8-K: C2 Blockchain Secures $1.33M via Convertible Notes

C2 Blockchain, Inc. announced the entry into two material definitive agreements for the issuance of convertible promissory notes totaling $1.33 million, aimed at funding future strategic initiatives.

Summary

• C2 Blockchain, Inc. has entered into two separate agreements to issue convertible promissory notes, raising a total of $1.33 million.
• The first agreement, with Auctus Fund, LLC, involves a $130,000 promissory note issued for $117,000, with an original issue discount of $13,000 and a 12% interest charge upon issuance. Net proceeds after fees were $108,000.
• The Auctus Note matures on May 22, 2027, and is convertible into common stock at 60% of the lowest traded price during the 15 trading days prior to conversion. Warrants for 5,200,000 shares at $0.05 were also issued.
• The second agreement, with Leonite Fund I, LP, is for a senior secured convertible promissory note of up to $1,200,000, with an original issue discount of $200,000, providing up to $1,000,000 in funding. The initial tranche funded $100,000, with $7,000 retained for legal fees, resulting in net proceeds of $93,000.
• The Leonite Note bears 10% annual interest and is secured by substantially all company assets. It is convertible into common stock at $0.05 per share. 1,000,000 commitment shares and a warrant for 2,000,000 shares at $0.10 were issued.
• Both notes were issued under exemptions from registration, relying on Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D, with investors represented as accredited and having access to company information.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a negative development due to the dilutive nature of convertible notes with significant discounts and warrants, suggesting potential financial distress or unfavorable terms for the company.

Positives

• Secured significant funding of $1.33 million through convertible notes.
• The Leonite Note is secured, potentially offering better terms and investor confidence.
• Warrants issued in both transactions could provide additional capital if exercised.
• The conversion price for the Auctus Note is set at a discount (60% of lowest traded price), potentially benefiting the investor and signaling a belief in future stock price appreciation.
• The Leonite Note's conversion price is also at a discount ($0.05), offering similar potential benefits.

Negatives

• The issuance of convertible notes with discounts and warrants can be dilutive to existing shareholders.
• The conversion price for the Auctus Note is 60% of the lowest traded price, which could lead to significant dilution if the stock price is low.
• The Leonite Note has a substantial original issue discount ($200,000) and a conversion price of $0.05, indicating potentially unfavorable terms for the company.
• The company is incurring legal and due diligence fees related to these transactions.
• The notes carry interest charges and original issue discounts, increasing the cost of capital.

Risks

• Potential for significant dilution of existing shareholders' equity due to the conversion features of the notes.
• The company's reliance on debt financing, especially convertible debt with discounts, may indicate financial strain or a need for immediate capital.
• The conversion price being tied to a percentage of the lowest traded price could lead to a substantial increase in the number of outstanding shares if the stock price declines.
• The secured nature of the Leonite Note means a default could lead to the seizure of company assets.
• The company may face challenges in meeting its obligations if it cannot achieve its strategic goals or secure further financing.

Future Outlook

The proceeds from these financing arrangements are intended to be used to pursue a registered offering of the Company's common stock, acquisitions, and general working capital. The company is also obligated to remain a fully reporting company under SEC requirements.

Industry Context

StockSavvy.ai notes that the issuance of convertible notes with significant discounts and warrants is a common, albeit often dilutive, financing strategy for early-stage or growth-oriented companies in the blockchain and technology sectors seeking to raise capital without immediate equity dilution. Competitors often employ similar methods to fund operations and expansion.

Comparison to Industry Standards

• The conversion price of 60% of the lowest traded price for the Auctus Note is a significant discount, often seen in distressed financing situations or for companies with high perceived risk.
• The $0.05 conversion price for the Leonite Note is also very low, suggesting a need for substantial capital and potentially unfavorable terms compared to companies with stronger market valuations.
• The inclusion of warrants is standard practice in convertible note financings to sweeten the deal for investors, but the large number of shares (5.2 million for Auctus, 2 million for Leonite) indicates a significant potential for future dilution.
• The 10% annual interest rate on the Leonite Note is within a typical range for such instruments, but the 12% one-time charge on the Auctus Note is higher.
• The secured nature of the Leonite Note is a stronger provision than typically seen in standard convertible notes, indicating a higher risk profile for the company or a stronger negotiating position for the lender.

Stakeholder Impact

• Existing shareholders may experience dilution in their ownership percentage and potential decrease in earnings per share due to the conversion of notes and exercise of warrants.
• Creditors may be concerned about the company's increased leverage and the secured nature of the Leonite Note.
• Investors in the convertible notes gain potential upside through conversion into equity, with preferential terms (discounts, warrants).

Next Steps

• The company intends to use the proceeds for a registered offering of common stock, acquisitions, and general working capital.
• The company must remain compliant with SEC reporting requirements.
• The notes are convertible into common stock, which will increase the number of outstanding shares upon conversion.
• Warrants issued with the notes are exercisable, potentially providing further capital if exercised.

Key Dates

Recommendation

The company has secured necessary funding, but the terms of the financing (significant discounts, warrants, potential dilution) suggest underlying financial pressures. While the capital infusion is positive for operations and strategic initiatives, the dilutive nature warrants a cautious 'hold' recommendation pending further clarity on the company's operational performance and the impact of these new securities.

Keywords

convertible notes, securities purchase agreement, promissory note, financing, capital raise, C2 Blockchain, Auctus Fund, Leonite Fund