older, are increasingly looking for services that can provide free home delivery of prescription medications so they are not forced to visit crowded pharmacies and risk exposure.
The company’s net sales consist of payments for prescription and some over-the-counter (“OTC”) items. For a prescription medication covered by a third-party payor, such as an insurance company, a pharmacy benefit management (“PBM”) company or manufacturer coupon plan, the company receives a portion of its revenues from the patient, in the form of a co-payment paid or charged at the time the prescription is filled, and the remainder as a reimbursement from the third-party payor, at contracted prices. For prescription medication not covered by a third-party payor, the payment is collected entirely from the patient. The company records the amounts subject to reimbursement in accounts receivable until payment is received, typically 20-45 days after the prescription is filled. Cost of goods sold consists primarily of prescription and OTC medications that are acquired from wholesale suppliers.
Our net sales, gross profit margin and gross profit are impacted by, among other things, the percentage of prescriptions that we fill that are generic versus brand name, the rate at which new generic and brand name drugs are introduced to the market, the mix of business between prescription medications and OTC items, and variations in wholesale pricing. Because any number of factors outside of our control can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods. Further consolidation among generic manufacturers coupled with changes in the number of major brand name drugs anticipated to undergo a conversion from branded to generic status may also result in gross margin pressures within the industry. We continuously face reimbursement pressure from PBM companies and other commercial third-party payors. In addition, plan changes with rate adjustments often occur in January and our reimbursement arrangements may provide for rate adjustments at prescribed intervals during their term. Wholesale pricing plans provide volume discounts that present an opportunity to increase gross margins as we grow our business. Increasing the percentage of revenue contributed by OTC items can also expand margins, as OTC items typically have higher margins than prescription medications. Longer term, we expect downward pressure on reimbursements to be offset by improvements in wholesale volume discounting and increased OTC sales. However there is significant uncertainty in predicting the result of these offsetting factors on margins.
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The company’s operating expenses consist of pharmacy operations and support, general and administrative, sales and marketing, depreciation, and research and development expenses. Pharmacy operations and support consists of expenses related to pharmacy payroll, delivery costs, rent for fulfilment and micro-fulfillment centers and other pharmacy operations expense includes pharmacy supplies, licenses and permits, etc. General and administrative consists primarily of payroll for administrative staff, legal and accounting expense, and headquarters rent.
Results of Operations
Six Months ended June 30, 2020 Compared to Six Months ended June 30, 2019
Net Sales
The company’s net sales for the six months ended June 30, 2020 (“Interim 2020”) were $5,794,748, an increase of $2,607,610, or 81.8%, from net sales of $3,187,138 for the six months ended June 30, 2019 (“Interim 2019”). This increase is attributable to a significant increase in number of customers. Cost of goods sold was $4,885,722 for Interim 2020, resulting in gross profit of $909,026, and a gross margin of 15.7%. This compares to cost of goods sold totaling $2,809,828, gross profit of $377,310, and a gross margin of 11.8% in Interim 2019. The company fulfilled 57,287 prescription orders in Interim 2020, as compared to 33,805 in Interim 2019. Average revenue per prescription and average gross profit per prescription during Interim 2020 were $100.14 and $15.87, respectively. During Interim 2019, average revenue per prescription and average gross profit per prescription during were $94.28 and $10.25, respectively. The recent increase in gross profit per prescription is primarily the result of an to improvement inventory purchasing procedures and correcting systematic errors in insurance claim submission processes, made possible via enhancements to the company’s pharmacy management software. The company’s mix of business, brand name drug vs. generic drug, which cause significant variation in revenue and margin per prescription, did not change materially during the first half of 2020 as compared to the same period in 2019. While the company does not anticipate dramatic change in the mix of business in the near term, new contracts from wholesaler arrangements, drug manufacturers, health facilities or other partners could have significant impact in its mix of business and/or margins.
Operating Expenses
Operating expenses for Interim 2020 were $6,199,588, compared to $2,711,677 for Interim 2019, an increase of $3,487,911, or 129%, resulting from the company’s expanding operations to meet increased customer demand, increase in marketing to raise awareness, and increase in technology development.
Sales and marketing expenses represented the largest component of this increase, from $405,312 in Interim 2019 to $2,589,787 in Interim 2020. A significant portion of the marketing expenses in Interim 2020, $2,002,398, was directly related to the company’s 2019 Regulation A Offering (see “-- Liquidity and Capital Resources” below). Marketing unrelated to the offering in Interim 2020 was $587,389, an increase of 45% over non-offering-related marketing in Interim 2019. The company’s sales and marketing payroll increased from $201,639 for Interim 2019 to $431,353 for Interim 2020, as the company added more capacity in its existing micro-fulfilment centers to support ongoing growth in customers. Other sales and marketing expenses for Interim 2020 were $156,036, a decrease of 23% from $203,673 for Interim 2019. The company intends to increase marketing, including advertising and hiring sales representatives, to drive further sales, which will result in a significant increase in these costs in future periods.
Pharmacy operations and support expenses represented the next largest component of this increase, from $1,531,317 in Interim 2019 to $2,245,557 for Interim 2020, as:
| · | The company’s pharmacy payroll increased from $704,630 for Interim 2019 to $1,105,553 for Interim 2020, as the company fulfilled 57,287 prescriptions during Interim 2020 versus 33,305 prescriptions fulfilled during Interim 2019 and added more staff to its micro-fulfillment centers. |
| · | Delivery costs increased from $360,372 for Interim 2019 to $638,449 for Interim 2020, as the company delivered 72% more prescriptions during Interim 2020 as compared to Interim 2019. |
| · | Rent and other pharmacy operations expenses for Interim 2020 were $501,555, an increase of 8% from $466,316 for Interim 2019, as the company added 4 new micro-fulfilment centers to support expansion. |
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We anticipate that our pharmacy operations and support expenses will continue to increase as we continue to grow and expand geographically. To execute on our plan to establish multiple locations in strategic patient-dense areas, we will need to lease additional space for new micro-fulfilment centers. For instance, during Interim 2020, we entered leases for new facilities in the California cities of Pleasanton, Hayward and Van Nuys, as well as the city of Mesa, Arizona. Throughout the remainder of 2020 and beyond the company intends to continue to lease additional space for new fulfilment centers in new and existing territories to meet increasing customer demand.
General and administrative expenses for Interim 2020 were $762,173, compared to $347,460 for Interim 2019, an increase of 119%, as the company expanded corporate staffing to manage growth. Research and development expenses increased from $375,100 in Interim 2019 to $542,381 in Interim 2020, as the company continues to advance the development of its proprietary pharmacy management system, QuickFill. The company intends to continue investing in research and development to further enhance our pharmacy automation and logistics software platform.
Other income (expense) consists of interest income and expense. The company had interest expense of $58,362 in Interim 2020, compared to $1,465 in interest income in Interim 2019. The expense in Interim 2020 was attributable to interest accrued or paid on a new credit facility established with Decathlon Capital Partners. See “—Liquidity and Capital Resources – Indebtedness.” In Interim 2019, the company had no debt and therefore incurred no interest expense, however, the company earned interest income from a money market account.
As a result of the foregoing factors, the company’s net loss was $5,306,270 for Interim 2020, a 127% increase from a net loss of $2,332,902 in Interim 2019.
Liquidity and Capital Resources
As of June 30, 2020, the company’s cash on hand was $4,885,135. To date, the company has not made any profits and is still a “development stage company.” The company has recorded losses from the time of its inception in the total amount of $16,098,677.
In accordance with ASU No. 2014-15 Presentation of Financial Statements – Going Concern (subtopic 205-40), our management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the audited financial statements are issued. We have incurred substantial losses since our inception and we expect to continue to incur operating losses in the near-term. We expect that we will need to raise additional capital to meet anticipated cash requirements over the next several years, depending on changing market and competitive conditions, our ability to secure lower cost of goods with volume, as well as our ability to gain further efficiencies from our proprietary automation technology. In addition, we regularly consider fundraising opportunities and will determine the timing, nature and amount of financings based upon various factors, including market conditions and our operating plans. As we have done historically, we may again in the future elect to finance operations by selling equity or debt securities or borrowing money. If we raise funds by issuing equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common and preferred stock. If additional funding is required, we cannot assure you that additional funds will be available to us on acceptable terms on a timely basis, if at all, or that we will generate sufficient cash from operations to adequately fund our operating needs. If we are unable to raise additional capital or generate sufficient cash from operations to adequately fund our operations, we will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute on our business plan, and have an adverse effect on our business, results of operations and future prospects.
2019 Regulation A Offering; Issuance of Series B Preferred Stock
On September 20, 2019, the company commenced an offering pursuant to Regulation A under the Securities Act of 1933, as amended (the “2019 Regulation A Offering”), pursuant to which offered to sell up to 5,800,969 shares of its Series B Preferred Stock, convertible into shares of Common Stock, at a price of $3.4477 per share. The company intends to utilize the net proceeds from the 2019 Regulation A Offering to execute on its business plans.
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The company held its first closing in connection with the 2019 Regulation A Offering on November 19, 2019. The initial closing of the 2019 Regulation A Offering constituted a qualified financing for purposes of the company’s 2019 SAFE securities, all of which were converted into shares of the company’s Series B Preferred Stock at that date. The 2019 Regulation A Offering terminated on June 19, 2020. As of June 30, 2020, the company issued 3,518,230 shares of Series B Preferred Stock in the 2019 Regulation A Offering, which provided net cash proceeds after total offering expenses and commissions of $10,878,304. Subsequent to June 30, 2020, the company received an additional $8,360,473 in net proceeds and issued an additional 2,657,455 shares of Series B Preferred Stock. The company has used and will continue to use the net proceeds to hire additional sales personnel, purchase additional equipment and furnishings for its new fulfillment centers, fund expanding operations, and develop the next phase of its proprietary software.
In addition, during the six months ended June 30, 2020, the Company conducted a private placement under Regulation D of the Securities Act for shares of its Series B Preferred Stock in which it received gross proceeds of $328,620 for the issuance of 95,316 shares of Series B Preferred Stock.
2018 Regulation A Offering; Issuance of Series A Preferred Stock
On March 30, 2018, the company commenced an offering pursuant to Regulation A under the Securities Act (the “2018 Regulation A Offering”). In the 2018 Regulation A Offering, the company offered to sell up to 3,500,000 shares of its Series A Preferred Stock, convertible into shares of Common Stock, at a price of $2.00 per share. The company completed the 2018 Regulation A Offering in September 2018. The company issued 3,499,878 shares of Series A Preferred Stock in the 2018 Regulation A Offering, which provided net cash proceeds after total offering expenses and commissions of $6,352,845. The company used a portion of the net proceeds to hire additional sales personnel, purchase additional equipment and furnishings for its new fulfillment centers, pay security deposits in connection with the 3 new leases executed in 2018 and develop the next phase of its proprietary software.
Issuances of SAFE securities
In August and September 2019, the company issued a series of simple agreements for future equity (“SAFE securities”) for total proceeds of $675,000 in reliance on Regulation D under the Securities Act. The SAFE securities did not bear interest and had no maturity date. The proceeds of this offering were used for general business purposes. The initial closing of the 2019 Regulation A Offering triggered the conversion provisions of the SAFE securities, all of which converted into 279,429 shares of Series B Preferred Stock.
Paycheck Protection Program (PPP) Loan
The company applied for loans being administered by the Small Business Administration under the Coronavirus Aid, Relief, and Economic Recovery Act of 2020 (“CARES Act”) to assist in maintaining payroll and operations through the period impacted by the COVID-19 pandemic. On April 21, 2020, the company entered into a loan under the Paycheck Protection Program (“PPP”), in the amount of $533,652, which may be forgivable as specified in the CARES Act. The loan will mature 2 years from the date it was issued and will accrue interest at a rate of 1% per year. If the company does not apply for loan forgiveness, it will be required to pay principal and interest payments of $30,032.32 per month, beginning six months from the last day of the covered period. The “covered period” during which PPP loan expenses may be incurred and spent begins on the date of loan origination and ends six months after origination. This funding helped defray additional expenses the company sustained due to having to pay hazard pay to employees, hire additional temporary workers and excess overtime due to surge in customer demand, and additional operational expenses due to additional safety measures being implemented within our pharmacy operations (daily cleanings, etc.). The company intends to apply for loan forgiveness by utilizing the funds in accordance with defined loan forgiveness guidance issued by the government. The Paycheck Protection Program Flexibility Act of 2020 authorized the company to apply for forgiveness of the funds utilized over the course of 24 weeks so long as the full-time equivalent staffing level remains the same (or increases) and that at least 60% of the funds are utilized to pay payroll costs. It is anticipated that between 80% and 100% of the PPP loan will be forgiven, according to the terms therein.
Indebtedness
In 2019, the Company entered into an $100,000 inventory financing arrangement with Kabbage. The loan is secured by all assets of the Company, bears an interest rate of approximately 23% per annum, and is payable over six months, with expected average monthly payments of approximately $17,833, for a total repayment of $107,000. This loan was paid in full during Interim 2020. There is no further obligation as of June 30, 2020.
In April 2018, the company extended the operating lease agreement for its office space in Mountain View, California for an additional 3 years. In connection with entering into the extension and as security deposit for the landlord, the company secured an irrevocable letter of credit with Silicon Valley Bank for $60,000 to the benefit of the landlord. To establish this facility, the Company placed $60,000 in a deposit account with Silicon Valley Bank. At June 30, 2020, the facility has not been drawn down and the company remains current with its lease payments.
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On April 29, 2020, the company entered into a $3 million revenue-based financing facility with Decathlon Capital Partners. The facility matures on the earliest of (a) September 29, 2024, (b) immediately prior to a change in control of the company and (c) acceleration of the obligations, such as upon the occurrence of any event of default under the agreement. If the facility is paid off after 6 months, the company will pay interest at a rate starting at 0.35 times the amount advanced under the facility up to 1.00 times the amount advanced if the facility is paid off after more than 30 months have elapsed from the effective date. The facility requires monthly payments, commencing on May 15, 2020, equal to the product of all revenue for the immediately preceding month and applicable revenue percentage, which is 2.25% in 2020, 2.5% in 2021 and 3.00% in 2022. If the annual revenue is not equal to at least 80% of projected revenue, the applicable revenue percentage for all subsequent payments will automatically increase by 0.50%, without notice from the lender. At June 30, 2020, $2,000,000 was outstanding under the facility.
In March 2020, the company entered into a 5-year operating lease agreement for micro-fulfilment space in Mesa, Arizona, as it expands outside of California. In June 2020, the company entered into a 5-year operating lease agreement for micro-fulfilment space in Pleasanton, California. In addition, in July and August 2020, the company entered into 5-year operating lease agreements for micro-fulfilment space in Hayward and Van Nuys, California. Management anticipates it will incur additional capital expenditures in the future as the company continues to expand to these and other new locations.
The company maintains inventory used in the normal course of business, and had $1,692,137 of inventory on hand as of June 30, 2020.
Trend Information
Margin trends
The company has several initiatives underway to increase gross margins and improve operating margins, as follows:
| • | Pharmacy Management System – The company historically utilized an “off-the-shelf” industry software system to manage pharmacy operations. Management has noted several areas of inefficiencies in the pharmacy management system that cause higher than necessary labor costs for filling prescriptions, as well as, inefficiencies in inventory purchasing and insurance claims that negatively impact gross margins. Inventory purchases occur daily and human errors can result in a failure to purchase the lowest cost product available, sometimes having substantial impact on gross margin. Insurance claim processing is also subject to human errors that can negatively affect the insurance claim reimbursement amount, sometimes reducing the reimbursement several fold, again negatively impacting gross margin. During the latter half of 2018 and early 2019, the company developed a proprietary pharmacy management system to replace the “off-the-shelf” industry software the company historically utilized. The company expects this new pharmacy management system over time to reduce labor costs per prescription order, provide improvements in customer service, and improve control over inventory purchasing and insurance claim submissions. The system was put into production during April 2019, with significant updates planned every few months for the foreseeable future as the company continues to invest in Research and Development. Over time, the company anticipates a gradual reduction in pharmacy labor and an increase in gross margin, as the company continues to invest in research and development in software automation and gains inventory purchasing power with increased scale. There can be no assurances that these improvements will materialize exactly as expected. |
| • | AI-Assisted Customer Chat Bot – The company is developing a proprietary system to provide its customer service agents a rapid, precise and effective response to customers via text or app notification. The system is based on artificial intelligent algorithms and natural language processing that accurately interprets pharmacy customer questions and automatically pulls critical information from the patient’s file. The information is presented to the customer service agent in in a variety of natural-language consistent responses that can be sent to the customer with a simple click. |
| • | Optimized Robotic Dispensing – The company has more than a year of experience with a robotic dispensing system, the usage of which is currently below capacity. As order volume grows and the company further enhances its own proprietary pharmacy management system, we believe there is an opportunity to increase the efficiency and utility of the robot to reduce labor costs per order. |
| • | Pharmacy Refill Process Optimization – The company is developing proprietary algorithms to opportunistically process refills in advance of customary refill date, based on geographic location, in order to optimize delivery routing and reduce delivery costs per order. |
| • | Reduced Delivery Expense per Order – As the company increases revenue and customer volume per geography, the customer density increases and the run time per delivery is reduced, increasing the number of orders delivered per driver-hour and reducing the delivery cost per order. In addition, in territories with high customer density, the company plans to add additional micro-fulfilment centers and is developing algorithms to triage new customer requests and upcoming, scheduled refills based on their location to further optimize delivery routing. |
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| • | Wholesale Volume Discounts – Wholesale pharmaceutical suppliers offer discounts for increasing volume of purchases and longer-term contracts. As we grow our business, management anticipates being able to purchase products at a reduced cost. |
| • | Increased OTC sales – Many OTC products on average have a larger gross margin than the average prescription medication. Management intends to increase OTC as a percentage of sales over time, increasing average revenue per order (“basket size”) as well as increasing the overall gross margin for the company. |
| • | Medication Synchronization – Many customers have multiple prescription medications that refill monthly, but often at times such that the refill dates fall on different days of the month causing multiple trips to the same customer’s house per month. By synchronizing medications, with the customer’s approval, to refill on the same day of the month, delivery efficiency can be enhanced, reducing delivery costs per order. |
Order trends
The company seeks to continually grow the number of orders and its revenues by focusing on two initiatives:
| • | Increase sales and marketing through a combination of direct consumer advertising and sales representatives, which has generated steady growth from inception in the number of prescriptions, the number of referring physicians, and in revenues. The company plans to substantially increase spending on direct-to-consumer marketing during 2020 and 2021 to accelerate growth in customers and revenue, although there can be no assurances that this effort will produce substantial growth in customers and revenue, or produce a customer acquisition cost (CAC) that is attractive relative to the average life-time-value (LTV) of a typical customers. |
| • | The company added its fourth operational pharmacy location in early May 2020, in Burlingame, California, and has 1 additional location licensed in Mesa, Arizona, that is expected to be fully operational by October, 2020, and has leased 3 additional facilities in California that are in various stages of being licensed and contracted with insurance company networks. The company anticipates having 8 micro-fulfilment centers operational by end of 2020. Should the company continue to have access to sufficient growth capital, the company plans to expand into new geographies and anticipate it will experience growth rates and other business performance metrics equal to or better than those achieved in the company’s initial service territory. Even if we are able to meet our projected timeline for establishing new geographies, these operations may not generate the anticipated growth in customers, orders and revenues at the pace that we project. Management believes that, given the growth pattern of revenues since inception through June 30, 2020, assuming we increase marketing expenditures as planned, it is likely that revenues will continue to increase. Management also believes the COVID-19 pandemic helps drive demand for the company’s services. Even if we are able to meet our projected timeline for establishing the new geographies and the pandemic continues to be a significant issue, these developments may not generate the anticipated growth in customers, orders, revenue and profit(loss) at the pace that we project. |
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States. While the disruption is currently expected to be temporary, there is uncertainty around the duration.
COVID-19 has been a highly disruptive economic and societal event that has affected our business and has had a significant impact on consumer behavior. To serve our customers while also providing for the safety of our team members, we have adapted aspects of our operations.
As the company qualified as an essential business as defined by state regulations, we continued to operate our fulfillment centers with modifications to work flows to maintain social distancing. At the same time, we have taken a variety of safety measures following federal, state and local guidelines at our fulfillment centers’ operations. These safety measures include enhanced daily cleaning and disinfection policies, enhanced personal hygiene efforts and implementing social distancing efforts and awareness throughout the fulfillment centers. To date, we have not experienced any significant disruptions in our pharmacy operations, supply chain or any delivery interruptions or delays. If, as a result of COVID-19, we face disruptions in our supply chain, or are unable to continue to operate one or more of our fulfillment centers or timely deliver orders to our customers, we may not be able to retain our customers or attract new customers.
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Since late March 2020, we have experienced an increase in demand primarily as a result of changes to consumer behaviors resulting from the various stay-at-home orders in California in response to the COVID-19 pandemic. This increased demand may not continue at current levels, if at all, depending on the duration and severity of the COVID-19 pandemic, the length of time stay-at-home orders stay in effect and for economic and operating conditions, and consumer behaviors to resume to levels prior to the COVID-19 pandemic and numerous other uncertainties.
The ultimate financial impact on the company’s future operating results and consolidated financial statements cannot be reasonably estimated at this time. However, as of the date of this report, the company has experienced increased demand for its products and services, so it does not expect this matter will have a material negative impact on its business, results of operations, and financial position.
Item 2. Other Information
On April 29, 2020, the company entered into a revenue-based financing facility with Decathlon Capital Partners. See “—Liquidity and Capital Resources – Indebtedness” above. A copy of the revenue loan and security agreement has been filed as Exhibit 6.1 to this report.
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Item 3. Financial Statements
NowRx, Inc.
A Delaware Corporation
Financial Statements as of June 30, 2020 and December 31, 2019
and for the six-month periods ended June 30, 2020 and 2019
NowRx, Inc.
TABLE OF CONTENTS
| Page | |
| FINANCIAL STATEMENTS AS OF JUNE 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019 (AUDITED) AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED). | |
| Balance Sheets | 1 |
| Statements of Operations | 2 |
| Statements of Changes in Stockholders’ Equity/(Deficit) | 3 |
| Statements of Cash Flows | 4 |
| Notes to Financial Statements | 5-21 |
BALANCE SHEETS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and equivalents | $ | 4,885,135 | $ | 702,626 | ||||
| Accounts receivable, net | 943,001 | 568,664 | ||||||
| Inventory | 1,660,354 | 941,543 | ||||||
| Prepaid expense | 118,041 | 73,809 | ||||||
| Total Current Assets | 7,606,531 | 2,286,642 | ||||||
| Other non-current assets | 262,516 | 226,266 | ||||||
| Property and equipment, net | 777,104 | 732,670 | ||||||
| TOTAL ASSETS | $ | 8,646,151 | $ | 3,245,578 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 991,077 | $ | 659,360 | ||||
| Accrued liabilities | 331,411 | 323,776 | ||||||
| Warrant liability | 4,428 | - | ||||||
| Loan payable, net of unamortized discount | 600,156 | - | ||||||
| Short-term inventory financing | - | 63,667 | ||||||
| Short-term notes payable | - | 125,000 | ||||||
| Total Current Liabilities | 1,927,072 | 1,171,803 | ||||||
| Non-Current Liabilities: | ||||||||
| SBA Paycheck Protection Program loan | 543,652 | - | ||||||
| Loan payable, net of unamortized discount and current portion | 1,395,580 | - | ||||||
| Total Non-Current Liabilities | 1,939,232 | - | ||||||
| Total Liabilities | 3,866,304 | 1,171,803 | ||||||
| Stockholders' Equity: | ||||||||
| Series A Preferred Stock, $0.00001 par value, 8,853,173 shares authorized, 8,853,173 shares issued and outstanding, liquidation preference of $17,706,346 as of June 30, 2020 and December 31, 2019. | 88 | 88 | ||||||
| Series B Preferred Stock, $0.00001 par value, 6,500,000 shares authorized, 3,518,230 and 970,434 shares issued and outstanding, liquidation preferences of $12,129,802 and $3,345,765 as of June 30, 2020 and December 31, 2019, all respectively. | 35 | 10 | ||||||
| Common stock, $0.00001 par value, 30,000,000 shares authorized, 8,540,000 and 8,527,500 shares issued and outstanding, 8,540,000 and 7,996,250 vested as of June 30, 2020 and December 31, 2019, all respectively. | 85 | 85 | ||||||
| Additional paid-in capital | 20,878,480 | 12,823,345 | ||||||
| Accumulated deficit | (16,098,841 | ) | (10,749,753 | ) | ||||
| Total Stockholders' Equity | 4,779,847 | 2,073,775 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 8,646,151 | $ | 3,245,578 | ||||
See accompanying notes, which are an integral part of these financial statements.
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STATEMENTS OF OPERATIONS (UNAUDITED)
For the six-month periods ended June 30, 2020 and 2019
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| Sales, net | $ | 5,794,748 | $ | 3,187,138 | ||||
| Cost of goods sold | (4,885,722 | ) | (2,809,828 | ) | ||||
| Gross profit | 909,026 | 377,310 | ||||||
| Operating Expenses: | ||||||||
| Pharmacy operations and support | 2,245,557 | 1,531,217 | ||||||
| General and administrative | 768,789 | 347,460 | ||||||
| Sales and marketing | 2,589,787 | 405,312 | ||||||
| Depreciation expense | 53,074 | 52,579 | ||||||
| Research and development | 542,381 | 375,109 | ||||||
| Total Operating Expenses | 6,199,588 | 2,711,677 | ||||||
| Loss from operations | (5,290,562 | ) | (2,334,367 | ) | ||||
| Other Income (Expenses): | ||||||||
| Interest income (expense) | (58,526 | ) | 1,465 | |||||
| Total Other Income (Expenses) | (58,526 | ) | 1,465 | |||||
| Net Loss | $ | (5,349,088 | ) | $ | (2,332,902 | ) | ||
| Weighted-average vested common shares outstanding: | ||||||||
| - Basic and Diluted | 8,353,750 | 6,375,000 | ||||||
| Net loss per common share | ||||||||
| - Basic and Diluted | $ | (0.64 | ) | $ | (0.37 | ) | ||
See accompanying notes, which are an integral part of these financial statements. In the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included.
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STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT) (UNAUDITED)
For the six-month periods ended June 30, 2020 and 2019
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Total | |||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Additional Paid- In Capital | Accumulated Deficit | Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 8,841,630 | $ | 88 | - | $ | - | 8,527,500 | $ | 85 | $ | 10,055,650 | $ | (4,963,557 | ) | $ | 5,092,266 | ||||||||||||||||||||
| Issuance of preferred stock as broker commission | 11,543 | - | - | - | - | - | 23,086 | - | 23,086 | |||||||||||||||||||||||||||
| Offering costs | - | - | - | - | - | - | (24,129 | ) | - | (24,129 | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 9,784 | - | 9,784 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (2,332,902 | ) | (2,332,902 | ) | |||||||||||||||||||||||||
| Balance at June 30, 2019 | 8,853,173 | 88 | - | - | 8,527,500 | 85 | 10,064,391 | (7,296,459 | ) | 2,768,105 | ||||||||||||||||||||||||||
| Issuance of preferred stock for cash | - | - | 691,005 | 7 | - | - | 2,382,379 | - | 2,382,386 | |||||||||||||||||||||||||||
| Offering costs | - | - | - | - | - | - | (308,443 | ) | - | (308,443 | ) | |||||||||||||||||||||||||
| Conversion of SAFE agreements | - | - | 279,419 | 3 | - | - | 674,997 | - | 675,000 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 10,021 | - | 10,021 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (3,453,294 | ) | (3,453,294 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2019 | 8,853,173 | 88 | 970,424 | 10 | 8,527,500 | 85 | 12,823,345 | (10,749,753 | ) | 2,073,775 | ||||||||||||||||||||||||||
| Issuance of preferred stock for cash | - | - | 2,547,806 | 25 | - | - | 8,784,134 | - | 8,784,159 | |||||||||||||||||||||||||||
| Offering costs | - | - | - | - | - | - | (737,640 | ) | - | (737,640 | ) | |||||||||||||||||||||||||
| Exercise of stock options | - | - | - | - | 12,500 | - | 1,025 | - | 1,025 | |||||||||||||||||||||||||||
| Issuance of warrant | - | - | - | - | - | - | 1,000 | - | 1,000 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 6,616 | - | 6,616 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (5,349,088 | ) | (5,349,088 | ) | |||||||||||||||||||||||||
| Balance at June 30, 2020 | 8,853,173 | $ | 88 | 3,518,230 | $ | 35 | 8,540,000 | $ | 85 | $ | 20,878,480 | $ | (16,098,841 | ) | $ | 4,779,847 | ||||||||||||||||||||
See accompanying notes, which are an integral part of these financial statements.
- 3 -
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six-month periods ended June 30, 2020 and 2019
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (5,349,088 | ) | $ | (2,332,902 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 53,074 | 52,579 | ||||||
| Stock-based compensation | 6,616 | 9,784 | ||||||
| Loan discount amortization | 164 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Change in receivables | (374,337 | ) | (4,287 | ) | ||||
| Change in inventory | (718,811 | ) | (131,699 | ) | ||||
| Change in prepaid expenses | (44,232 | ) | (30,185 | ) | ||||
| Change in deposits | - | 15,000 | ||||||
| Change in other non-current asset | (36,250 | ) | (54,890 | ) | ||||
| Change in accounts payable and accrued liabilities | 339,352 | (263,752 | ) | |||||
| Net Cash Used in Operating Activities | (6,123,512 | ) | (2,740,352 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | (97,508 | ) | (172,108 | ) | ||||
| Net Cash Used in Investing Activities | (97,508 | ) | (172,108 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Repayments of short-term inventory financing | (63,667 | ) | - | |||||
| Proceeds from SBA Paycheck Protection Program loan | 543,652 | - | ||||||
| Proceeds from loan payable | 2,000,000 | - | ||||||
| Proceeds/(repayments) from/on short-term notes payable | (125,000 | ) | - | |||||
| Proceeds from issuance of preferred stock | 8,784,159 | - | ||||||
| Offering costs | (737,640 | ) | (1,043 | ) | ||||
| Proceeds from exercise of stock options | 1,025 | - | ||||||
| Proceeds from issuance of warrant | 1,000 | - | ||||||
| Net Cash Provided by Financing Activities | 10,403,529 | (1,043 | ) | |||||
| Net Change In Cash | 4,182,509 | (2,913,503 | ) | |||||
| Cash at Beginning of Period | 702,626 | 4,253,065 | ||||||
| Cash at End of Period | $ | 4,885,135 | $ | 1,339,562 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | 59,998 | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
See accompanying notes, which are an integral part of these financial statements.
- 4 -
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
NOTE 1: NATURE OF OPERATIONS
NowRx, Inc. (the “Company”), is a corporation organized February 19, 2015 under the laws of Delaware. The Company is an on-demand pharmacy that fulfills and delivers customer prescriptions using a web and application-based platform.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP).
The Company adopted the calendar year as its basis of reporting.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is dependent upon additional capital resources for its planned full-scale operations and is subject to significant risks and uncertainties; including failing to secure funding to continue to operationalize the Company’s plans or failing to profitably operate the business.
Cash Equivalents and Concentration of Cash Balance
The Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits. As of June 30, 2020 and December 31, 2019, the Company’s cash balances exceeded federally insured limits by $4,135,135 and $452,626, respectively. As of June 30, 2020 and December 31, 2019, $60,000 of the cash balance is restricted due to collateral requirements for a letter of credit (LOC) in the same amount used in lieu of a security deposit for one of the Company’s locations.
Accounts Receivable
The Company assesses its receivables based on historical loss patterns, aging of the receivables, and assessments of specific identifiable customer accounts considered at risk or uncollectible. The Company also considers any changes to the financial condition of its customers and any other external market factors that could impact the collectability of the receivables in the determination of the allowance for doubtful accounts. The Company has recorded an allowance against its accounts receivable balances of $17,170 as of June 30, 2020 and December 31, 2019.
- 5 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Inventory
Inventory is stated at the lower of cost or market and accounted for using the weighted average cost method. The inventory balances of $1,660,354 and $941,543 as of June 30, 2020 and December 31, 2019, respectively, consisted of pharmaceuticals and related products. The Company records impairment and obsolescence reserves against its inventory balances as deemed necessary.
Property and Equipment
Property and equipment are recorded at cost when purchased. Depreciation is recorded for property and equipment using the straight-line method over the estimated useful lives of assets, which range from 5-15 years. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. Depreciation charges on property and equipment totaled $53,074 and $52,579 for the periods ended June 30, 2020 and 2019, respectively. The Company’s property and equipment consisted of the following as of June 30, 2020 and December 31, 2019:
| 6/30/2020 | 12/31/2019 | |||||||
| Automobiles | $ | 264,891 | $ | 212,312 | ||||
| Furniture and equipment | 435,272 | 435,271 | ||||||
| Leasehold improvements | 289,464 | 244,536 | ||||||
| Property and equipment, at cost | 989,627 | 892,119 | ||||||
| Less: accumulated depreciation | (212,523 | ) | (159,449 | ) | ||||
| Property and equipment, net | $ | 777,104 | $ | 732,670 | ||||
Warrant Liabilities
Freestanding warrants to purchase shares of the Company’s common stock are classified as liabilities on the balance sheets at their estimated fair value when the warrant holder has the option to elect to receive cash value for the warrants and, therefore, may obligate the Company to transfer assets at some point in the future. Such common stock warrants are recorded at fair value upon issuance and are subject to remeasurement to their respective estimated fair values. At the end of each reporting period, changes in the estimated fair value of such common stock warrants are recorded in the statements of operations. The Company will continue to adjust the liability associated with the liability classified common stock warrants for changes in the estimated fair value until the earlier of the exercise or expiration of the common stock warrants. Common stock warrants that are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of these common stock warrants is determined using the Black-Scholes option-pricing model.
The Company issued common stock warrant in connection with the execution of certain debt financing during the period ended June 30, 2020. The Company determined that this warrant is liability classified and recorded as debt discount and is being amortized over the term of the related debt.
- 6 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Fair Value of Financial Instruments
Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).
Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
The carrying amounts reported in the balance sheets approximate their fair value.
Revenue Recognition
ASC Topic 606, “Revenue from Contracts with Customers” establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements: 1) identify the contract with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to performance obligations in the contract; and 5) recognize revenue as the performance obligation is satisfied. No adjustments to revenue recognition were required from the adoption of ASC 606, which was adopted January 1, 2019 and retroactively applied to the periods presented. The Company generally recognizes revenues upon shipment of its products.
Cost of goods sold includes product costs, while delivery related costs are included in pharmacy operations and support in the statement of operations.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, which is generally the option vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options.
- 7 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Research and Development
Research and development costs are expensed as incurred. Total expense related to research and development was $542,381 and $375,109 for the periods ended June 30, 2020 and 2019, respectively.
Sales and Marketing
Sales and marketing costs are expensed as incurred and include advertising costs related to the Series A and Series B Preferred Stocks offering. Total expense related to the offerings was $2,002,398 and $1,043 for the periods ended June 30, 2020 and 2019, respectively.
Deferred Offering Costs
The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed.
Income Taxes
The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will be realized.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy is to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements. The Company has determined that there are no material uncertain tax positions.
The Company accounts for income taxes with the recognition of estimated income taxes payable or refundable on income tax returns for the current period and for the estimated future tax effect attributable to temporary differences and carryforwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized in the immediate future. The Company had net operating loss carryforwards of $17,492,232 and $11,435,044 as of June 30, 2020 and December 31, 2019, respectively. The Company pays Federal and California income taxes at rates of approximately 21% and 8.8%, respectively, and has used an effective blended rate of 28% to derive net tax assets of $4,897,266 and $3,200,519 as of June 30, 2020 and December 31, 2019, respectively, resulting from its net operating loss carryforwards and other temporary book to tax differences. Due to uncertainty as to the Company’s ability to generate sufficient taxable income in the future to utilize the net operating loss carryforwards before they begin to expire in 2035, the Company has recorded a full valuation allowance to reduce the net deferred tax asset to zero.
- 8 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
The Company files U.S. federal and state income tax returns. All previous tax returns have been filed. All tax periods since inception remain open to examination by the taxing jurisdictions to which the Company is subject.
Net Earnings or Loss per Share
Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net earnings or loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of June 30, 2020 and 2019, diluted net loss per share is the same as basic net loss per share for each period.
NOTE 3: GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not yet generated profits, has negative cash flows from operations, has sustained net losses of $5,349,088 and $2,332,902 during the periods ended June 30, 2020 and 2019, respectively, and has an accumulated deficit of $16,098,841 as of June 30, 2020.
The Company’s ability to continue as a going concern in the next twelve months following the date the financial statements were available to be issued is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Management has evaluated these conditions and plans to generate revenues and raise capital as needed to satisfy its capital needs. No assurance can be given that the Company will be successful in these efforts.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities.
NOTE 4: FINANCING ARRANGEMENTS
Kabbage Loans
In August 2017, the Company entered into an inventory financing arrangement of $62,100 with Kabbage, an inventory financier. The loan is secured by all assets of the Company, bears an interest rate of approximately 24% per annum, and is payable over six months, with expected average monthly payments of approximately $11,075, for a total repayment of $66,447. The loan was repaid in full during the year ended December 31, 2018.
- 9 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
In 2019, the Company entered into an $100,000 inventory financing arrangement with Kabbage. The loan is secured by all assets of the Company, bears an interest rate of approximately 23% per annum, and is payable over six months, with expected average monthly payments of approximately $17,833, for a total repayment of $107,000. The balance due under this obligation as of December 31, 2019 was $63,667. The loan was repaid in full during the period ended June 30, 2020.
Short-Term Notes Payable
In October 2019, the Company issued two secured promissory notes for total principal of $125,000. The notes are secured by substantially all assets of the Company. The notes bear interest at 10% per annum. No payments are required until maturity on March 1, 2020 (extended to September 30, 2020) when all principal and interest are due. The outstanding principal balance at December 31, 2019 was $125,000, accrued interest payable at December 31, 2019 was $2,082. The loan was repaid in full during the period ended June 30, 2020. Interest expense for the period ended June 30, 2020 was $4,841.
SAFE Agreements
In 2019, the Company issued simple agreements for future equity (SAFE Agreement) in exchange for cash investments totaling $675,000 (the “Purchase Amount”). The SAFE Agreements entitle the holder to convert the SAFE agreements into the Company’s preferred stock (this classification of stock has not yet been authorized or established). The terms provide for automatic conversion of the SAFE agreements’ purchase amounts into the Company’s preferred stock if and upon a qualified equity financing event, which is generally defined as a transaction or series of transactions involving the issuance of the Company’s preferred stock at a fixed pre-money valuation. The number of shares of preferred stock the SAFE agreements convert into is the Purchase Amount divided by the discount price. Discount rate is 15% for $75,000, 20% for $300,000, 30% for $150,000, and 50% for $150,000.
In the case of a liquidation event (as defined in the SAFE agreement) before the termination of the SAFE, the SAFE will automatically be entitled to receive a portion of proceeds equal to the greater of a) cash of the Purchase Amount; b) the amount payable on the number of Common Stock shares equal to the Purchase Amount divided by the Liquidity Price (as defined in the agreement).
The SAFE agreements provide holders with various additional protections, including preferences over
unitholders in a dissolution event for payment of the Purchase Amount and anti-dilution protections. If the SAFE agreement converts into the Company’s preferred stock, it will have all the same rights and privileges of the preferred stock from the triggering financing, except that the liquidation preference will be equal to the Purchase Amount.
In 2019, the Series B Preferred Stock offering triggered conversion of all the SAFE agreements resulting in the conversion of the then outstanding purchase amounts of $675,000 into 279,429 shares of Series B Preferred Stock.
- 10 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
SBA Paycheck Protection Program Loan
On April 21, 2020, the Company applied for and received an SBA Paycheck Protection Program loan from Silicon Valley Bank for $533,652. The instrument matures in 24 months and bears 1% interest per annum. As no repayments have occurred to date, the outstanding principal balance as of June 30, 2020 was $533,652.
Loan Payable
On April 29, 2020, the Company entered into a revenue loan and security agreement with a third party for $2,000,000. The instrument requires monthly payments, commencing on May 15, 2020, equal to the product of all revenue for the immediately preceding month and applicable revenue percentage, which is 2.25% in 2020, 2.50% in 2021 and 3.00% in 2022. If the annual revenue is not equal to at least 80% of the projected revenue, the applicable revenue percentage for all subsequent payments will automatically increase by 0.50%, without notice from the lender. The instrument matures on the earliest of (a) September 29, 2024, (b) immediately prior to a change in control and (c) acceleration of the obligations, such as upon the occurrence of any event of default, as discussed in the agreement. The instrument bears interest, with minimum interest ranging from 0.35 to 1.00 times the amount advanced, depending on the period during which the payoff date occurs. The loan is secured by the Company’s assets. In addition, the Company issued warrant to the lender for a consideration of $1,000 (see Note 5). The fair value of this warrant was $4,428, which was recorded as a discount to the loan payable and is being amortized over the term of the loan.
At June 30, 2020, the carrying balance of the loan payable amounted to $1,995,736, net of unamortized discount of $4,264. For the period ended June 30, 2020, amortization of discount was $164 and interest expense was $43,280.
NOTE 5: STOCKHOLDERS’ EQUITY/(DEFICIT)
Capital Structure
In 2018, the Company had authorized 20,000,000 shares of $0.00001 par value common stock and 10,000,000 shares of $0.00001 par value Series A Preferred Stock. The certificate of incorporation was amended in 2019, authorizing 30,000,000 shares of $0.00001 par value common stock and 18,000,000 shares of $0.00001 par value preferred stock. The preferred stock is designated as 8,853,173 shares of $0.00001 par value Series A Preferred Stock, 6,500,000 shares of Series B Preferred Stock, and leaves 2,646,827 shares of preferred stock undesignated.
As of each June 30, 2020 and December 31, 2019, 8,540,000 shares of common stock were issued and outstanding. As of each June 30, 2020 and December 31, 2019, 8,853,173 and 8,853,173 shares of Series A Preferred Stock were issued and outstanding, respectively. As of each June 30, 2020 and December 31, 2019, 3,518,630 and 970,434 shares of Series B Preferred Stock were issued and outstanding, respectively.
The preferred stockholders have certain dividend preferences over common stockholders. The preferred stock are subject to an optional conversion right, where the preferred stock are convertible into fully paid and non-assessable shares of common stock at a 1:1 rate, with certain dilution protections and automatic conversion upon a qualifying IPO or vote of preferred stockholders (each as defined in the certificate of incorporation). The preferred stockholders are entitled to a liquidation preference over common stockholders at the preferred stock purchase price of $2.00 per share for Series A Preferred Stock and $3.4477 per share for Series B Preferred Stock, providing a total liquidation preference of $29,837,526 and $21,052,111 as of June 30, 2020 and December 31, 2019, respectively. Preferred stockholders have voting rights on an as-converted basis.
- 11 -
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Common Stock
In June of 2015, the Company issued its two founders a total of 8,500,000 shares of common stock at $0.00001 per share, in exchange for $850 of cash and intellectual property. These stock issuances were conducted under terms of restricted stock purchase agreements and are subject to vesting terms contingent upon continuous service with the Company, which provide the Company the right to repurchase unvested shares at the original purchase price. These shares vest at 1/48 per month, commencing May 2015. As of December 31, 2017, 5,489,583 of the shares had vested. During 2018, the founders entered into an agreement to re-vest their shares. Under this agreement, the total outstanding common stock become 50% vested and 50% unvested, and then vest monthly over 24 months commencing March 2018. As of June 30, 2020, and December 31, 2019, 8,500,000 and 7,996,250 shares of common stock were vested, respectively.
During 2018, the founders of the Company transferred a collective total of 1,700,000 shares of common stock to another co-founder.
During the six-month period ended June 30, 2020, two employees exercised stock options into 12,500 shares of common stock at exercise prices of $0.05 and $0.21 per share, resulting in proceeds of $1,025.
2019 Regulation A Offering; Issuance of Series B Preferred Stock
On September 20, 2019, the Company commenced an offering pursuant to Regulation A under the Securities Act of 1933, as amended (the “2019 Regulation A Offering”), pursuant to which it offered to sell up to 5,800,969 shares of its Series B Preferred Stock, convertible into shares of Common Stock, at a price of $3.4477 per share. The Company intends to utilize the net proceeds from the 2019 Regulation A Offering to execute on its business plans, although there can be no assurances to what extent the offering will be subscribed.
The Company held its first closing in connection with the 2019 Regulation A Offering on November 19, 2019, in which it received gross proceeds in excess of $1.6 million. The initial closing of the 2019 Regulation A Offering constituted a qualified financing for purposes of the Company’s 2019 SAFE securities with investment amounts totally $675,000, all of which were converted into a total of 279,429 shares of the Company’s Series B Preferred Stock at that date. As of December 31, 2019, the Company issued 691,005 shares of Series B Preferred Stock in the 2019 Regulation A Offering, which provided gross cash proceeds of $2,382,386. The Company has used a portion of the net proceeds to hire additional sales personnel, purchase additional equipment and furnishings for its new fulfillment centers, pay security deposits in connection with the 3 new leases executed in 2019 and develop the next phase of its proprietary software.
- 12 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
During the six-month period ended June 30, 2020, the Company had several additional closings in connection with the 2019 Regulation A Offering, in which it received gross proceeds of $8,455,480 for the issuance of 2,452,490 shares of Series B Preferred Stock.
Regulation D Placement; Issuance of Series B Preferred Stock
During the six-month period ended June 30, 2020, the Company conducted a private placement under Regulation D of the Securities Act for shares of its Series B Preferred Stock in which it received gross proceeds of $328,620 for the issuance of 95,316 shares of Series B Preferred Stock.
2018 Regulation A Offering; Issuance of Series A Preferred Stock
The Company conducted an offering of its Series A Preferred Stock in 2018, issuing 3,499,878 shares of Series A Preferred Stock at $2.00 per share, providing gross proceeds of $6,999,721. In conjunction with this offering, the Company issued its broker 163,451 shares of Series A Preferred Stock valued at $326,900, in addition to cash broker fees and other associated offering costs with this offering, which were charged to additional paid-in capital.
This offering triggered conversion of all outstanding SAFE agreements, KISS notes, and Crowd Notes into Series A Preferred Stock. SAFE agreements with purchase amounts totaling $1,829,960 were converted into 2,540,006 shares of Series A Preferred Stock at conversion prices of $0.60 or $1.00 per share. KISS notes with outstanding principal and accrued interest totaling $1,571,028 were converted into 2,206,195 shares of Series A Preferred Stock at conversion prices of $0.60 or $1.00 per share. Crowd Notes with outstanding principal and accrued interest totaling $258,138 were converted into 432,100 shares of Series A Preferred Stock at conversion prices of $0.60 per share.
During the six-month period ended June 30, 2019, 11,543 shares of Series A preferred stock were issued to a broker as compensation, which were recorded at fair value of $23,086 against additional paid-in capital and offering costs.
2015 Equity Incentive Plan
The Company adopted the 2015 Equity Incentive Plan (the “Plan”), as amended and restated. The Plan permits the grant of stock options, stock appreciation rights and restricted stock to attract and retain employees and consultants. Under the Plan, the Company issues stock appreciation rights and options having a term of up to ten years and a strike price of no less than fair market value of common stock at the time of issuance. Restricted stock is subject to vesting restrictions determined on a case-by-case basis. While shares may be restricted, the restricted stockholder retains voting rights for each share, regardless of restriction. Upon termination of employment or services, the Company may exercise its repurchase option over unvested equity interests. The Company issues new common shares upon the exercise of options.
The Company has reserved 1,500,000 shares of common stock under the Plan. As of June 30, 2020 and December 31, 2019, 204,489 and 148,695 shares of common stock were available for grant under the Plan, respectively. A summary of options activities for the periods ended June 30, 2020 and December 31, 2019 is as follows:
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
| June 30, 2020 | December 31, 2019 | |||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||||||
| Outstanding - beginning of year | 1,323,805 | $ | 0.07 | 903,055 | $ | 0.07 | ||||||||||
| Granted | 137,206 | $ | 0.80 | 428,250 | $ | 0.21 | ||||||||||
| Exercised | (12,500 | ) | $ | 0.21 | - | $ | - | |||||||||
| Forfeited | (193,000 | ) | $ | 0.15 | (7,500 | ) | $ | 0.21 | ||||||||
| Outstanding - end of year | 1,255,511 | $ | 0.21 | 1,323,805 | $ | 0.07 | ||||||||||
| Exercisable at end of year | 842,609 | $ | 0.13 | 885,130 | $ | 0.10 | ||||||||||
| Weighted average grant date fair value of options granted during year | $ | 0.040 | $ | 0.103 | ||||||||||||
| Intrinsic value of options outstanding at year-end | $ | 743,815 | $ | 125,840 | ||||||||||||
| Weighted average duration (years) to expiration of outstanding options at year-end | 7.4 | 7.3 | ||||||||||||||
| Weighted average duration (years) to expiration of exercisable options at year-end | 6.5 | 6.4 | ||||||||||||||
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified method,” which is the midpoint between the vesting start date and the end of the contractual term, as the Company has limited historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.
The stock option issuances were valued using the using the following inputs for the periods ended June 30, 2020 and December 31, 2019:
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
| June 30, 2020 | December 31, 2019 | |||||
| Risk Free Interest Rate | 0.53 | % | 1.84%-2.62% | |||
| Expected Dividend Yield | 0.00 | % | 0.00% | |||
| Expected Volatility | 50.00 | % | 50.00% | |||
| Expected Life (years) | 7 | 5 - 8 | ||||
| Fair Value per Stock Option | $ | 0.04 | $0.010 - $0.115 | |||
The Company calculated its estimate of the value of the stock compensation granted for the periods ended June 30, 2020 and December 31, 2019 under FASB ASC 718 and FASB ASC 505, and recorded compensation costs related to the stock option grants of $6,616 and $19,805, respectively. As of June 30, 2020, there is $36,885 of stock-based compensation to be recognized over a weighted-average period of approximately 3 years.
Warrant
On April 29, 2020, the Company issued a warrant in conjunction with execution of a revenue loan and security agreement for consideration of $1,000. The warrant expires on April 29, 2030. The warrant provides the lender with the right to purchase shares of the Company’s common stock, with the number of shares dependent upon the buyout value in the triggering change in control event, whereby the holder is to receive the number of shares to represent 0.15% of the total buyout value in the triggering change in control event. The Company estimated the number of shares to be issued under this warrant using the fully diluted capitalization on the date of issuance multiplied by the 0.15% buyout rate, which provided for 33,045 shares. The warrant may be settled in a cash payment. The Company considered accounting guidance and determined that this warrant is liability classified. The warrant liability will be re-measured at fair value each reporting period. The settlement of the warrant liability will occur once all the warrants have either been exercised or expire. The calculated fair value of the warrants using the Black-Scholes model was $4,428, which was recorded as discount to the loan and is being amortized over the term of the loan.
The Black-Scholes fair value was determined using the following inputs:
| June 30, 2020 | ||||
| Risk Free Interest Rate | 0.36 | % | ||
| Expected Dividend Yield | 0.00 | % | ||
| Expected Volatility | 50.00 | % | ||
| Expected Life (years) | 5 | |||
| Fair Value per Warrant | $ | 0.13 | ||
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
NOTE 6: RELATED PARTY TRANSACTIONS
During 2015, the Company’s co-founders extended financing of $65,000 and $15,000, a Director extended financing in the amount of $50,000, and an employee extended financing to the Company in the amount of $25,000. In 2016, that employee issued another $10,000. In 2018, that Director issued another $250,000 to the Company. All such financings were through the SAFE agreements discussed in Note 4. All such balances remained outstanding as of December 31, 2017 and were converted during 2018 to Series A Preferred Stock, as discussed in Note 5.
The Company reimburses the CEO for an apartment on a month-to-month basis. Rent is $1,677 per month and is available for reimbursement monthly.
NOTE 7: LEASE ARRANGEMENTS
Lease Agreement – Office Space
In June 2015, the Company entered into a 3-year operating lease agreement for office space. The agreement called for a security deposit of $8,898 and monthly payments of $4,194 for the first year, with subsequent annual rent increases of 3% over the next two years. Additionally, the Company is responsible for 18% of the homeowners’ association dues, which currently totals $200-$300 per month. In April 2018, the Company extended the existing lease 3-year operating lease for the office space. The security deposit was lowered to $5,051 creating the difference of $3,848 being credited towards rent in August 2018.
Future minimum payments under this lease are as follows:
| 2020 | $ | 30,083 | ||
| 2021 | 37,880 | |||
| Total future minimum lease payments | $ | 67,963 |
For the periods ended June 30, 2020 and 2019, the Company incurred $33,231 and $31,244 of rent expense related to this lease, respectively.
Lease Agreement – San Jose
In July 2018, the Company entered into a 5-year operating lease agreement for office space in San Jose, California. The agreement called for a security deposit of $50,000 and monthly payments of $4,877 for the first year, with subsequent annual rent increases of 3% over the next four years. Additionally, the Company is responsible for 0.027% of the common area maintenance charges of the complex.
Future minimum payments under this lease are as follows:
| 2020 | $ | 31,566 | ||
| 2021 | 64,284 | |||
| 2022 | 66,588 | |||
| 2023 | 33,870 | |||
| Total future minimum lease payments | $ | 196,308 |
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
For the periods ended June 30, 2020 and 2019, the Company incurred $46,705 and $42,624 of rent expense related to this lease, respectively.
Lease Agreement – Mountain View Office
In August 2018, the Company entered into a 3-year operating lease agreement for office space in Mountain View, California. The agreement called for a security deposit of $10,000 and monthly payments of $1,320 for the first year, with subsequent annual rent increases of 3% over the next two years. Additionally, the Company is responsible for $285 per month of the common area maintenance charges of the complex.
Future minimum payments under this lease are as follows:
| 2020 | $ | 8,320 | ||
| 2021 | 11,200 | |||
| Total future minimum lease payments | $ | 19,520 |
For the periods ended June 30, 2020 and 2019, the Company incurred $10,215 and $9,762 of rent expense related to this lease, respectively.
Lease Agreement – Santa Ana
In December 2018, the Company entered into a 5-year operating lease agreement for office space in Santa Ana, California starting in January 2019. The agreement called for a security deposit of $50,000 and monthly payments of $8,531 for the first year, with subsequent annual rent increases of 3% over the next five years. The Company terminated this lease on June 30, 2019, surrendering its $50,000 deposit. For the period ended June 30, 2019, the Company incurred $101,188 of rent expense related to this lease, inclusive of $50,000 of forfeited lease surrender value.
Lease Agreement – Mountain View
In February 2019, the Company entered into a 1-year and 4-month operating lease agreement for office space in Mountain View, California starting in February 2019. The agreement called for a security deposit of $5,066 and monthly payments of $4,918 for the first year, with subsequent annual rent increases of 3% over the next year. Additionally, the Company is responsible for 21% of the common area maintenance charges of the complex. For the periods ended June 30, 2020 and 2019, the Company incurred $34,922 and $26,972 of rent expense related to this lease, respectively.
Lease Agreement – Burlingame
In February 2019, the Company entered into a 5-year operating lease agreement for office space in Burlingame, California starting in February 2019. The agreement called for a security deposit of $30,000 and monthly payments of $8,742 for the first year, with subsequent annual rent increases of 3% over the next four years. Additionally, the Company is responsible for 25% of the common area maintenance charges of the complex.
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Future minimum payments under this lease are as follows:
| 2020 | $ | 54,030 | ||
| 2021 | 111,030 | |||
| 2022 | 114,358 | |||
| 2023 | 117,793 | |||
| 2024 | 9,840 | |||
| Total future minimum lease payments | $ | 407,051 |
For the periods ended June 30, 2020 and 2019, the Company incurred $58,241 and $43,935 of rent expense related to this lease.
Lease Agreement – Irvine
In June 2019, the Company entered into a 5-year operating lease agreement for office space in Irvine, California starting in September 2019. The agreement called for a security deposit of $57,400 and monthly payments of $8,500 for the first year, with subsequent annual rent increases of 3% over the next four years. Additionally, the Company is responsible for 42% of the common area maintenance charges of the complex.
Future minimum payments under this lease are as follows:
| 2020 | $ | 52,020 | ||
| 2021 | 106,112 | |||
| 2022 | 109,296 | |||
| 2023 | 112,572 | |||
| 2024 | 76,536 | |||
| Total future minimum lease payments | $ | 456,536 |
For the period ended June 30, 2020 the Company incurred $68,542 of rent expense related to this lease.
Lease Agreement – Mesa, AZ
In March 2020, the Company entered into a 5-year, 2-month operating lease agreement for office space in Mesa, Arizona starting in May 2020. The agreement called for a security deposit of $20,000 and monthly payments of $6,051 for the first year, with subsequent annual rent increases averaging 2.67% over the next four years. Additionally, the Company is responsible for 3.6% of the common area maintenance charges of the complex and 2.3% for rental tax.
- 18 -
NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Future minimum payments under this lease are as follows:
| 2020 | $ | 37,143 | ||
| 2021 | 75,317 | |||
| 2022 | 77,380 | |||
| 2023 | 79,444 | |||
| 2024 | 81,507 | |||
| 2025 | 41,269 | |||
| Total future minimum lease payments | $ | 392,060 |
For the period ended June 30, 2020 the Company incurred $0 of rent expense related to this lease.
Lease Agreement – Pleasanton, CA
In June 2020, the Company entered into a 5-year, 1-month operating lease agreement for office space in Pleasanton, California starting in August 2020. The agreement called for a security deposit of $10,000 and monthly payments of $8,085 for the first year, with subsequent annual rent increases of 3% over the next four years. Additionally, the Company is responsible for 25% of the common area maintenance charges of the complex.
Future minimum payments under this lease are as follows:
| 2020 | $ | 32,340 | ||
| 2021 | 97,990 | |||
| 2022 | 100,930 | |||
| 2023 | 103,958 | |||
| 2024 | 107,077 | |||
| 2025 | 72,798 | |||
| Total future minimum lease payments | $ | 515,092 |
For the period ended June 30, 2020 the Company incurred $0 of rent expense related to this lease.
NOTE 8: COMMITMENTS AND CONTINGENCIES
The Company may be subject to pending legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome, if any, arising out of any such matter will have a material adverse effect on its business, financial condition or results of operations.
NOTE 9: CONCENTRATIONS
The Company has significant concentrations in its account receivables, where approximately 48% and 76% of its accounts receivable balance as of June 30, 2020 and December 31, 2019, respectively, were held with one pharmacy services administration organization (PSAO) payor and 13% of its accounts receivable were held with a pharmacy benefits manager (PBM) as of June 30, 2020. Should these payors no longer be able to satisfy these obligations to the Company, it would have a significantly adverse effect to the Company.
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Approximately 85% of the Company’s products are procured through a single supplier. Should this supplier no longer be willing or able to satisfy the Company’s product needs it could adversely affect the Company’s business.
NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the previous revenue recognition requirements in ASC Topic 605—Revenue Recognition and most industry-specific guidance throughout the ASC. The core principle within this ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date for ASU 2014-09 by one year to fiscal years beginning after December 15, 2017, while providing the option to early adopt for fiscal years beginning after December 15, 2016. Transition methods under ASU 2014-09 must be through either (i) retrospective application to each prior reporting period presented, or (ii) retrospective application with a cumulative effect adjustment at the date of initial application. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures, including but not limited to a review of accounting policies, internal controls and processes. The Company adopted this new standard retroactively effective January 1, 2019 and did not realize any significant impacts to its past or 2019 revenues as a result.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. The ASU is effective for annual and interim periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
NOTE 11: SUBSEQUENT EVENTS
Stock Issuances
Through the issuance of these financial statements, the Company has received additional gross proceeds in the 2019 Regulation A Offering of $9,162,135 through the issuance of 2,657,455 shares of Series B Preferred Stock at $3.4477 per share.
Lease Agreement – Hayward, CA
In July 2020, the Company entered into a 5-year, 1-month operating lease agreement for office space in Hayward, California starting in August 2020. The agreement called for a security deposit of $7,455 and monthly payments of $6,624 for the first year, with subsequent annual rent increases of 3% over the next four years.
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NOWRX, INC.
NOTES TO FINANCIAL STATEMENTS
As of June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six-month periods ended June 30, 2020 and 2019 (unaudited)
Lease Agreement – Van Nuys, CA
In August 2020, the Company entered into a 5-year, 1-month operating lease agreement for office space in Van Nuys, California starting in October 2020. The agreement called for a security deposit of $9,805 and monthly payments of $9,805 for the first year, with average subsequent annual rent decreases of 1.51% over the next four years.
Management’s Evaluation
Management has evaluated subsequent events through September 23, 2020, the date the financial statements were available to be issued. Based on this evaluation, no additional material events were identified which require adjustment or disclosure in these financial statements.
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Item 4. Exhibits
The documents listed in the Exhibit Index of this report are incorporated by reference or are filed with this report, in each case as indicated below.
| Exhibit Number |
Description | |
| 2.1 | Second Amended and Restated Certificate of Incorporation (1) | |
| 2.2 | Bylaws (2) | |
| 3.1 | Series A Preferred Stock Conversion Agreement (3) | |
| 3.2 | Series B Preferred Stock Conversion Agreement (4) | |
| 4.1 | Form of Series B Subscription Agreement (5) | |
| 4.2 | Form of Series A Subscription Agreement (6) | |
| 6.1 | Revenue Loan and Security Agreement dated as of April 29, 2020 | |
| 8 | Form of Escrow Agreement (7) |
(1) Filed as an exhibit to the NowRx, Inc. Current Report on Form 1-U dated November 19, 2019 and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000110465919067702/tm1923944d1_ex2-1.htm
(2) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10792) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420418002814/tv481456_ex2-3.htm
(3) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-11058) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420419040140/tv526960_ex3-3.htm
(4) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-11058) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420419040140/tv526960_ex3-3.htm
(5) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-11058) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420419044606/tv529216_ex4.htm
(6) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-10792) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420418014641/tv488125_ex4-1.htm
(7) Filed as an exhibit to the NowRx, Inc. Regulation A Offering Statement on Form 1-A (Commission File No. 024-11058) and incorporated herein by reference. Available at, https://www.sec.gov/Archives/edgar/data/1702206/000114420419044606/tv529216_ex8.htm
9
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, California, on September 25, 2020.
| NowRx, Inc. | ||
| /s/ Cary Breese | ||
| By: Cary Breese, Chief Executive Officer | ||
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the date indicated.
| /s/ Cary Breese | |
| Cary Breese, Chief Executive Officer, | |
| Principal Financial Officer, Principal Accounting Officer, Director | |
| Date: September 25, 2020 | |
| /s/ Sumeet Sheokand | |
| Sumeet Sheokand, Director | |
| Date: September 25, 2020 | |
| /s/ Barry Karlin | |
| Barry Karlin, Director | |
| Date: September 25, 2020 |
10
Exhibit 6.1
Execution Version
REVENUE LOAN AND SECURITY AGREEMENT
THIS REVENUE LOAN AND SECURITY AGREEMENT (as amended from time to time, this “Agreement”) is made as of April 29, 2020 (the “Effective Date”), by and among:
Cary Breese
(the “Key Person”),
NOWRX, INC., a Delaware corporation,
2224 Old Middlefield Way #J
Mountain View, CA 94043
(“Company”),
and
DECATHLON ALPHA IV, L.P., a Delaware limited partnership,
1441 West Ute Boulevard, Suite 240
Park City, UT 84098
(“Lender”).
BACKGROUND
Company wishes to borrow from Lender and Lender wishes to lend to Company an amount up to the Revenue Loan Amount (as defined below) on the terms and conditions of this Agreement. In connection with and as a material inducement to Lender to lend the Revenue Loan Amount to Company, Company desires to make certain representations and warranties to Lender.
AGREEMENT
The parties hereby agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING PRINCIPLES
1.1 Definitions. Capitalized words and phrases used in this Agreement but not otherwise defined herein have the definitions given in Article 11.
1.2 Accounting Principles. The character or amount of any asset, liability, capital account or reserve and of any item of income or expense required to be determined pursuant to this Agreement, and any consolidation or other accounting computation required to be made pursuant to this Agreement, and the construction of any definition in this Agreement containing a financial term, will be determined or made, as the case may be, in accordance with United States generally accepted accounting principles (“GAAP”), to the extent applicable, unless such principles are inconsistent with the express requirements of this Agreement.
ARTICLE 2
ADVANCE, INTEREST AND PAYMENTS
2.1 Revenue Loan Advance. Upon the terms and subject to the conditions of this Agreement:
(a) Initial Advance. Lender will make the Initial Advance to Company on the date of Closing.
(b) Subsequent Advance. Any time beginning 15 days prior to an Advance Period through the end of such Advance Period as set forth on Schedule 2.1(b), Company may by delivering to Lender a written Advance Request in the form provided by Lender to Company (“Advance Request”) request one or more Subsequent Advances in accordance with the Schedule 2.1(b) up to a maximum for all Advances equal to the Revenue Loan Amount. If all of the conditions set forth on Schedule 2.1(b) are satisfied on the date of the Advance Request, Lender will advance to Company the requested amount within 15 business days of receipt of the Advance Request. Contemporaneously with each Subsequent Advance, Company shall deliver to Lender a certificate signed on behalf of Company by the Key Person (or other officer of Company acceptable to Lender) confirming that Company is not in default and no Event of Default has occurred and that all representations and warranties of Company in Article 3 are true as of such date (except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date). Lender may, in its sole discretion, waive or modify any one or more of the conditions to any Subsequent Advance. Company must request and accept delivery of at least the Minimum Subsequent Advance on or before the Minimum Subsequent Advance Deadline.
(c) Not a Revolving Facility. Company acknowledges and agrees that the credit facility granted hereunder is a multiple advance facility, but is not a revolving facility, and Company may not borrow, repay and re-borrow Advances.
2.2 Interest. Interest on the Amount Advanced shall accrue from and after the date of Closing at such rate as is necessary to generate an amount equal to the Minimum Interest (the “Interest”), provided, however, in no case shall such rate exceed the maximum rate allowable under applicable law.
2.3 Promise to Pay. Company promises to pay to the order of Lender, or its assigns in lawful money of the United States of America, for application against the Amount Advanced, together with the Interest as follows (with all payments to be applied first to fees and expenses incurred by Lender, then to accrued interest, and finally to principal, which Lender shall enter in its records of payments made by Company, and such records will be deemed conclusive evidence of the subject matter thereof unless proven otherwise):
(a) Maturity. The Amount Advanced and accrued but unpaid Interest will be immediately due on the Maturity Date and will be payable on demand any time thereafter.
(b) Monthly Payments. Commencing on the Payment Commencement Date and continuing thereafter until maturity or earlier prepayment in full, Company shall pay to Lender, on the 15th day of each month (or the next business day if such date is not a business day) (each a “Payment Date”), by wire transfer or Automated Clearing House (ACH) transfer to the Lender Account described on Schedule 2.3(b)(1) an amount equal to the product of (i) all Revenue for the immediately preceding month multiplied by (ii) the Applicable Revenue Percentage. Notwithstanding anything to the contrary in the preceding sentence, payments made by ACH transfer must be initiated no later than three business days prior to the applicable Payment Date. Lender, in its sole discretion, may apply any monthly payment first to offset any outstanding invoices for legal or other fees that are 60 or more days overdue and then toward satisfaction of the Obligations. If any payment due pursuant to this Agreement is not paid when due, then Company will be assessed on the following day, automatically and without notice from Lender, a service fee of $500 payable to Lender (or other loan servicing agent). All service fees for missed payments are due on the day they arise. Successive service fees will be assessed and due on the 15th day of each month until Company has paid such past due amounts. All service fees will bear interest at the rate set forth in Section 12.7 from the date they arise. A pro-forma payment schedule that is based on Company’s financial projections is attached as Schedule 2.3(b)(2).
1
(c) Annual Payment Cap. Notwithstanding Section 2.3(b), for each calendar year during the term of this Agreement, Company will not be required to make aggregate monthly payments under Section 2.3(b) in excess of the amount equal to 120% of the aggregate dollar amount for such calendar year set forth in the column labeled “Projected Annual Debt Service” of Schedule 2.3(b)(2) (the “Annual Payment Cap”). Once the monthly payments received by Lender for a calendar year equal the Annual Payment Cap, Company will not be obligated to make additional monthly payments pursuant to Section 2.3(b) for the remainder of such calendar year and the next monthly payment due under Section 2.3(b) would be payable on January 15th of the following year.
(d) Prepayment. Company may at its option prepay the Amount Advanced balance and accrued but unpaid Interest on any Payment Date without penalty or premium (other than payment of the Minimum Interest).
(e) Termination of Payment Obligation. The payment obligation shall terminate upon Lender receiving payments from Company equal to the Amount Advanced plus the Interest and all other amounts due pursuant to this Agreement (the “Payoff Date”).
2.4 Security Interest. Company hereby assigns and grants to Lender, a continuing security interest in all of its right, title and interest in and to the Collateral. Upon indefeasible payment in full of the Obligations and termination of Lender’s obligation to make Advances hereunder, Lender shall promptly release such security interest. Company hereby authorizes Lender to take all such actions as are reasonably necessary to, in Lender’s sole discretion, perfect its security interest in the Collateral, including the filing of such financing statements and amendments and continuations thereof as may be useful in order to perfect such security interest and, if any Collateral is covered by a certificate of title, Company will from time to time upon request of Lender execute such documents as may be required to have such security interest properly noted on a certificate of title. In addition, Company authorizes Lender to file, from time to time, (and reaffirms its authorization of the filing of any financing statements filed prior to the date of this Agreement) such financing statements against the Collateral described as “all assets” or the like as Lender reasonably deems necessary or useful to perfect such security interest. The security interest granted to Lender is subordinate to the Senior Indebtedness.
2.5 Revival and Reinstatement of Indebtedness. If the payment of all or any part of the Obligations by Company or the transfer to Lender of any Collateral or other property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights (a “Voidable Transfer”), and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the advice of its counsel, then the amount of such Voidable Transfer or the amount of such Voidable Transfer that Lender is required or elects to repay or restore, including all reasonable costs, expenses and attorneys’ fees incurred by Lender in connection therewith, and the Obligations shall automatically be revived, reinstated and restored by such amount and shall exist as though such Voidable Transfer had never been made.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Company. As a material inducement to Lender to enter into this Agreement and to make one or more Advances to Company, Company represents and warrants to Lender as follows:
(a) Organization, Good Standing and Qualification. Company is duly organized, validly existing and in good standing under the laws of the state of its organization. Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. Company has all required power and authority necessary to own and operate its properties, to carry on its business as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement.
(b) Subsidiaries. Except as set forth on Schedule 3.1(b), Company does not presently own or control, directly or indirectly, or hold any rights to acquire, any interest in any other entity. Company is not a participant in any joint venture, partnership or similar arrangement.
(c) Authorization. All action necessary on the part of Company, its officers, directors, managers and members, for the authorization, execution and delivery of the Transaction Documents, the performance of all Obligations of Company hereunder and thereunder has been taken or will be taken prior to the Closing. The Transaction Documents and all other agreements contemplated thereby constitute valid and legally binding obligations of Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions may be limited by applicable laws.
(d) Litigation. There is no action, suit, proceeding or investigation pending or, to Company’s knowledge, threatened against Company. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or, to Company’s knowledge, threatened involving the prior employment of any Company employees or its obligations under any agreements with prior employers. Company is not subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by Company currently pending or that Company intends to initiate.
(e) Compliance with Other Instruments. Company is not: (i) in violation of or default under any provision of its organizational documents, as amended, (ii) to its knowledge in violation of or default under, in any Material respect, any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or (iii) to its knowledge in violation of or default under, in any Material respect, any provision of any federal or state statute, rule or regulation applicable to Company. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby will not result in any such violation, or be in Material conflict with or constitute, with or without the passage of time and giving of notice, either a Material default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of Company or the suspension, revocation, impairment, forfeiture or non-renewal of any permit, license, authorization or approval applicable to Company, its business or operations or any of its assets or properties, other than the security interests arising under the Transaction Documents.
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(f) Related-Party Transactions. No employee, member, manager, officer or director of Company or member of his or her immediate family is indebted to Company, nor is Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To Company’s knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Company is affiliated or with which Company has a Material business relationship, or any firm or corporation that competes with Company, except that employees, shareholders, officers or directors of Company and members of their immediate families may own up to 2% of the outstanding stock of one publicly traded company that may compete with Company.
(g) Financial Statements. The financial statements for Company’s most recently completed fiscal year and year-to-date for the current year as of the most recently ended month are attached hereto as Schedule 3.1(g), are correct in all Material respects, and fairly present Company’s operating results and financial conditions as of dates and for the periods indicated therein. As of the dates of such financial statements, Company has not had any Material obligation, contingent liability, liability for taxes or long-term lease obligation that is not reflected in such financial statements or the notes thereto. Since the date of such financial statements: (i) Company has operated its businesses only in the ordinary course; (ii) there has not been individually or in the aggregate any change that may result in a Material Adverse Effect; (iii) Company has not guaranteed any Indebtedness of any other Person; (iv) Company does not have any Indebtedness for borrowed money other than pursuant to this Agreement and as otherwise disclosed in the financial statements; and (v) no event has occurred that could have a Material Adverse Effect. Company is solvent.
(h) Tax Returns; Taxes. (i) Company has timely filed all returns, declarations, reports, estimates, information returns, and statements, including any schedules and amendments to such documents (“Returns”), required to be filed or sent by it in respect of any Taxes or required to be filed or sent by it by any taxing authority having jurisdiction; (ii) all such Returns are complete and accurate in all material respects; (iii) Company has timely and properly paid all Taxes required to be paid by it; and (iv) Company has complied with all applicable laws, rules, and regulations relating to the collection or withholding of Taxes from third parties and the payment thereof; (v) there are no liens for Taxes upon any assets of Company; (vi) no deficiency for any Taxes has been asserted, assessed or proposed in writing against Company that has not been resolved and paid in full or is not being contested in good faith; (vii) no waiver, extension or comparable consent given by Company regarding the application of the statute of limitations with respect to any Taxes or Returns is outstanding, nor is any request for any such waiver or consent pending; and (viii) there has been no Tax audit or other administrative proceeding or court proceeding with regard to any Taxes or Returns, nor is any such Tax audit or other proceeding pending, nor has there been any notice to Company by any taxing authority regarding any such Tax audit or other proceeding.
(i) Permits. Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business the lack of which would have a Material Adverse Effect, and Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. Company is not in default in any Material respect under any of such franchises, permits, licenses or other similar authority.
(j) Compliance with Laws. Company, the operation of its business and all premises controlled by Company is in Material compliance with all applicable laws and orders or directives of any governmental authorities having jurisdiction over Company, its properties or operations, except where the failure to comply could not reasonably be expected to have a Material Adverse Effect. Company has not received any citation, directive, letter or other communication (whether oral or written) or any notice of any proceeding, claim, lawsuit or investigation, from any Person arising out of Company’s ownership or occupation of its premises or the conduct of its operations.
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(k) Disclosure. Company has provided Lender with all the information available to it that Lender has requested for deciding whether to make Advances. To the best of Company’s knowledge, neither this Agreement (including all the exhibits attached hereto) nor any certificates delivered in connection herewith contains any untrue statement of a Material fact or omits to state a Material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made.
(l) Title to Property and Assets. The property and assets owned by Company are owned solely by Company free and clear of all mortgages, liens, loans and encumbrances. With respect to Company’s leased property and assets, Company is in compliance with the applicable leases in all Material respects and, to Company’s knowledge, it holds valid leasehold rights in and to such leased property and assets. There are no financing statements reflecting the perfection of any security interest in favor of any creditor other than Lender covering all or any part of Company’s assets in existence or on file in any public office other than those representing the Permitted Liens.
(m) Name and Location of Company. Company has provided to Lender in writing its legal name, state of organization, entity type, and chief executive office address. Company maintains all of its books and records regarding its assets at its chief executive office. Company has such business and financial experience as is necessary to enable it to protect its interests in connection with the transactions contemplated by this Agreement.
(n) Collateral. Company has full power and authority to create a first-priority lien on the Collateral pursuant to this Agreement and no disability or contractual obligation exists that would prohibit Company from pledging the Collateral pursuant to this Agreement. There are no subscriptions, warrants, rights of first refusal, or other restrictions on transfer relative to, or options exercisable with respect to, the Collateral. The Collateral is not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and Company does not know of any reasonable grounds for the institution of any such proceedings. The Collateral consisting of equipment and inventory is in good operating condition and repair, subject to ordinary wear and tear, and Company has made all economically reasonable and necessary repairs thereto. The Collateral consisting of inventory is of good and marketable quality, free from defects, except for inventory for which adequate reserves have been made in accordance with GAAP.
(o) Intellectual Property. Company owns or is a licensee of all intellectual property rights used in or necessary for the conduct of its business and operations, as currently conducted and as proposed to be conducted, or that are Material to the condition (financial or otherwise), business, or operations of Company.
(p) Suppliers. None of the suppliers of Company have indicated to Company that they intend to terminate, discontinue, or materially reduce their business relationship with Company. There have been no developments with any suppliers of Company that may serve as the basis for such supplier to Materially change its relationship with Company. Company does not have any overdue payables to any supplier for services, materials, equipment or other products previously provided to Company.
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(q) Ordinary Course of Business. Company intends to run its business in the ordinary course of business and will continue to use commercially reasonable efforts to preserve substantially intact the business organization and assets of Company and preserve the current relationships of Company with customers, suppliers and other persons with which Company has significant business relations. Company does not have any current intention to make, nor is Company evaluating or contemplating making, any Material changes to its business, including its business model, pricing model, or product offering.
(r) Recent Developments. As of the Effective Date, (i) all actions by Company necessary to authorize the execution, delivery and performance of the Transaction Documents have been taken (including the adoption of appropriate resolutions of the Governing Body), (ii) no Event of Default has occurred, and (iii) Company has not incurred any additional Indebtedness since the Term Sheet Date other than the PPP Indebtedness.
3.2 Representations and Warranties of the Key Person. As a material inducement to Lender to enter into this Agreement and to make one or more Advances to Company, the Key Person hereby represents and warrants to Lender:
(a) Financial Interest. The Key Person has a financial interest in Company and will receive a direct or indirect financial and other benefit from this Agreement and the Advances made to Company hereunder.
(b) Non-Contravention. The execution, delivery and performance by the Key Person of this Agreement and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which the Key Person is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any court order, indenture, mortgage, deed to secure debt, deed of trust, trust deed, charge, lien, or any contract, agreement or other instrument to which the Key Person is a party or which may be binding on or applicable to the Key Person. This Agreement is a legal, valid and binding obligation of the Key Person and is enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors and by general principles of equity.
(c) Authorization. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or any Person (other than those that have been duly obtained or made and which are in full force and effect) is required for the consummation of this Agreement or the execution, delivery or performance by the Key Person of this Agreement.
(d) Financial Condition; Litigation. There has been no material adverse change in the net worth, assets, financial condition, or prospective financial position of the Key Person since the Term Sheet Date. No litigation, investigation, or proceeding of or before any arbitrator, court or governmental authority is pending or, to the knowledge of the Key Person, threatened by or against the Key Person or against any of the Key Person’s assets.
(e) Accuracy of Information. None of the factual information heretofore or contemporaneously furnished in writing to Lender by or on behalf of the Key Person in connection with this Agreement or any of the Transaction Documents contains any untrue statement of a material fact, or omits to state any material fact necessary to make any information not misleading, and no other factual information hereafter furnished in connection with this Agreement or any of the Transaction Documents by or on behalf of the Key Person to Lender will contain any untrue statement of a material fact or will omit to state any material fact necessary to make any information not misleading on the date as of which such information is dated or certified.
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ARTICLE 4
CLOSING
4.1 Closings. The closing of the Initial Advance pursuant to this Agreement (the “Closing”) shall take place at the offices of Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402-1425, by an electronic exchange of executed counterpart copies of this Agreement and the other Transaction Documents between counsel for Company and Lender. At the Closing, Company and Lender shall exchange signature pages to this Agreement by facsimile, portable document format (.pdf), DocuSign or other electronic transmission, and Lender will thereafter make the Initial Advance. Lender shall also pay the Warrant purchase price pursuant to Article 9 to Company. Distributions of proceeds of the Initial Advance pursuant to this Section 4.1 shall be made by wire transfer and, in Lender’s sole discretion, are subject to off-set of the Company’s Share of Transaction Costs.
4.2 Lender’s Conditions to Closing. Lender’s Advances pursuant to this Agreement are subject to the condition that on or before the Closing, Lender has received evidence of the following actions and or executed original copies of the following documents, in form and substance satisfactory to Lender:
(a) a Non-Solicitation and Confidential Information Agreement from the Key Person;
(b) a Warrant in the form attached as Exhibit A;
(c) a Subordination Agreement with McKesson Corporation;
(d) a copy of resolutions duly adopted by the board of directors (the “Governing Body”) of Company authorizing this Agreement and the transactions contemplated hereby;
(e) a Certificate of Perfection from Company in the form provided by Lender to Company; and
(f) a copy of Company’s current operating budget including, without limitation, projected revenues, expenses, wages, and uses of loan proceeds, and if applicable, approved by Company’s Governing Body.
4.3 Subsequent Closings. The closing of each Subsequent Advance pursuant to this Agreement, if any (each, a “Subsequent Closing”) shall take place at the offices of Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402-1425 by electronic exchange of documents deemed necessary by Lender in connection with such Subsequent Closing, including a Subsequent Closing certificate from a Key Person in form and substance satisfactory to Lender certifying that the conditions to the Subsequent Advance set forth on Schedule 2.1(b) have been satisfied and Company shall execute and deliver to Lender any other agreement or document as reasonably requested by Lender to consummate the transactions contemplated by this Agreement in connection with such Subsequent Closing.
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ARTICLE 5
AFFIRMATIVE COVENANTS
Unless otherwise agreed in writing by Lender, Company shall, so long as any of the Obligations remain unsatisfied, comply with the covenants in this Article 5.
5.1 Financial Information, etc. Upon request from Lender, Company will furnish to Lender copies of the following financial statements, reports and information:
(a) as soon as available and in any event within 120 days after the end of each fiscal year of Company, a copy of its annual consolidated financial statements (balance sheet, cash flow statement and income statement), detailed on a monthly basis, which will be reviewed (or audited if Company has its financial statements audited by Company’s accounting firm) (the “Financial Statements”) and prepared in all Material respects, in accordance with GAAP, as well as a complete version of Lender’s required annual operational survey;
(b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of Company, a copy of Company’s consolidated quarterly Financial Statements from the beginning of such fiscal year to the end of such quarter, detailed on a monthly basis, prepared by Company’s accounting firm, in all Material respects, in accordance with GAAP, except for the presence of footnotes and subject to normal year-end adjustments;
(c) with each quarterly and annual financial statement or report required by Sections 5.1(a) and 5.1(b), a certificate signed by the Chief Executive Officer or any Key Person of Company stating that, to the best of his or her knowledge after reasonable investigation, no Event of Default has occurred and is continuing with respect to Company, or if an Event of Default has occurred and is continuing, a statement of the nature thereof and the action which Company proposes to take with respect thereto;
(d) copies of all reports that Company sends to any of its equity holders (as an equity holder) promptly after the sending or filing thereof;
(e) within 45 days of the conclusion of each calendar year, Company’s consolidated annual operating and capital expenditure budgets and cash flow forecast for the following year presented on a monthly basis;
(f) within five days of receipt by, or delivery to, copies of all material notices to or from any other lender to Company;
(g) within 10 days of filing with the applicable taxing authority, a copy of all tax returns; and
(h) such other information and financial reports with respect to the Collateral, the Key Person and/or the financial condition and operations of Company as Lender may reasonably request, and, when so requested, Company will make available for inspection and copy by duly authorized representatives of Lender, any of Company’s books and records; and
(i) as soon as available and in any event within 30 days after the end of each calendar month, a copy of Company’s monthly consolidated Financial Statements as of the end of such month prepared by Company, in all Material respects, in accordance with generally accepted accounting principles, except for the omission of footnotes and subject to normal year-end adjustments.
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5.2 Maintenance of Corporate Existence and Properties.
(a) Company will at all times do or cause to be done all things necessary to maintain, preserve and renew its charter and its leases, privileges, franchises, qualifications and rights that are necessary or useful in the ordinary conduct of its business, and conduct its business as presently conducted in an orderly and efficient manner in accordance with good business practices;
(b) Company will provide or cause to be provided for itself insurance against loss or damage of the kinds customarily insured against by businesses similarly situated and located, with reputable insurers, in such amounts, with such deductibles and by such methods as are adequate in the judgment of Company’s Governing Body, and in any event in amounts not less than amounts generally maintained by other companies of similar size engaged in similar businesses;
(c) Company will keep true books of records and accounts in which full and correct entries will be made of all its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles; and
(d) Company will comply in all Material respects with all applicable laws, statutes, rules, regulations, orders and restrictions in respect of the conduct of its business and the ownership of its properties, except such as are being contested in good faith.
5.3 Payment of Indebtedness, Taxes and Claims. Company will pay (a) its Indebtedness, the Obligations, and all other obligations promptly and in accordance with their terms; (b) file all tax returns and reports which are required by law to be filed by it; (c) pay before they become delinquent, all taxes (including payroll taxes), assessments and governmental charges and levies imposed upon it or its property; and (d) pay all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehousemen, landlords and other like persons) which, if unpaid, might result in the creation of a lien upon its property other than a Permitted Lien.
5.4 Nature of Relationship. Lender is entering into this Agreement and making one or more advances to Company based on its confidence in the Key Person and the Key Person’s integrity and ability to manage Company. Given the Key Person’s experience and expertise operating Company and his greater access to information, Lender is entrusting the Key Person with broad discretion in the control and management of Company. Lender is dependent upon Company and thus the Key Person for repayment and satisfaction of all Obligations. The Key Person acknowledges Lender’s confidence in him/her and hereby agrees to act with the utmost good faith for the benefit of Lender.
5.5 Litigation and Other Notices. Company and/or the Key Person shall furnish to Lender written notice of the following promptly after any officer (or similar) of Company becomes aware of the same:
(a) any Event of Default or the occurrence of any event or condition that would likely result in an Event of Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; provided, however, that Company shall provide written notice to Lender not later than 48 hours prior to the occurrence of an Event of Default described in Section 7.3 of this Agreement;
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(b) the filing or commencement of, or receipt of notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any governmental authority, against Company which has had or would likely have a Material Adverse Effect;
(c) any development, event or condition affecting or relating to Company that has had, or would likely have, a Material Adverse Effect; provided, however, notice for events which occur on a frequent basis may be aggregated into one monthly or quarterly notice as agreed upon in writing by Lender; and
(d) the issuance by any governmental authority of any injunction, order or decision, or the entry by Company into an agreement with any governmental agency, Materially restricting the business of Company or concerning any Material business practice of Company; provided, however, notices regarding regulatory changes will be provided only quarterly.
5.6 Inspection. Company shall permit Lender, at Lender’s expense, to visit and inspect Company’s properties; examine its books of account and records; and discuss Company’s affairs, finances, and accounts with its officers during normal business hours of Company as may be reasonably requested by Lender; provided, however, that Company shall not be obligated pursuant to this Section 5.6 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to Company) or the disclosure of which would or could reasonably be expected to adversely affect the attorney-client privilege between Company and its counsel.
5.7 Audit Right.
(a) Upon reasonable advance notice from Lender, Company shall, not more than once every 12 months, make the financial books and records of Company available to Lender and its designated representatives for review and audit so that Lender may verify (i) the amount of payments made by Company to Lender and (ii) the aggregate Revenues. Lender shall provide the full written results of such review and audit to Company within 10 days after the completion of such review and audit. Subject in each case to Section 5.7(b), in the event that a review and audit by Lender or its designated representatives results in a determination that the amounts that were paid to Lender (A) were underpaid by less than 10%, Company shall pay to Lender the amount unpaid plus interest at the rate of 1% per month on the amount unpaid, but Lender shall bear all of the costs, fees and expenses incurred by Lender as a result of the review and audit or (B) were underpaid by 10% or more, Company shall pay to Lender, in addition to the amount unpaid plus interest at the rate of 1% per month on the amount unpaid, all of the reasonable third-party costs, fees and expenses actually incurred by Lender as a result of the review and audit.
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(b) Notwithstanding the foregoing, if Company disputes or disagrees with any of the results of Lender’s review and audit, Company may deliver to Lender, within 15 days of its receipt of the written results of Lender’s review and audit, a written dispute notice of its specific objections to Lender’s review and audit (a “Dispute Notice”). Upon the delivery by Company of a Dispute Notice, Company and Lender shall in good faith, and in consultation with their respective accountants, work together to resolve all disputed issues set forth in such Dispute Notice. To the extent that the disputed items set forth in the Dispute Notice remain unresolved after 20 business days following the receipt of the Dispute Notice, Company and Lender shall submit such unresolved items to an accounting firm of national or regional reputation that is mutually agreed upon by Company and Lender (the “Accountants”). If the issues in dispute are submitted to the Accountants for resolution: (i) Company and Lender shall each furnish to the Accountants such documents and information relating to the disputed issues as the Accountants may reasonably request and are available to that party and shall be afforded the opportunity to present to the Accountants any material relating to the review and audit in question and to discuss such review and audit with the Accountants; (ii) the determination by the Accountants of the actual amounts that should have been paid to Lender during the period subject to review and audit (the “Settled Audit Amount”), as set forth in a notice delivered to both parties by the Accountants within 30 days of the Accountants’ engagement, will be binding and conclusive on the parties; and (iii) Company and Lender shall bear the costs, fees and expenses of the Accountants for such determination in the same manner they would bear the costs, fees and expenses of Lender for the review and audit in accordance with Section 5.7(a). Within 10 business days following the determination of the Settled Audit Amount, the appropriate payments shall be made by Company, if any, in accordance with Section 5.7(a), based solely on the Settled Audit Amount.
5.8 Subsidiaries and Related Businesses. Company shall cause all of the Related Businesses to comply with the provisions of Article 5 and Article 6. Company shall deliver prior written notice to Lender of the formation or acquisition of any subsidiary and/or purchase of equity investment or lending or advancing of funds to any other entity. All such subsidiaries of Company and Related Businesses shall execute and deliver to Lender such joinders, pledge agreements and other documents as Lender requests.
5.9 Further Assurances.
(a) Company will at any time or times promptly execute and shall cause any Related Business to promptly execute, such instruments and perform such acts as Lender may reasonably request to establish and maintain an attached and perfected security interest in the Collateral and will pay all costs of filing and recording.
(b) Company will reimburse Lender for all reasonable costs, fees and expenses (including attorneys’ fees) for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral and the cost of any terminations, extensions, renewals, amendments and releases thereof, and shall promptly pay all reasonable costs, fees and expenses of any record searches for financing statements Lender may reasonably require.
5.10 Records Regarding Collateral. Company shall maintain all records, instruments or other documentation evidencing or otherwise relating to the Collateral at Company’s chief executive office and will not (a) remove any part thereof, or (b) change Company’s name, state of organization, or location of its chief executive office, without the prior written consent of Lender (which consent shall not be unreasonably withheld or delayed).
5.11 Company Bank Account. Company shall use its best efforts to: (a) maintain a banking relationship with Company Bank or other qualified commercial bank; (b) ensure that all payments to Company from whatever source shall be deposited into Company account described in Schedule 5.11, or successor account thereto; (c) ensure that such account has a balance in excess of the amount due to Lender on each date that a payment pursuant to this Agreement is due; and (d) ensure that the Applicable Revenue Percentage is transferred to Lender Account on a monthly basis in accordance with this Agreement. Company shall within five business days notify Lender in writing of any change in its banking relationship (whether such change is within Company’s current bank or to another bank) and shall provide Lender with new contact information and account details for all new bank accounts.
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5.12 Key Person Insurance; Background Check. Within 60 days following the Effective Date, Company shall hold from one or more “A or better” insurers, “key-person” life insurance on the Insured Executive(s) in the Insurance Amount and on other terms and conditions reasonably acceptable to Lender and Company. The key-person policy, whether obtained prior to or following the Effective Date, shall be collaterally assigned to Lender, name Lender as loss payee, and continuously maintained in force and shall not be cancelable by Company without prior approval from Lender prior to full satisfaction of the Obligations. If at any time following such 60 day period Company does not hold a key-person policy in compliance with the preceding two sentences, Lender may obtain a key-person policy as owner and beneficiary on the life of the Insured Executive(s) in the Insurance Amount. Insured Executive(s) and Company shall fully cooperate with Lender in obtaining such policy and Company shall reimburse Lender for all related fees and expenses. All or any portion, in Lender’s sole discretion, of the insurance proceeds received by Lender as loss payee or beneficiary on any one or more key-person life insurance policies shall be applied against the outstanding Obligations with the excess being returned to the insurance company for redistribution. Proceeds of key-person life insurance policies received by Company while any Obligations are outstanding will, in the sole discretion of Lender, be used, in whole or in part, to satisfy the Obligations. Failure to obtain key-person insurance within such 60 day period will be considered an Event of Default under Section 7.2 of this Agreement. It is further agreed that prior to any person assuming any office, position, or responsibilities currently held by the Key Person, Company will use commercially reasonable efforts to ensure that such person provides Lender with written authorization to conduct a background check within 30 days after such person’s appointment; provided that such background check shall only be for informational purposes and shall not give Lender any rights to veto such replacement Key Person. Failure by such person to provide written consent within such 30 day period will be considered an Event of Default under Section 7.2 of this Agreement.
5.13 Compliance. Company shall comply with the requirements of all applicable state and federal laws, and of all rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject.
5.14 Government Regulation. Company will not be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit to Company or from otherwise conducting business with Company, or fail to provide documentary and other evidence of Company’s identity as may be requested by Lender at any time to enable Lender to verify Company’s identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.
5.15 Annual Survey. Company shall complete Lender’s annual compliance survey within 30 days of receipt of such compliance survey from Lender by Company for the applicable year. For each time Company fails to submit an annual compliance survey within 30 days after the date on which it is due, Company will automatically, and without notice from Lender, be assessed a $500 service charge and each such service charge will bear interest at the rate set forth in Section 12.7 from the date such service charge arises (i.e., 30 days after delivery of the compliance survey by Lender (or its representatives) to Company).
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5.16 Expenses Related to Non-Compliance with Covenants. If after five days’ notice from Lender, Company fails to comply with any one or more of the covenants provided for in this Agreement, Lender may, but has no obligation to, take such reasonable actions as Lender, in its sole discretion, deems appropriate to ensure Company remains in or returns to compliance with this Agreement and to protect Lender’s interest under this Agreement, including without limitation, paying premiums, taxes, unpermitted Indebtedness and/or judgments. Company shall thereafter promptly reimburse Lender for all reasonable costs, fees and expenses incurred by Lender in connection therewith together with interest at the rate set forth in Section 12.7 from the date of disbursement.
5.17 Registration of Intellectual Property Rights. Company will register with the United States Patent and Trademark Office or the United States Copyright Office its intellectual property rights including revisions or additions thereto with any product before the sale or licensing of the product to any third party, in each case to the extent registrable and the Governing Body of Company in good faith deems appropriate for the development of Company’s business and in the best interest of Company and its equity holders. To the extent that the Governing Body of Company in good faith determines appropriate for the development of Company’s business and in the best interests of Company and its equity holders, Company will: (i) protect, defend, and maintain the validity and enforceability of the intellectual property rights and promptly advise Lender in writing of any known or claimed infringements thereof, and (ii) not allow any intellectual property rights to be abandoned, forfeited or dedicated to the public without Lender’s prior written consent.
5.18 Monthly Questionnaires. On or before each Payment Date, Company shall accurately and fully complete and submit Lender’s online financial data questionnaire reporting the information requested by Lender about the most recently completed month (each, a “Monthly Questionnaire”). If any Monthly Questionnaire due pursuant to this Agreement is not submitted within 30 days of its due date, then Company will be assessed on the following day, automatically and without notice from Lender, a $500 service fee payable to Lender (or other loan servicing agent). All service fees for late Monthly Questionnaires are due on the day that they arise. Successive service fees will be charged and due on the 15th day of each month until Company has submitted all past due Monthly Questionnaires. All service fees will bear interest at the rate set forth in Section 12.7 from the date they arise.
5.19 Retirement of Promissory Notes. Lender acknowledges that Company currently is in default under the Cray Note and Upadhyay Note. Within seven calendar days after Closing, Company shall pay in full the outstanding principal balance and accrued interest under the Cray Note and Upadhyay Note and deliver evidence satisfactory to Lender that the notes have been paid in full.
5.20 Kabbage Loan UCC-3 Termination Statements. As soon as reasonably practicable after Closing, Company shall deliver copies of filed UCC-3 termination statements regarding the liens granted by Company to Celtic Bank under the Kabbage Business Loan Agreement ($62,100) dated January 29, 2020 and the Kabbage Business Loan Agreement ($100,000) dated October 17, 2019.
5.21 PPP Indebtedness. Company must take all actions necessary to preserve its eligibility for 100% loan forgiveness with respect to the PPP Indebtedness under the CARES Act (as may be amended, supplemented, or otherwise modified after the date hereof), including without limitation using, and properly documenting and reporting its use of, the proceeds of the PPP Indebtedness for payroll and other costs eligible for loan forgiveness under the CARES Act. In addition, Company must request the maximum eligible amount of loan forgiveness from Silicon Valley Bank promptly after becoming eligible under applicable Small Business Administration regulations and guidance.
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ARTICLE 6
NEGATIVE COVENANTS
Unless otherwise agreed in writing by Lender, Company and each Related Business shall, so long as any of the Obligations remain unsatisfied, comply with the covenants in this Article 6.
6.1 Indebtedness.
(a) Company will not (i) create, incur, assume, guarantee, or otherwise become liable for any Indebtedness after the date of this Agreement, or (ii) create any lien, security interest, mortgage or pledge of its assets. Notwithstanding the preceding sentence, during any period of time in which Company is not in default on any Senior Indebtedness and no Event of Default exists, Company may create Permitted Indebtedness and Permitted Liens.
(b) Without the prior written approval of Lender, Company will not (i) increase the advance rate or interest rate in respect of any Indebtedness, (ii) increase the maximum principal amount of any Indebtedness, or (iii) shorten the dates upon which payments of principal or interest of any Indebtedness are due.
6.2 Restricted Payments.
(a) Company and the Related Business will not, at any time, make or become obligated to make, directly or indirectly, any: (i) payment or distribution in respect of any capital stock, units or other equity interests in Company; (ii) payment or distribution on account of the purchase, repurchase (other than repurchases of unvested capital stock from employees, consultants and advisers at the original purchase price paid by such persons), redemption or other retirement of any capital stock, units or other interests in Company; (iii) loans, advances or payments to any affiliate, stockholder, or member, including, without limitation, any officer or member of the Governing Body of Company or any Related Business; and/or (iv) investment in third parties other than in money market funds for purposes of cash management.
(b) Notwithstanding Section 6.2(a), Company may pay reasonable compensation (including reasonable salary, bonus and equity compensation for a company of similar size, financial condition, location and industry), reimburse expenses incurred on behalf of Company, and, if Company is, for tax purposes, a partnership (including a limited liability company taxed as a partnership) or Subchapter S corporation, distributions in such amounts as reasonably determined to be necessary to allow equity holders to pay federal, state and local income taxes with respect to the income allocated to such equity holder from Company with respect to the applicable tax year.
6.3 Ownership; Maintenance of Collateral. Company shall not (i) transfer or otherwise dispose of all or any portion of the Collateral, other than in the ordinary course of business, (ii) enter into any lease or license for the use of the Collateral without fair and reasonable consideration, or (iii) waive, forgive, release, amend, terminate or fail to enforce any material amount owed to Company or other right held by Company. Company shall keep the Collateral free and clear of all levies, attachments, liens, charges, encumbrances and security interests of every kind or character (except for the security interest granted to Lender hereunder and except for Permitted Liens). Company shall promptly pay and discharge when due all license fees, registration fees, taxes, assessments and other charges which may be levied upon or assessed against the ownership, possession or uses of the Collateral or any portion thereof, except as otherwise permitted in this Agreement. Company shall keep accurate and complete records of the Collateral and shall, upon Lender’s reasonable request, promptly affix on any Collateral constituting chattel paper, a notice, in form satisfactory to Lender, of Lender’s security interest created hereunder. Company shall use commercially reasonable efforts to maintain all Collateral in good working order, subject to ordinary wear and tear, and, with respect to intellectual property, make such filings, prosecute such applications, pay necessary fees (including maintenance fees), and take such other actions as necessary to properly maintain and protect Company’s intellectual property rights. For the avoidance of doubt, Company shall not, without Lender’s prior written consent, sell or otherwise transfer or cease operations of any business unit, operating division, or other Material portion of Company’s business operations.
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6.4 New Subsidiaries. Company will not create or permit to exist any new subsidiary or joint venture. If Lender consents to the formation of any subsidiary or joint venture after the date of this Agreement (each, an “Approved Subsidiary”), then such Approved Subsidiary (a) shall execute and deliver the joinder contemplated by Section 5.8 hereof and (b) will be considered a guarantor of Company’s Obligations hereunder. By executing and delivering the joinder required under clause (a) above, such Approved Subsidiary will be deemed to have granted a security interest as contemplated under Section 2.4 of this Agreement in all of such Approved Subsidiary’s assets and Lender will be permitted to take such actions and make such filings as are contemplated in Section 2.4 of this Agreement with respect to such Approved Subsidiary.
6.5 Related Party Transactions. Company will not enter into any agreement with a Related Business or any officer, director or employee of Company or a Related Business, or any member of the immediate family of any such officer, director or employee, or any entity in which any of such persons owns any beneficial interest (other than a publicly traded business of which any of the foregoing persons or entities owns less than 2% of the outstanding voting securities thereof).
ARTICLE 7
EVENTS OF DEFAULT
The term “Event of Default” means the occurrence of any one or more of the following events:
7.1 Payment of Obligations. The failure or refusal of Company to pay any portion of the Obligations on the due date in accordance with the terms of the Transaction Documents (each, a “Payment Event of Default”); provided that, subject to Section 8.2 and Section 12.7 hereof, Company will have 15 days following the due date thereof to cure any such Payment Event of Default.
7.2 Other Covenants. The failure or refusal of Company to punctually and properly perform, observe and comply with any Material affirmative covenant, agreement or condition contained in any of the Transaction Documents and such failure continues for a period of 30 days after the earliest of: (a) the date Company gives notice of such failure to Lender; (b) the date Company should have given notice of such failure to Lender pursuant to this Agreement; and (c) the date Lender gives notice of such failure to Company; provided, there will be no cure period for (i) any breach of any negative covenant contained in any of the Transaction Documents, (ii) the Events of Default provided in Section 7.3, (iii) failure to obtain “key person” insurance within the time period prescribed by Section 5.12 of this Agreement, or (iv) failure to obtain written consent to a background check within the time period prescribed by Section 5.12 of this Agreement.
7.3 Bankruptcy; Insolvency.
(a) Company commences a voluntary case under Title 11 of the United States Code as now or hereafter in effect, or any successor thereto;
(b) an involuntary case under Title 11 of the United States Code is commenced against Company and the petition is not dismissed within 30 days after commencement of the case;
(c) a custodian is appointed for, or takes charge of, all or any substantial part of the property of Company;
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(d) Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Company;
(e) Company fails to pay, or states that it is unable to pay, or is unable to pay, its debts generally as they become due; or
(f) Company ceases or substantially changes or reduces its operations.
7.4 Judgments. A judgment for the payment of money in excess of $150,000 is rendered against Company, and such judgment remains unpaid or undischarged for more than 30 days from the date of entry thereof or such longer period during which execution of such judgment is stayed during an appeal from such judgment.
7.5 False Statement. Any representation or warranty made by or on behalf of Company in this Agreement or any other Transaction Documents or in any certificate, statement, report or document herewith or hereafter furnished to Lender pursuant to this Agreement or any other Transaction Documents shall prove to have been false or misleading in any Material respect on the date as of which the facts set forth are stated or certified, if the facts are not remedied to reflect the representation or warranty made within 30 days of any officer of Company becoming aware of such false or misleading representation or warranty.
7.6 Key Person Events.
(a) Without written consent of Lender, the Key Person:
(i) ceases full-time employment with Company other than for reason of death or disability;
(ii) provides services to a business that is competitive with Company;
(iii) improperly uses intellectual property or confidential information of Company for the benefit of any Person other than Company; or
(iv) violates any provision of his or her Non-Solicitation and Confidential Information Agreement.
(b) If an Event of Default under Section 7.6(a)(i) occurs, Company and Lender will use their commercially reasonable efforts to identify a mutually acceptable replacement Key Person, and Company will cause such replacement Key Person to promptly execute a joinder to this Agreement and to enter into a Non-Solicitation and Confidential Information Agreement in substantially the same form as is delivered by the Key Person pursuant to Section 4.2(a) hereof (if not previously executed by such replacement Key Person). The replacement Key Person will be required to fulfill the duties and obligations of the Key Person set forth in this Agreement. Company will not, without Lender’s prior written consent, hire or compensate a replacement Key Person on terms substantially different from those applicable to the prior Key Person. Additionally, Company shall obtain “key-person” life insurance in the amount required under Section 5.12 hereof within 60 days of the date on which the Key Person is mutually agreed upon by Company and Lender. Failure to obtain such “key-person” life insurance within such 60 day period will constitute an Event of Default under Section 7.2 of this Agreement.
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7.7 Cross Default. (a) The maturity of any Indebtedness of Company (other than Indebtedness under this Agreement) owed to Lender that is not paid when due, after giving effect to any grace or cure period, (b) the maturity of any Indebtedness of Company in an aggregate amount equal to or greater than $50,000 owed to others is accelerated, or (c) Company fails to pay any such Indebtedness when due or, in the case of such Indebtedness payable on demand when demanded, after giving effect to any grace or cure period.
7.8 Material Adverse Effect. Any other event that Lender deems in its reasonable discretion to have had a Material Adverse Effect on Company.
ARTICLE 8
RIGHTS AND REMEDIES
8.1 General Remedies. If any Event of Default specified in Section 7.3 shall occur, any commitment to make Advances hereunder shall automatically terminate and all Obligations of Company to Lender hereunder and under the other Transaction Documents shall automatically become immediately due and payable without notice. Upon the occurrence of any Event of Default, Lender may, without notice of any kind (including, without limitation, notice of acceleration or of intention to accelerate, presentment and demand or protest, all of which are hereby expressly waived by Company) do any one or more of the following:
(a) declare the entire Amount Advanced, Interest and all other Obligations, or any part thereof, immediately due and payable (provided that the Minimum Interest used to determine the Interest in such event will be the maximum Minimum Interest determined in accordance with Schedule 11.3, which will include all actual adjustments to the Minimum Interest in accordance with the terms of this Agreement, but will exclude speculative adjustments);
(b) terminate any commitment to make Advances hereunder;
(c) exercise any and all other legal or equitable rights afforded by the Transaction Documents and the laws of the Applicable Jurisdiction or any other jurisdiction as Lender shall deem appropriate, and
(d) take any action permitted by this Agreement or by applicable law, including the Uniform Commercial Code then in effect in the Applicable Jurisdiction, to satisfy the Obligations of Company owed to Lender, including, but not limited to:
(i) Without limiting the generality of the foregoing Lender, may, to the fullest extent permitted by applicable law, without notice, hearing or process except as specified below, take possession and maintain control over the Collateral. Within two days following demand by Lender for possession and control of the Collateral following an Event of Default, Company shall, at its sole cost and expense, assemble and turn over to Lender all Collateral of Company and any Related Business then held by Company and/or any Related Business.
(ii) Lender may in its sole discretion sell the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as Lender may deem commercially reasonable, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set off the amount of such purchase price against the Obligations. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, with notice, be made at the time and place to which it was so adjourned. Lender may abandon any such proposed sale. Company acknowledges that any private sales of Collateral effected by Lender may result in terms less favorable to a seller than public sales but Company agrees that such private sales shall nevertheless be deemed commercially reasonable. Company shall pay all costs, fees and expenses incurred by Lender, including reasonable attorney’s fees and court costs, in connection with any such sale.
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(iii) Lender may enter upon and into and take possession of all or such part or parts of the properties owned or occupied by Company, including lands, buildings, equipment and other property as may be necessary or appropriate in the judgment of Lender to permit or enable Lender to complete the processing or collection of all or any part of the Collateral as Lender may elect, and use and operate such properties for such purposes and for such length of time as Lender may deem reasonably necessary or appropriate for such purposes without the payment of any compensation to Company therefor.
8.2 Minimum Interest Multiple Remedies.
(a) Minimum Interest Increase on Payment Event of Default. Following the occurrence of any Payment Event of Default and in addition to all other rights and remedies provided by this Agreement or applicable law, for each payment not timely made under this Agreement, the applicable Minimum Interest multiple will be increased by 0.015 on the Payoff Date; provided that for the first two Payment Events of Default and for purposes of this Section 8.2 only, Company will have 15 days to cure such instances of a Payment Event of Default without a corresponding increase to the Minimum Interest multiple. The applicable Minimum Interest multiple will be increased regardless of whether Lender notifies Company of any Payment Event of Default. If Company has not fully cured such Payment Event of Default at the end of such 15 day period, the applicable Minimum Interest multiple will increase as described above. Beginning with the third Payment Event of Default and continuing with each Payment Event of Default thereafter, the applicable Minimum Interest multiple will increase by 0.015 on the Payoff Date upon the occurrence of each such Payment Event of Default regardless of whether or not such Payment Event of Default is subsequently cured.
(b) [Intentionally omitted.]
(c) Indebtedness. During the term of this Agreement, in addition to all other rights and remedies provided by this Agreement or applicable law, for each instance of noncompliance with Section 6.1 of this Agreement (an “Additional Indebtedness Breach”), the greater of the following remedies (in terms of dollar amount) will be applied automatically and regardless of whether Lender notifies Company of the Additional Indebtedness Breach: (i) the applicable Minimum Interest multiple will increase by 0.10 on the Payoff Date or (ii) Company will be assessed a service fee equal to 50% of the principal amount of the unauthorized Indebtedness incurred by Company.
(d) Increases Cumulative. For the avoidance of doubt, any increases to the Minimum Interest made pursuant to this Section 8.2 will be cumulative and will apply throughout the remainder of the term of this Agreement for all periods set forth in the table on Schedule 11.3.
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8.3 Notice of Sale. If any notification of intended disposition of any of the Collateral is required by law, such notification will be deemed reasonably and properly given if provided in accordance with Section 12.6 at least 10 days before such disposition, postage prepaid, addressed to Company at the address set forth in the introduction to this Agreement. Such disposition shall be established by affidavit of a representative of Lender, receipts or other reasonable method.
8.4 Remedies Cumulative; No Waiver. The rights and remedies of Lender hereunder are cumulative and nonexclusive and the exercise of any one or more of the remedies provided for herein or under applicable law shall not be construed as a waiver of any of the other remedies of Lender so long as any part of the Obligations remain unsatisfied. No failure on the part of Lender to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by Lender preclude any other or further exercise thereof or the exercise of any other right, power or remedy.
8.5 Application of Proceeds. Any payments or proceeds received by Lender from the Collateral shall be applied to the payment of costs, fees and expenses incurred by Lender in connection with performing, managing, maintaining or selling the Collateral, including reasonable attorneys’ fees and expenses, and the balance, if any, shall be applied by Lender to payment of the Obligations, in order of application as Lender shall reasonably determine.
8.6 Notice to Account Debtors. Upon the occurrence and during the continuance of (a) any Event of Default under Section 7.3, or (b) upon any other Event of Default (provided Lender has declared all Obligations immediately due and payable following such Event of Default), Lender may notify any or all account debtors of the existence of Lender’s security interest in the Collateral and require such account debtors to pay or remit all sums due or to become due directly to Lender or its nominee.
8.7 Performance by Lender. If Company does not perform any covenant, duty or agreement in accordance with the terms of the Transaction Documents, Lender may, at its option, perform or attempt to perform, such covenant, duty or agreement on behalf of Company. In such event, any amount expended by Lender in such performance or attempted performance will be payable by Company to Lender on demand, will become part of the Obligations and will bear interest at the rate set forth in Section 12.7 from the date of such expenditure by Lender until paid. Notwithstanding the foregoing, it is expressly understood that Lender does not assume and will never have, except by express written consent of Lender, any liability or responsibility for the performance of any covenant, duty or agreement of Company. Lender will have (and is hereby granted in such event) a royalty-free license to use intellectual property rights of Company to complete production of, advertisement for, and disposition of any Collateral and Lender will have a license to enter into, occupy, and use Company’s premises and the Collateral without charge to exercise any of Lender’s rights or remedies under this Agreement or under any other Transaction Document.
8.8 Delegation of Duties and Rights. Lender may perform any of its duties or exercise any of its rights under the Transaction Documents by or through its officers, members of its Governing Body, employees, attorneys, agents or other representatives.
8.9 Expenditures by Lender. Company shall indemnify Lender for all court costs, attorneys’ fees, other costs of collection and other sums spent by Lender pursuant to the exercise of any right (including, without limitation, any effort to collect amounts due or otherwise enforce this Agreement) provided herein. All such amounts will be payable to Lender on demand and will bear interest at the rate set forth in Section 12.7 from the date spent until the date repaid.
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8.10 Lender’s Authority. Lender has the authority, but is not obligated to:
(a) place on any chattel paper received as proceeds a notation or legend showing Lender’s security interest;
(b) demand, collect, receive and receipt for, compound, compromise, settle and give acquittance for, and prosecute and discontinue any suits or proceedings in respect of any or all of the Collateral in the name of Company;
(c) upon prior written notice to Company, take any action which Lender may deem necessary or desirable in order to realize on the Collateral, including, without limitation, performance of any contract and endorsement in the name of Company of any checks, drafts, notes or other instruments or documents received in payment of or on account of the Collateral; and
(d) place upon Company’s books and records relating to the Collateral covered by the security interest granted hereby a notation or legend stating that such are subject to a security interest held by Lender.
8.11 Power of Attorney.
(a) Company hereby irrevocably appoints Lender as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (i) endorse Company’s name on any checks or other forms of payment or security; (ii) sign Company’s name on any invoice or bill of lading for any account or drafts against account debtors; (iii) settle and adjust disputes and claims about the accounts directly with account debtors, for amounts and on terms Lender determines reasonable; (iv) make, settle, and adjust all claims under Company’s insurance policies; (v) pay, contest or settle any lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (vi) transfer the Collateral into the name of Lender or a third party as the UCC permits.
(b) Company hereby appoints Lender as its lawful attorney-in-fact to sign Company’s name on any documents necessary to perfect or continue the perfection of Lender’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and Lender is under no further obligation to make Advances hereunder.
(c) Lender’s foregoing appointment as attorney in fact of Company, and all of Lender’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Lender’s obligation to provide Advances terminates.
8.12 Notification to Company. Lender may, but is under no obligation, to use reasonable efforts to notify Company of any of the foregoing actions by Lender in this Article 8; provided, however, the parties hereto expressly agree that the failure of Lender to provide notice shall not in any way affect or impair any action taken by Lender, it being understood that any absolute obligation of notice is hereby waived by Company.
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ARTICLE 9
WARRANT
In consideration for the Initial Advance, Company hereby agrees to sell to Lender for $1,000 to be paid at Closing, a warrant (a “Warrant”) in the form attached as Exhibit A.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification. Company agrees to indemnify and hold harmless Lender and its successors and assigns, together with any of its officers, members of its Governing Body, shareholders, partners, members, and/or managers (such persons, the “Indemnified Parties”), from and against all losses, damages, liabilities, obligations, costs or expenses (any one such item being herein called a “Loss” and all such items being herein collectively called “Losses”) which are caused by or arise out of, or (in the case of claims asserted against any Indemnified Parties by a third party) alleged to result from, arise out of or have been incurred with respect to, (a) any breach or default in the performance by Company of any covenant or agreement of Company contained in this Agreement, (b) any breach of warranty or inaccurate or erroneous representation made by Company herein or in any certificate or other instrument delivered by or on behalf of Company pursuant hereto, and (c) any and all actions, suits, proceedings, claims, demands, judgments, costs and expenses (including costs and attorneys’ fees) arising out of the foregoing except when such actions, suits, proceedings, claims, demands, judgments, costs and expenses arise as a result of the grossly negligent or intentional actions or omissions of Lender.
10.2 Survival. The indemnification provided in this Article 10 shall only apply, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the date of payment in full of the Obligations.
ARTICLE 11
DEFINITIONS
“Accountants” has the meaning given in Section 5.7(b).
“Advance(s)” means the Initial Advance, each Subsequent Advance or any one or more of them, if any.
“Advance Period” means each period listed on Schedule 2.1(b) during which Company may receive a Subsequent Advance.
“Amount Advanced” means, as of any date of determination, the aggregate amount of all Advances actually advanced by Lender to Company.
“Applicable Revenue Percentage” means that percentage with respect to any given time as provided for on Schedule 11.1.
“Applicable Jurisdiction” means the State of California.
“Certificate of Perfection” means a Certificate of Perfection in the form provided by Lender to Company.
“Change of Control” means either (a) a merger or consolidation of Company with or into another entity, or other transaction, following which the stockholders of Company immediately prior to such transaction hold securities representing less than a majority of the voting power of the surviving entity or parent of the surviving entity immediately following such transaction, or (b) the sale, lease, license or other disposition of all or substantially all of Company’s assets. Notwithstanding the prior sentence, the sale of Company’s equity securities in a bona fide equity financing transaction shall not be deemed a “Change of Control”.
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“Closing” has the meaning given in Section 4.1.
“Collateral” means those assets of Company listed on Schedule 11.2.
“Company Bank” means Silicon Valley Bank.
“Company’s Share of Transactions Costs” means up to $25,000, which may include all or a portion of the legal fees, filing fees, due diligence expenses, and/or other costs or expenses incurred by Lender in connection with the transactions contemplated by this Agreement.
“Cray Note” means the Secured Promissory Note issued by Company to Michael Cray on October 16, 2019 in the original principal amount of $25,000.
“Dispute Notice” has the meaning given in Section 5.7(b).
“Event of Default” has the meaning given in Article 7.
“Financial Statements” has the meaning given in Section 5.1(a).
“Indebtedness” means (a) indebtedness for borrowed money or the deferred price of property or services, and other obligations to pay, (b) obligations evidenced by notes, bonds, debentures or similar instruments and (c) capital lease obligations. For the avoidance of doubt, “Indebtedness” includes, without limiting the foregoing, merchant cash advances, factoring obligations, pre-sale of future accounts receivable and/or purchase orders, credit card advances, and any off-balance sheet arrangements.
“Initial Advance” means $1,000,000, and will be the only Advance unless there are Subsequent Advances.
“Insured Executive(s)” means Cary Breese and any successor Key Person.
“Insurance Amount” means, as of any date of determination, an amount equal to the Amount Advanced.
“Interest” has the meaning given in Section 2.2.
“Key Person” means each of Cary Breese and any successor Key Person.
“Lender Account” means the account with Silicon Valley Bank held in Lender’s name with the account details as set forth in Schedule 2.3(b)(1).
“Lien” means a claim, mortgage, deed of trust, levy, charge, pledge, security interest, or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.
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“Material” means material in relation to the properties, business, prospects, operations, earnings, assets, liabilities and/or condition (financial or otherwise) of Company, whether or not in the ordinary course of business.
“Material Adverse Effect” means a Material adverse effect on the properties, business, prospects, operations, earnings, assets, liabilities and/or the condition (financial or otherwise) of Company, whether or not in the ordinary course of business.
“Maturity Date” means the earliest of: (a) September 29, 2024, (b) immediately prior to a Change of Control, and (c) acceleration of the Obligations as provided in Article 8.
“Minimum Interest” means those amounts set forth in Schedule 11.3.
“Minimum Subsequent Advance” means not less than $500,000.
“Minimum Subsequent Advance Deadline” means July 15, 2021.
“Obligations” means the payment when due of the principal amount of all Advances and Interest and all other amounts due under this Agreement when due, whether at maturity, by acceleration, prepayment or otherwise, together with all other costs, fees, expenses, indemnities and reimbursements, as well as all other obligations of Company now or hereafter existing under this Agreement or any other Transaction Document.
“Payment Commencement Date” means May 15, 2020, but only if the Closing has occurred and the Initial Advance has been made to Company prior to such date.
“Payoff Date” has the meaning given in Section 2.3(d).
“Permitted Indebtedness” means those liabilities and Indebtedness listed on Schedule 11.4 attached hereto.
“Permitted Liens” means liens listed on Schedule 11.5 attached hereto.
“Person” means any individual, entity or association.
“PPP Indebtedness” means $533,652 in principal amount of Indebtedness to Silicon Valley Bank in the form of a Small Business Administration Paycheck Protection Program (PPP) loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
“Projected Revenue” means Company’s projected Revenue for the applicable period as outlined in the “Revenue Assumptions” on Schedule 2.3(b)(2).
“promptly” means within 10 calendar days following the applicable event.
“Related Business” means any business (whether operated as a sole proprietorship, partnership, corporation or other entity or association) operating in a market or market segment that is substantially similar to Company’s business or that is a logical extension of Company’s business and which is owned and/or operated by Company (whether or not as a subsidiary), the Key Person, officer, member of its Governing Body, member or manager of Company or any affiliated entities or direct family members of the foregoing; provided, however, a Related Business does not include a publicly traded business of which any of the foregoing persons or entities owns less than 2% of the outstanding voting securities thereof.
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“Reported Revenue” means the amount of Revenue reported as being generated by Company during the applicable period as stated in the Monthly Questionnaire(s) delivered by Company to Lender pursuant to Section 5.19.
“Revenue” means all non-financing related cash and cash equivalents (without duplication) received by Company during the applicable period.
“Revenue Loan Amount” means $3,000,000.
“Revenue Test Period” means each 12-month period ending on December 31 during the term of this Agreement (provided, that for the year in which this Agreement is executed, such period means the period from the Effective Date through December 31 of the year of the Effective Date).
“Settled Audit Amount” has the meaning given in Section 5.7(b).
“Senior Indebtedness” means all Indebtedness of Company, now existing or hereafter arising, to McKesson Corporation under the Security Agreement dated on or around December 11, 2015 that is secured by a security interest in Company’s inventory.
“Subsequent Advances” mean all Advances made by Lender to Company following the Initial Advance.
“Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, environmental taxes, customs duties, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, workers’ compensation, employment-related insurance, real property, personal property, sales, use, transfer, value added, alternative or add-on minimum or other governmental tax, fee, assessment or charge of any kind whatsoever including any interest, penalties or additions to any Tax or additional amounts in respect of the foregoing.
“Term Sheet Date” means April 7, 2020.
“Transaction Documents” means this Agreement, the Warrant, and all exhibits and schedules to this Agreement, as well as all other agreements executed or delivered by Company, any guarantor or party granting security interests or providing credit enhancements in connection with this Agreement, one or more of the Advances or any Collateral for the Obligations.
“Upadhyay Note” means the Secured Promissory Note issued by Company to Mayank Upadhyay on October 16, 2019 in the original principal amount of $100,000;
“Warrant” has the meaning given in Article 9.
ARTICLE 12
MISCELLANEOUS
12.1 Survival and Confirmation of Representations and Warranties. The warranties, representations and covenants of Company and Lender and the indemnification obligations of each party contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of Lender or Company. All of the representations and warranties set forth herein will be deemed to be repeated and reaffirmed on the day of each Advance.
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12.2 Successors and Assigns. Company may not assign its rights or delegate its Obligations under this Agreement without Lender’s prior written consent, except in connection with a Change of Control. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties’ respective successors and assigns. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
12.3 Governing Law. This Agreement is governed by and construed under the substantive laws of the Applicable Jurisdiction without regard to the conflicts of law provisions thereof. The state and federal courts in the Applicable Jurisdiction have exclusive jurisdiction of any and all actions or suits commenced by Lender or Company arising under or with respect to this Agreement.
12.4 Jurisdiction and Venue. Each of Lender and Company irrevocably consents to the exclusive jurisdiction and venue of any court within the Applicable Jurisdiction, in connection with any matter based upon or arising out of this Agreement, the Transaction Documents or the matters contemplated herein or therein, and agrees that process may be served upon them in any manner authorized by the laws of the Applicable Jurisdiction for such persons.
12.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
12.6 Notices. All notices required or permitted hereunder shall be in writing and will be deemed effectively given: (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the address as set forth on the first page of this Agreement or at such other address as such party may designate by ten days’ advance written notice to the other parties hereto.
12.7 Fees and Expenses. Irrespective of whether the Closing is completed, Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Closing is completed, Company shall, at the Closing, pay the fees and expenses of Lender (including reasonable fees and expenses of counsel for Lender) up to the Company’s Share of Transaction Costs. Lender will submit an invoice to Company no less frequently than annually for out-of-pocket costs, fees and expenses incurred by Lender in the administration of the transactions contemplated by this Agreement. Following Closing, Company shall promptly reimburse Lender for all reasonable, documented out-of-pocket costs, fees and expenses (including accounting, appraisal, consulting, and attorneys’ fees) incurred by Lender in connection with (a) the administration of the transactions contemplated by this Agreement, (b) any breach or default by Company under the Transaction Documents, and (c) any request by Company to modify or waive the Transaction Documents and otherwise change or affect the rights of Lender or Obligations of Company pursuant to the Transaction Documents. All fees and expenses assessed or incurred by Lender under this Agreement will accrue interest at a rate of 18% from the date reimbursement is requested by Lender. Accrued but unpaid service fees, whether previously noticed or not, will be billed in writing to Company at Lender’s discretion.
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12.8 Amendments and Waivers. No failure on the part of Lender to exercise and no delay in exercising any power or right hereunder or under any other Transaction Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in any other instrument, document or agreement delivered or to be delivered to Lender hereunder or in connection herewith are cumulative and not exclusive of any remedies provided by law. No notice to or demand on Company not required hereunder shall in any event entitle Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of Lender to any other or further action in any circumstances without notice or demand. No amendment, modification or waiver of any provision of this Agreement or any other Transaction Document or consent to any departure by Company therefrom will be effective unless the same is in writing and signed by Lender and Company.
12.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms.
12.10 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and supersede any prior agreements or understandings (whether written or oral) regarding the subject matter hereof.
12.11 Representation of Lender. Lender is an accredited investor as defined in Rule 501(a) of Regulation D and has such business and financial experience as necessary to enable it to protect its interests in connection with the transactions contemplated by this Agreement. Lender has had the opportunity to ask questions and to receive answers and to obtain the information concerning Company and the transactions contemplated by this Agreement that it has deemed material and necessary to evaluate the merits and risks of the transactions contemplated by this Agreement.
12.12 Termination. This Agreement shall terminate upon indefeasible satisfaction of the Obligations, provided, however, Sections 5.1, 5.2, 5.3, 5.5, 5.6, 6.1 and 6.2, shall terminate upon indefeasible payment to Lender in full of the principal amount of all Advances and Interest thereon.
12.13 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile, portable document format (.pdf), DocuSign or other electronic transmission is equally as effective as delivery of a manually executed counterpart of this Agreement.
12.14 Costs of Enforcement. Company agrees to pay all costs, fees and expenses of enforcement, collection, or preservation of collateral (including reasonable attorneys’ fees) that Lender incurs in connection with any default or Event of Default hereunder (whether before or after any cure). Additionally, Company agrees to pay all costs, fees and expenses (including reasonable attorneys’ fees) that Lender incurs, before or after any default or Event of Default as a result of any litigation or other action in which Lender becomes involved as a party, witness or otherwise as a result of making the Advances evidenced by this Agreement.
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12.15 Waiver of Jury Trial. Company hereby knowingly, voluntarily and intentionally WAIVES THE RIGHT TO TRIAL BY JURY in respect of any litigation based herein, arising out of, under or in connection with this Agreement or any other Transaction Document or any course of conduct, course of dealings, statements (whether verbal or written) or acts of either party, or any exercise by any party of their respective rights under this Agreement or any other Transaction Document. Company hereby acknowledges that this waiver of jury trial is a material inducement to Lender in extending credit to Company, that Lender would not have extended credit without this waiver of jury trial, and that Company has had an opportunity to consult with an attorney in connection with this waiver of jury trial and understands the legal effect of this waiver.
12.16 Waiver of Notices and Hearing. Company, by entering into this Agreement and negotiating the terms hereof, voluntarily, intelligently and knowingly waives any rights it may have to demand any notices other than those provided for herein and any right to a hearing as a condition precedent to Lender’s exercise of its rights to foreclose on any Collateral. All makers, endorsers, sureties, guarantors and other accommodation parties hereby waive presentment for payment, protest and notice of nonpayment and consent, without affecting their liability hereunder, to any and all extensions, renewals, substitutions and alterations of any of the terms of this Agreement and to the release of or failure by Lender to exercise any rights against any party liable for or any property securing payment thereof.
12.17 Confidentiality. No Company or any of their respective officers, members of its Governing Body, employees, agents, or equity holders shall disclose this Agreement, the terms hereof or any related transactions or agreements to any third party other than Company’s accountants and attorneys or otherwise as required by laws or regulations without the prior written approval of Lender. Nothing will prevent Lender from disclosing this Agreement or the terms hereof for marketing purposes, press releases or other transactional announcements or updates provided to investor or trade publications, including the placement of “tombstone” advertisements in financial and other newspapers and journals.
12.18 Credit Reporting. Company hereby authorizes Lender (but Lender has no obligation) (a) to provide to credit reporting agencies a report of the amount of the Obligations owed to Lender, the Revenue Loan Amount, Company’s payment history with respect to the Obligations, and any other information regarding Company or the Obligations or otherwise related to this Agreement that is customarily reported to credit reporting agencies, and (b) to respond to usual and customary credit inquiries from third parties concerning Company or any of the Related Businesses.
12.19 [Intentionally Omitted].
12.20 Time. Time is of the essence for the performance of each and every covenant of Company under this Agreement.
The signature page follows.
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The parties have executed this Agreement as of the Effective Date.
| COMPANY: | ||
| NOWRX,INC. | ||
| By: | /s/. Cary Breese | |
| Cary Breese, Chief Executive Officer | ||
| LENDER: | ||
| DECATHLON ALPHA IV, L.P. | ||
| By: | Decathlon Alpha GP IV, LLC | |
| Its: | General Partner | |
| By: | /s/ John Borchers | |
| John Borchers, Managing Director | ||
| KEY PERSON: | ||
| By: | /s/ Cary Breese | |
| Cary Breese | ||
[Signature Page to Revenue Loan and Security Agreement]
SCHEDULE 2.1(b)
SUBSEQUENT ADVANCE AMOUNT
Company may request that Lender make the following Subsequent Advances during the Advance Periods stated below, subject to the condition precedent that all of the following criteria are satisfied as of the date of the corresponding Advance Request (in each case as determined by Lender in its sole discretion):
| 1. | the amount of all Advances previously advanced to Company by Lender plus the new Subsequent Advance requested does not exceed the Revenue Loan Amount; |
| 2. | the amount of all previous Subsequent Advances plus the new Subsequent Advance requested does not exceed the amount of Subsequent Advances for the applicable Advance Period; |
| 3. | Company provides Lender with a Certificate of Perfection together with the Advance Request or certifies to Lender that all information contained in the most recent Certificate of Perfection delivered by Company to Lender is accurate and complete as of the date of the Advance Request; |
| 4. | Company certifies to Lender in writing that (i) Company is not in default and no Event of Default has occurred and (ii) all representations and warranties of Company in Article 3 are true as of the date of the Advance Request; |
| 5. | the requested Subsequent Advance is at least $100,000; |
| 6. | the sum of the Revenue for each month ended between the Effective Date and the date of the Advance Request exceeds 85% of the pro forma projections set forth on Schedule 2.3(b)(2) for the corresponding period; |
| 7. | the Subsequent Advance will not cause the sum of all Senior Indebtedness plus the Amount Advanced to exceed an amount equal to 20% of the sum of the Revenue for the trailing twelve-month period immediately preceding the date of the Advance Request; |
| 8. | Company must have generated net income of at least $1 or net losses within 10% of cumulative pro forma projections in each month ended between the Effective Date and the date of the Advance Request; and |
| 9. | For any amount drawn over the $1,000,000 Initial Advance from Lender, Company must have raised, on a dollar-for-dollar basis, equity capital in the same amount since the Effective Date of this Agreement. For the avoidance of doubt, for each post-Closing dollar of equity capital that Company raises, Company will be eligible to draw an additional dollar from Lender pursuant to this Agreement. As an example, if Company were to raise $1,000,000 in fresh equity capital post-Closing, then Company would be eligible for an additional $1,000,000 Subsequent Advance from Lender. |
| Subsequent Advance Amount | Advance Period | |||
| $ | 1,000,000 | Between June 15, 2020 and June 15, 2021 | ||
| $ | 1,000,000 | Between July 15, 2020 and July 15, 2021 | ||
SCHEDULE 2.3(b)(1)
LENDER’S ACCOUNT DETAILS
SCHEDULE
2.3(b)(2)
PRO-FORMA PAYMENT SCHEDULE
Schedule
3.1(b)
Subsidiaries
None.
SCHEDULE
3.1(g)
FINANCIAL STATEMENTS
SCHEDULE 5.11
COMPANY BANK ACCOUNT
SCHEDULE 11.1
APPLICABLE REVENUE PERCENTAGE
(a)
Between the Effective Date and December 31, 2020 (inclusive) the Applicable Revenue Percentage will be 2.25% of Revenue for all payments due during any month within such period.
Between January 1, 2021 and December 31, 2021 (inclusive) the Applicable Revenue Percentage will be 2.50% of Revenue for all payments due during any month within such period.
Between January 1, 2022 and the Maturity Date (inclusive) the Applicable Revenue Percentage will be 3.00% of Revenue for all payments due during any month within such period.
(b)
If the Revenue or Reported Revenue is not equal to at least 80% of Projected Revenue (the “ARP Threshold”) for any Revenue Test Period, the Applicable Revenue Percentage for all subsequent monthly payments (beginning with the payment due the following January 15) will, automatically and without notice from Lender, increase by 0.50%.
For clarity, the terms “Revenue” and “Reported Revenue” have separate meanings (even though it is expected that these amounts will be the same). The determination of whether the ARP Threshold has been met for the corresponding Revenue Test Period will be made initially based off of Reported Revenue (as reported in the Monthly Questionnaires delivered by Company to Lender pursuant to Section 5.19). If Company fails to meet the ARP Threshold based off of Reported Revenue, then the adjustment to the Applicable Revenue Percentage made pursuant to part (b) of this Schedule 11.1 will be effective immediately beginning with the payment due on January 15 of the year immediately following the applicable Revenue Test Period. If it appears initially that Company met the ARP Threshold for the corresponding Revenue Test Period based off of Reported Revenue, but it is later discovered that Company failed to meet the ARP Threshold based off of actual Revenue (as reported in the Financial Statements), then the adjustment to the Applicable Revenue Percentage made pursuant to part (b) of this Schedule 11.1 will be effective retroactively beginning with the payment due on January 15 of the year immediately following the applicable Revenue Test Period.
If Company fails to meet the ARP Threshold for two or more consecutive Revenue Test Periods, the adjustments made pursuant to part (b) of this Schedule 11.1 will be cumulative. If, after failing to meet the ARP Threshold for one or more previous Revenue Test Periods, Company meets the ARP Threshold for a subsequent Revenue Test Period, any previous adjustments made pursuant to part (b) of this Schedule 11.1 will no longer be applied cumulatively and the Applicable Revenue Percentage will revert back to the standard Applicable Revenue Percentage as determined in accordance with part (a) of this Schedule 11.1. Except as provided in the previous paragraph, all adjustments to the Applicable Revenue Percentage made pursuant to this Schedule 11.1 will be applied prospectively and will not result in a retroactive adjustment to any prior monthly payment.
SCHEDULE 11.2
COLLATERAL
All present and hereafter acquired property of Company wherever located and however described and whether or not constituting a fixture (including, without limitation, any and all present and future property), together, in each case, with all proceeds thereof, including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including health-care-insurance receivables and credit card receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, money, patents, patent applications, trademarks, trademark applications, copyrights, copyright applications, trade names, other names, software, and all general intangibles (including all payment intangibles); together with all goodwill related to the foregoing property and all rights, liens, security interests and other interests which Company may at any time have by law or agreement against any account debtor, issuer or obligor obligated to make any such payment or against any of the property of such account debtor, issuer, or obligor, and all other supporting obligations relating to the foregoing, whether now existing or hereafter arising, whether now owned or hereafter acquired; and all products and proceeds of the foregoing property, including without limitation all accounts, instruments, chattel paper, investment property, letter-of-credit rights, letters-of-credit, other rights to payment, documents, deposit accounts, money, insurance proceeds and general intangibles related to the foregoing property, and all refunds of insurance premiums due or to become due under all insurance policies covering the foregoing property, all whether now owned or hereafter acquired, and wherever located, together with proceeds of all of the foregoing.
[ALL REGISTERED INTELLECTUAL PROPERTY SHOULD BE SPECIFICALLY IDENTIFIED BELOW. FAILURE TO SO LIST REGISTERED INTELLECTUAL PROPERTY DOES NOT EXCLUDE IT FROM COLLATERAL.]
SCHEDULE 11.3
MINIMUM INTEREST
(a)
The “Minimum Interest” means the amount shown below in the column headed Minimum Interest opposite the applicable period during which the Payoff Date occurs:
| Period During Which the Payoff Date Occurs | Minimum Interest | |
| On or before 6 months after the Effective Date | 0.35 times the Amount Advanced | |
| After 6 months and on or before 12 months after the Effective Date | 0.45 times the Amount Advanced | |
| After 12 months and on or before 18 months after the Effective Date | 0.55 times the Amount Advanced | |
| After 18 months and on or before 24 months after the Effective Date | 0.65 times the Amount Advanced | |
| After 24 months and on or before 30 months after the Effective Date | 0.80 times the Amount Advanced | |
| After 30 months after the Effective Date | 1.00 times the Amount Advanced |
For the avoidance of doubt, any increases to the Minimum
Interest made pursuant to Section 8.2 of the Agreement will be cumulative and will apply throughout the remainder
of the term of the Agreement for each period set forth in the table above.
(b)
If the Revenue or Reported Revenue is not equal to at least 75% of Projected Revenue (the “MI Threshold”) for any Revenue Test Period, then the Minimum Interest multiple will increase, automatically and without notice from Lender, by 0.10 throughout the remainder of the term of the Agreement for each period set forth in the table in part (a) of this Schedule 11.3. For each incremental 10% that the Projected Revenue is lower than the MI Threshold, the Minimum Interest multiple will increase, automatically and without notice from Lender, by an additional 0.05 throughout the remainder of the term of the Agreement for each period set forth in the table in part (a) of this Schedule 11.3.
If Company fails to meet the MI Threshold for two or more Revenue Test Periods, the adjustments made pursuant to part (b) of this Schedule 11.3 will be cumulative. There is no limit to the number of adjustments that may be made pursuant to part (b) of this Schedule 11.3.
SCHEDULE 11.4
PERMITTED INDEBTEDNESS
“Permitted Indebtedness” is:
(a) Company’s Indebtedness to Lender under this Agreement and the other Transaction Documents;
(b) Senior Indebtedness;
(c) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;
(d) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of Company’s business;
(e) Indebtedness under capital leases not to exceed in the aggregate, at any given time, an amount equal to 5% of Company’s Revenue for trailing twelve-month period (“Capital Lease Obligations”); and
(f) Convertible Note Bridge loan up to $5M within next 6-18 months that is subordinate to Company’s Obligations under this Agreement.
SCHEDULE 11.5
PERMITTED LIENS
“Permitted Liens” are:
(a) Liens existing on the Effective Date and shown on the Perfection Certificates or arising under this Agreement and the other Transaction Documents;
(b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Company maintains adequate reserves on its books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;
(c) Liens securing Company’s inventory granted pursuant to Senior Indebtedness;
(d) statutory Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other Persons imposed without action of such parties, provided they have no priority over any of Lender’s Lien and the aggregate amount of such Liens does not exceed $10,000 at any one time;
(e) leases or subleases of real property granted in the ordinary course of business, if the leases, subleases, licenses and sublicenses do not prohibit granting Lender a security interest; and
(f) banker’s liens, rights of setoff and Liens in favor of financial institutions incurred made in the ordinary course of business arising in connection with Company’s deposit accounts or securities accounts held at such institutions to secure solely payment of fees and similar costs and expenses;
(g) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);
(h) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 7.4;
(i) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and similar charges or encumbrances affecting real property not constituting a Material Adverse Effect;
(j) non-exclusive licenses of intellectual property granted to third parties in the ordinary course of business;
(k) non-exclusive licenses of intellectual property granted to third parties in the ordinary course of business in connection with joint ventures and corporate collaborations; and
(l) Liens securing Capital Lease Obligations.
EXHIBIT A
FORM OF WARRANT
See attached.
WARRANT
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, TRANSFER, PLEDGE OR HYPOTHECATION OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED HEREBY.
WARRANT TO PURCHASE SHARES OF STOCK
| Effective Date: | April 29, 2020 |
| Company: | NOWRX, INC., a Delaware corporation, |
| Holder: | Decathlon Alpha IV, L.P., a Delaware limited partnership |
| Exercise Period: | Commencing on the Effective Date and ending on the tenth anniversary thereof. |
This certifies that, for value received, Holder, or its registered assigns, is entitled, subject to the provisions and upon the terms and conditions set forth herein, to purchase from the Company, Shares (as defined below), in the amounts, at such times and at the price per share set forth in this Warrant. This Warrant is issued in connection with the transactions described in that certain Revenue Loan and Security Agreement dated of even date herewith (the “Loan Agreement”). Capitalized words and phrases used but not defined in this Warrant have the meanings given in the Loan Agreement.
The following is a statement of the rights of the Holder and the conditions to which this Warrant is subject, and to which Holder, by acceptance of this Warrant, agrees:
1. Definitions.
“Applicable Jurisdiction” means Utah.
“Buyout Percentage” means 0.15%, subject to any adjustments as set forth in Section 2.
“Common Stock Equivalents” means shares of the Company’s common stock, securities convertible or exercisable into common stock, or options or rights to purchase common stock or securities convertible or exercisable into common stock.
“Exercise Price” means $0.10 per Share, subject to adjustment pursuant this Warrant.
“Gross Proceeds” means the aggregate consideration directly or indirectly paid or payable to the Company and all shareholders, as well as holders of options, warrants, convertible securities, phantom equity and similar rights (collectively, “Equity Owners”) in connection with or as a result of the Change of Control determined as follows:
(i) In the case of a Change of Control involving the acquisition of equity securities, the Gross Proceeds shall include the total consideration paid or payable to Equity Owners (or the Company in the case of a new issuance), plus the total amount of consideration paid or payable on any outstanding indebtedness for borrowed money (including capitalized leases) of the Company in connection with the Change of Control (without duplication) plus the amount of all assumed indebtedness for borrowed money (including capitalized leases) in connection with the Change of Control (without duplication).
(ii) In the case of a Change of Control involving the acquisition of assets, the Gross Proceeds shall include the total consideration paid or payable for the assets acquired plus the total amount of consideration paid or payable on any outstanding indebtedness for borrowed money (including capitalized leases) of the Company in connection with the Change of Control (without duplication) plus the amount of all assumed indebtedness for borrowed money (including capitalized leases) in connection with the Change of Control (without duplication).
(iii) In any Change of Control, the Gross Proceeds will include consideration paid or payable to the Company and its Equity Owners under covenants not to compete excluding reasonable amounts payable to employees pursuant to employment agreements and similar agreements; provided, however, that (i) such consideration is paid or payable directly to the Company or among all Equity Owners on a pro-rata basis and (ii) the Holder becomes a party to any agreement containing such covenants to the same extent as the Equity Owners.
(iv) In any Change of Control, the Gross Proceeds will include the aggregate amount of (i) any dividends or distributions declared within 360 days of or in connection with the Change of Control (other than normal recurring cash dividends in amounts or for purposes consistent with past practice), and (ii) payments by the Company to repurchase any outstanding equity securities in connection with the Change of Control.
(v) In any Change of Control, the Gross Proceeds will include amounts payable pursuant to any earnout, royalty or similar arrangement. To the extent payment of any consideration is contingent, the fair market value of the contingent portion of the consideration shall be determined in good faith by Holder and the Company, taking into account the likelihood of payment, and include it in the Gross Proceeds.
(vi) The Gross Proceeds will be deemed to include all forms of consideration, including without limitation, cash and cash equivalents, promissory notes and other evidence of indebtedness, securities and other property. Consideration other than cash and cash equivalents will be valued as follows: (A) promissory notes and other evidence of indebtedness will be valued at face value; (B) common stock and securities convertible into common stock will be valued at fair market value (as determined in good faith by agreement of the Company and Holder); (C) preferred stock will be valued at fair market value (as determined in good faith by agreement of the Company and Holder); and (D) securities and property not referenced above will be valued at fair market value (as determined in good faith by agreement of the Company and Holder).
(vii) If within 360 days of a Change of Control that does not result in the sale of all of the Company’s assets or acquisition by one or more third parties of all of the Company’s equity securities, the Company or its Equity Owners receive additional proceeds in connection with either (A) the sale of a substantial portion of the Company’s assets as of the date the Change of Control occurred or (B) a third party’s acquisition of all of the Company’s equity securities, then such proceeds will be considered Gross Proceeds.
(viii) The Gross Proceeds will exclude costs or expenses paid to third-party advisors in connection with a Change of Control in an amount not exceed five percent (5%) of the aggregate consideration paid or payable to the Company and Equity Owners.
“Shares” means shares of the Company’s common stock; provided, however, if in the event of a Change of Control, the Holder as a holder of the Company’s common stock will not receive an amount equal to the sum of (x) the Buyout Percentage of the Gross Proceeds from a Change of Control plus (y) the Exercise Price, “Shares” shall mean shares of the series of the Company’s preferred stock with the most senior liquidation preference that will result in the Holder after exercise of this Warrant receiving the sum of (x) the Buyout Percentage of the Gross Proceeds from a Change of Control, plus (y) the Exercise Price.
“Warrant” means this Warrant and any warrants delivered in substitution or exchange therefor as provided herein.
2. Number of Shares. Subject to any previous exercise of this Warrant, the Holder shall, upon exercise of this Warrant, have the right to receive a number of Shares that will result in the Holder receiving an amount equal to the Buyout Percentage of the Gross Proceeds from a Change of Control plus the Exercise Price. The Buyout Percentage and the number of Shares issuable upon exercisable of this Warrant are not subject to dilution.
3. Exercise of the Warrant.
3.1 Exercise. The purchase rights represented by this Warrant may be exercised immediately prior to a Change of Control at the election of the Holder in whole or in part by:
(i) the tender to the Company at its principal office (or such other office or agency as the Company may designate) of a notice of exercise in the form of Exhibit A (the “Notice of Exercise”), duly completed and executed by or on behalf of the Holder, together with the surrender of this Warrant; and
(ii) the payment to the Company of an amount equal to (x) the Exercise Price multiplied by (y) the number of Shares being purchased, by wire transfer or certified, cashier’s or other check acceptable to the Company and payable to the order of the Company, surrender and cancellation of promissory notes or other instruments representing indebtedness of the Company to the Holder, or a combination thereof.
3.2 Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 3.1, if the aggregate amount that the Shares of Holder will receive from the Gross Proceeds is greater than the aggregate Exercise Price (at the date of calculation as set forth below) the Holder may elect to receive a number of Shares equal to the value of this Warrant (or of any portion of this Warrant being canceled) by surrender of this Warrant at the principal office of the Company (or such other office or agency as the Company may designate) together with a properly completed and executed Notice of Exercise reflecting such election, in which event the Company shall issue to the Holder that number of Shares computed using the following formula:
| X | = | Y (A – B) |
| A |
Where:
| X | = | The number of Shares to be issued to the Holder |
| Y | = | The number of Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) |
| A | = | The amount of Gross Proceeds received by one Share (at the date of such calculation) |
| B | = | The Exercise Price (as adjusted to the date of such calculation) |
3.3 Stock Certificates. The rights under this Warrant shall be deemed to have been exercised and the Shares issuable upon such exercise shall be deemed to have been issued immediately prior to the close of business on the date this Warrant is exercised in accordance with its terms, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. As promptly as reasonably practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for that number of shares issuable upon such exercise. In the event that the rights under this Warrant are exercised in part and have not expired, the Company shall execute and deliver a new Warrant reflecting the number of Shares that remain subject to this Warrant.
3.4 No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the rights under this Warrant. In lieu of such fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.
3.5 Automatic Purchase. If the Holder of this Warrant has not elected to exercise this Warrant prior to the expiration of this Warrant pursuant to Section 8.1, then the Company shall, immediately prior to the closing of the Change of Control, pay to the Holder (without any act on the part of the Holder) the amount of securities and/or property (including cash) that the Holder would have been entitled to receive pursuant to such Change of Control if this Warrant had been exercised immediately prior to the effective date of such Change of Control; upon Holder’s receipt of such payment this Warrant shall be automatically terminated in its entirety without any act on the part of the Holder, except to the extent that Holder may be entitled to additional payments pursuant to subpart (vii) of the definition of Gross Proceeds.
3.6 Reservation of Stock. During the Exercise Period, the Company shall take all reasonable action to reserve and keep available from its authorized and unissued shares of common stock and preferred stock, if applicable, for the purpose of effecting the exercise of this Warrant such number of shares (and shares of common stock for issuance on conversion of such shares) as shall from time to time be sufficient to effect the exercise of the rights under this Warrant; and if at any time the number of authorized but unissued shares of common stock and preferred stock, if applicable, shall not be sufficient for purposes of the exercise of this Warrant in accordance with its terms and the conversion of the Shares, without limitation of such other remedies as may be available to the Holder, the Company will use all reasonable efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized and unissued shares of its common stock and preferred stock, if applicable, (and shares of common stock for issuance on conversion of such shares) to a number of shares as shall be sufficient for such purposes. For purposes of this Warrant, the Company and Holder agree that if the Company reserves as of the Effective Date and keeps available such number of shares of common stock representing the Buyout Percentage times the number of Common Stock Equivalents (the “Reserved Shares”), with the Buyout Percentage being subject to adjustment as set forth in this Warrant, such Reserved Shares shall be sufficient to comply with this Section 3.6.
3.7 Replacement of the Warrant. Subject to the receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.
4. Transfer of the Warrant.
4.1 Warrant Register. The Company shall maintain a register (the “Warrant Register”) containing the name and address of the Holder or Holders. Until this Warrant is transferred on the Warrant Register in accordance herewith, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. Any Holder of this Warrant (or of any portion of this Warrant) may change its address as shown on the Warrant Register by written notice to the Company requesting a change.
4.2 Warrant Agent. The Company may appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 4.1, issuing the Shares or other securities then issuable upon the exercise of the rights under this Warrant, exchanging this Warrant, replacing this Warrant or conducting related activities.
4.3 Transferability of the Warrant. Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the “Securities Act”) and limitations on assignments and transfers, including without limitation compliance with the restrictions on transfer set forth in Section 5, title to this Warrant may be transferred by endorsement (by the transferor and the transferee executing the assignment form attached as Exhibit B (the “Assignment Form”)) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. Notwithstanding anything herein to the contrary, in no event shall any Holder transfer this Warrant to any person that the Company’s board of directors reasonably determines in good faith to be a competitor of the Company.
4.4 Exchange of the Warrant upon a Transfer. On surrender of this Warrant (and a properly endorsed Assignment Form) for exchange, subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, the Company shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof, and the Company shall register any such transfer upon the Warrant Register. This Warrant (and the securities issuable upon exercise of the rights under this Warrant) must be surrendered to the Company or its warrant or transfer agent, as applicable, as a condition precedent to the sale, pledge, hypothecation or other transfer of any interest in any of the securities represented hereby.
4.5 Minimum Transfer. This Warrant may not be transferred in part unless such transfer is to a transferee who, pursuant to such transfer, receives the right to purchase all of the Shares purchasable pursuant to this Warrant.
4.6 Taxes. In no event shall the Company be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not payable.
5. Restrictions on Transfer of the Warrant and Shares; Compliance with Securities Laws. By acceptance of this Warrant, the Holder agrees to comply with the following:
5.1 Restrictions on Transfers. The Holder may not transfer or assign this Warrant in whole or in part without providing the Company with 10 days prior written notice, and any attempt by Holder to transfer or assign any rights, duties or obligations that arise under this Warrant without such notice shall be void. Any transfer of this Warrant or the Shares or the shares of common stock issuable upon conversion of the Shares (the “Securities”) must be in compliance with all applicable federal and state securities laws. The Holder agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Securities, or any beneficial interest therein, unless and until the transferee thereof has agreed in writing for the benefit of the Company to take and hold such Securities subject to, and to be bound by, the terms and conditions set forth in this Warrant to the same extent as if the transferee were the original Holder hereunder, and there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement, or (A) such Holder shall have given prior written notice to the Company of such Holder’s intention to make such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition, (B) the transferee shall have confirmed to the satisfaction of the Company in writing that the Securities are being acquired (i) solely for the transferee’s own account and not as a nominee for any other party, (ii) for investment and (iii) not with a view toward distribution or resale, and shall have confirmed such other matters related thereto as may be reasonably requested by the Company, and (C) if requested by the Company, such Holder shall have furnished the Company, at the Holder’s expense, with an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such Securities under the Securities Act whereupon such Holder shall be entitled to transfer such Securities in accordance with the terms of the notice delivered by the Holder to the Company.
5.2 Investment Representation Statement. Unless the rights under this Warrant are exercised pursuant to an effective registration statement under the Securities Act that includes the Shares with respect to which the Warrant was exercised, it shall be a condition to any exercise of the rights under this Warrant that the Holder shall have confirmed to the satisfaction of the Company in writing that the Shares so purchased are being acquired solely for the Holder’s own account and not as a nominee for any other party, for investment and not with a view toward distribution or resale and that the Holder shall have confirmed such other matters related thereto as may be reasonably requested by the Company.
5.3 Securities Law Legend. The Securities shall (unless otherwise permitted by the provisions of this Warrant) be stamped or imprinted with a legend substantially similar to the following (in addition to any legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS CERTIFICATE MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, TRANSFER, PLEDGE OR HYPOTHECATION OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED HEREBY.
5.4 Instructions Regarding Transfer Restrictions. The Holder consents to the Company making a notation on its records and giving instructions to any transfer agent in order to implement the restrictions on transfer established in this Section 5.
5.5 Removal of Legend. The legend referring to federal and state securities laws identified in Section 5.3 stamped on a certificate evidencing the Shares (and the common stock issuable upon conversion thereof) and the stock transfer instructions and record notations with respect to such securities shall be removed and the Company shall issue a certificate without such legend to the holder of such securities if (i) such securities are registered under the Securities Act, or (ii) such holder provides the Company with an opinion of counsel reasonably acceptable to the Company to the effect that a sale or transfer of such securities may be made without registration or qualification.
6. Adjustments. Subject to the expiration of this Warrant pursuant to Section 8, the number and kind of shares purchasable hereunder and the Exercise Price therefor are subject to adjustment from time to time, as follows:
6.1 Merger or Reorganization. If at any time there shall be any reorganization, recapitalization, merger or consolidation (a “Reorganization”) involving the Company (other than as otherwise provided for herein or as would cause the expiration of this Warrant under Section 8) in which shares of the Company’s stock are converted into or exchanged for securities, cash or other property, then, as a part of such Reorganization, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the kind and amount of securities, cash or other property of the successor corporation resulting from such Reorganization, equivalent in value to that which a holder of the Shares deliverable upon exercise of this Warrant would have been entitled in such Reorganization if the right to purchase the Shares hereunder had been exercised immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the board of directors of the successor corporation) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after such Reorganization to the end that the provisions of this Warrant shall be applicable after the event, as near as reasonably may be, in relation to any shares or other securities deliverable after that event upon the exercise of this Warrant.
6.2 Notice of Adjustments. Upon any adjustment in accordance with this Section 6, the Company shall give notice thereof to the Holder, which notice shall state the event giving rise to the adjustment, the Exercise Price as adjusted and the number of securities or other property purchasable upon the exercise of the rights under this Warrant, setting forth in reasonable detail the method of calculation of each. The Company shall, upon the written request of any Holder, furnish or cause to be furnished to such Holder a certificate setting forth (i) such adjustments, (ii) the Exercise Price at the time in effect and (iii) the number of securities and the amount, if any, of other property that at the time would be received upon exercise of this Warrant.
7. Notification of Certain Events. Prior to the expiration of this Warrant pursuant to Section 8, in the event that the Company shall authorize any transaction resulting in the expiration of this Warrant pursuant to Section 8, the Company shall send to the Holder of this Warrant at least ten (10) days prior written notice of the expected effective date of any such event. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the consent of the Holder of this Warrant.
8. Expiration of the Warrant. This Warrant shall expire and shall no longer be exercisable as of the earlier of:
8.1 The Closing of a Change of Control of the Company;
8.2 The voluntary liquidation, dissolution or winding up of the Company;
8.3 Immediately prior to the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act covering the offering and sale of the Company’s common stock; or
8.4 Expiration of the Exercise Period.
9. No Rights as a Stockholder. Nothing contained herein shall entitle the Holder to any rights as a stockholder of the Company or to be deemed the holder of any securities that may at any time be issuable on the exercise of the rights hereunder for any purpose nor shall anything contained herein be construed to confer upon the Holder, as such, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or any other rights of a stockholder of the Company until the rights under the Warrant shall have been exercised and the Shares purchasable upon exercise of the rights hereunder shall have become deliverable as provided herein.
10. Representations and Warranties of the Holder. By acceptance of this Warrant, the Holder represents and warrants to the Company as follows:
10.1 No Registration. The Holder understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Holder’s representations as expressed herein or otherwise made pursuant hereto.
10.2 Investment Intent. The Holder is acquiring the Securities for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. The Holder has no present intention of selling, granting any participation in, or otherwise distributing the Securities, nor does it have any contract, undertaking, agreement or arrangement for the same.
10.3 Investment Experience. The Holder has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company, and has such knowledge and experience in financial or business matters so that it is capable of evaluating the merits and risks of its investment in the Company and protecting its own interests.
10.4 Speculative Nature of Investment. The Holder understands and acknowledges that the Company has a limited financial and operating history and that its purchase of this Warrant is highly speculative and involves substantial risks. The Holder can bear the economic risk of its investment and is able, without impairing its financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of its investment.
10.5 Access to Data. The Holder has had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. The Holder believes that it has received all the information that it considers necessary or appropriate for deciding whether to acquire the Securities. The Holder understands that any such discussions, as well as any information issued by the Company, were intended to describe certain aspects of the Company’s business and prospects, but were not necessarily a thorough or exhaustive description. The Holder acknowledges that any business plans prepared by the Company have been, and continue to be, subject to change and that any projections included in such business plans or otherwise are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results.
10.6 Accredited Investor. The Holder is an “accredited investor” within the meaning of Regulation D, Rule 501(a), promulgated by the Securities and Exchange Commission and agrees to submit to the Company such further assurances of such status as may be reasonably requested by the Company.
10.7 Residency. The residency of the Holder (or, in the case of a partnership or corporation, such entity’s principal place of business) is correctly set forth on the signature page hereto.
10.8 Restrictions on Resales. The Holder acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. The Holder is aware of the provisions of Rule 144 promulgated under the Securities Act, which permit resale of shares purchased in a private placement subject to the satisfaction of certain conditions, which may include, among other things, the availability of certain current public information about the Company; the resale occurring not less than a specified period after a party has purchased and paid for the security to be sold; the number of shares being sold during any three-month period not exceeding specified limitations; the sale being effected through a “broker’s transaction,” a transaction directly with a “market maker” or a “riskless principal transaction” (as those terms are defined in the Securities Act or the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); and the filing of a Form 144 notice, if applicable. The Holder acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time the Holder wishes to sell the Securities and that, in such event, the Holder may be precluded from selling the Securities under Rule 144 even if the other applicable requirements of Rule 144 have been satisfied. The Holder acknowledges that, in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act or an exemption from registration will be required for any disposition of the Securities. The Holder understands that, although Rule 144 is not exclusive, the Securities and Exchange Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk.
10.9 No Public Market. The Holder understands and acknowledges that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company’s securities.
10.10 Brokers and Finders. The Holder has not engaged any brokers, finders or agents in connection with the Securities, and the Company has not incurred nor will incur, directly or indirectly, as a result of any action taken by the Holder, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with the Securities.
10.11 Legal Counsel. The Holder and the Company have both had the opportunity to review this Warrant, the exhibits and schedules attached hereto and the transactions contemplated by this Warrant with their respective legal counsel.
10.12 Tax Advisors. The Holder and the Company have both independently reviewed with their respective tax advisors the U.S. federal, state and local and non-U.S. tax consequences of this investment and the transactions contemplated by this Warrant. With respect to such matters, each relies solely on any such advisors and not on any statements or representations of the Company or any of its agents, written or oral.
11. Miscellaneous.
11.1 Amendments. Except as expressly provided herein, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Warrant and signed by the Company and the Holder.
11.2 Waivers. No waiver of any single breach or default shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.
11.3 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail (if to the Holder) or otherwise delivered by hand, messenger or courier service addressed:
(i) if to the Holder, to the Holder at the Holder’s address or facsimile number as shown in the Company’s records, as may be updated in accordance with the provisions hereof, or until any such Holder so furnishes an address, facsimile number, then to and at the address, facsimile number of the last holder of this Warrant for which the Company has contact information in its records; with a copy to Kevin Spreng, Fredrikson & Byron, P.A. 200 South Sixth Street, Minneapolis, MN 55402; or
(ii) if to the Company, to the attention of the Chief Executive Officer of the Company at the Company’s address as shown on the signature page hereto, or at such other address as the Company shall have furnished to the Holder.
All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. In the event of any conflict between the Company’s books and records and this Warrant or any notice delivered hereunder, the Company’s books and records will control absent fraud or error.
11.4 Governing Law. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the Applicable Jurisdiction, without regard to the conflicts of law provisions.
11.5 Jurisdiction and Venue. If either party initiates a claim in connection with any matter based upon or arising out of this Warrant or the matters contemplated herein or therein, each of Holder and Company irrevocably consents to the exclusive jurisdiction and venue of any federal court within Palo Alto, California, and agrees that process may be served upon them in any manner authorized by the laws of California for such persons.
11.6 Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.
11.7 Severability. If any provision of this Warrant becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Warrant, and such illegal, unenforceable or void provision shall be replaced with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, unenforceable or void provision. The balance of this Warrant shall be enforceable in accordance with its terms.
11.8 Waiver of Jury Trial. EACH OF THE HOLDER AND THE COMPANY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATED TO THIS WARRANT.
11.9 Rights and Obligations Survive Exercise of the Warrant. Except as otherwise provided herein, the rights and obligations of the Company and the Holder under this Warrant shall survive exercise of this Warrant.
11.10 Entire Agreement. Except as expressly set forth herein, this Warrant (including the exhibits attached hereto) constitutes the entire agreement and understanding of the Company and the Holder with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof.
** Signature page follows **
The Company and the Holder sign this Warrant as of the Effective Date.
| NOWRX, INC. | ||||
| By: | ||||
| Name: Cary Breese | ||||
| Title: Chief Executive Officer | ||||
| Address: | ||||
| 2224 Old Middlefield Way #J | ||||
| Mountain View, CA 94043 | ||||
| Email address: | ||||
| AGREED AND ACKNOWLEDGED, | ||||
| DECATHLON ALPHA IV, L.P. | ||||
| By: Decathlon Alpha GP IV, LLC | ||||
| Its: General Partner | ||||
| By: | ||||
| Name: John Borchers | ||||
| Title: Managing Director | ||||
| Address: | ||||
| 1441 West Ute Boulevard, Suite 240 | ||||
| Park City, UT 84098 | ||||
| Email address: jborchers@decathloncapital.com | ||||
Signature Page to Warrant
EXHIBIT A
NOTICE OF EXERCISE
| To: | NOWRX, INC. (the “Company”) | |
| Attention: | Chief Executive Officer |
1. Exercise. The undersigned elects to purchase the following pursuant to the terms of the attached warrant:
| Number of shares: | ||
| Type of security: |
2. Method of Exercise. The undersigned elects to exercise the attached warrant pursuant to:
| ¨ | A cash payment or cancellation of indebtedness, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. |
| ¨ | The net issue exercise provisions of Section 3.2 of the attached warrant. |
3. Stock Certificate. Please issue a certificate or certificates representing the shares in the name of:
| ¨ | The undersigned | ||
| ¨ | Other—Name: | ||
| Address: | |||
4. Unexercised Portion of the Warrant. Please issue a new warrant for the unexercised portion of the attached warrant in the name of: ¨ The undersigned
| ¨ | Other—Name: | ||
| Address: | |||
| ¨ | Not applicable | ||
5. Investment Intent. The undersigned represents and warrants that the aforesaid shares are being acquired for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, the distribution thereof, and that the undersigned has no present intention of selling, granting any participation in, or otherwise distributing the shares, nor does it have any contract, undertaking, agreement or arrangement for the same, and all representations and warranties of the undersigned set forth in Section 11 of the attached warrant are true and correct as of the date hereof.
** Signature page follows **
| (Print name of the warrant holder) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Date) | |
| (Email address) |
EXHIBIT B
ASSIGNMENT FORM
| ASSIGNOR: |
| COMPANY: | NOWRX, INC. (the “Company”) |
| WARRANT: | THE WARRANT TO PURCHASE SHARES OF STOCK HELD BY ASSIGNOR (the “Warrant”) |
| DATE: | _________________________ |
1. Assignment. The undersigned registered holder of the Warrant (“Assignor”) assigns and transfers to the assignee named below (“Assignee”) all of the rights of Assignor under the Warrant:
| Name of Assignee: | ||
| Address of Assignee: | ||
and does irrevocably constitute and appoint ______________________ as attorney to make such transfer on the books of the Company, maintained for the purpose, with full power of substitution in the premises.
2. Obligations of Assignee. Assignee agrees to take and hold the Warrant and any shares of stock to be issued upon exercise of the rights thereunder (and any shares issuable upon conversion thereof) (the “Securities”) subject to, and to be bound by, the terms and conditions set forth in the Warrant to the same extent as if Assignee were the original holder thereof.
3. Investment Intent. Assignee represents and warrants that the Securities are being acquired for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, the distribution thereof, and that Assignee has no present intention of selling, granting any participation in, or otherwise distributing the shares, nor does it have any contract, undertaking, agreement or arrangement for the same, and all representations and warranties set forth in Section 11 of the Warrant are true and correct as to Assignee as of the date hereof.
** Signature page follows **
Assignor and Assignee are signing this Assignment Form on the date first set forth above.
|
ASSIGNOR |
ASSIGNEE | |
| (Print name of Assignor) | (Print name of Assignee) | |
| (Signature of Assignor) | (Signature of Assignee) | |
| (Print name of signatory, if applicable) | (Print name of signatory, if applicable) | |
| (Print title of signatory, if applicable) | (Print title of signatory, if applicable) | |
| (Address) | (Address) |