8-K: Regen Biopharma Secures $100K Convertible Note

Regen Biopharma, Inc. entered into a securities purchase agreement for a $100,000 convertible promissory note with Labrys Fund II LP, providing $85,000 in immediate capital.

Summary

• Regen Biopharma, Inc. (the "Company") secured a 6% convertible promissory note with a principal amount of $100,000 from Labrys Fund II LP.
• The Company received $85,000 in cash, with $15,000 retained by Labrys Fund II LP as an Original Issue Discount (OID).
• The note matures on August 5, 2026.
• The holder can convert the principal and accrued interest into common stock at a conversion price equal to 60% of the lowest trading price over the 20 prior trading days.
• A beneficial ownership limitation of 4.99% applies to conversions, which can be increased to 9.99% with 61 days' notice.
• The Company must reserve a sufficient number of shares for conversion, specifically the greater of 11,262,500 shares or three times the shares issuable upon full conversion.
• The holder can deduct a $1,500 fee per conversion, up to an aggregate of $10,500.
• The Company has the right to prepay the note within 181 days, with prepayment premiums ranging from 100% to 125% of the outstanding principal and interest, depending on the prepayment period.

Sentiment

Score: 2

Explanation: The sentiment is very negative due to the highly unfavorable and predatory terms of the convertible note. The deep discount conversion price, significant Original Issue Discount, high default penalties, and restrictive covenants indicate severe financial distress and a high likelihood of substantial shareholder dilution. While capital was raised, the cost and future implications are extremely detrimental.

Positives

• Secured $85,000 in capital, providing immediate liquidity.

Negatives

• The $100,000 principal note only yielded $85,000 in cash due to a $15,000 Original Issue Discount.
• Highly dilutive conversion terms, allowing conversion at 60% of the lowest trading price over 20 days, which can lead to significant stock dilution.
• High default interest rate of 22% per annum or the maximum permitted by law.
• Upon an Event of Default, the Company must pay 150% of the outstanding principal and accrued interest, plus collection costs.
• Restrictive covenants include prohibitions on selling significant assets or changing the business nature without the holder's consent.
• Liquidated damages of 15% of the outstanding principal (minimum $25,000) for entering into a 3(a)(10) transaction.
• Liquidated damages of 10% of the outstanding principal (maximum $10,000) for failing to offer the holder participation in future equity raises.
• The note and conversion shares are unregistered, limiting immediate liquidity for the holder and potentially signaling a lack of broader market access.
• The Company waives its right to a jury trial for disputes related to the note.

Risks

• Significant future dilution risk for existing shareholders due to the deeply discounted conversion price (60% of lowest 20-day trading price).
• Risk of default due to numerous Event of Default clauses, including failure to pay, failure to issue/transfer shares, breach of covenants, and delisting/suspension of common stock.
• Financial strain from high default penalties (150% of outstanding principal and interest) and liquidated damages for covenant breaches.
• Potential for ongoing capital needs given the small amount raised and the unfavorable terms, which could lead to further dilutive financing.
• Operational constraints due to covenants restricting asset sales or changes in business nature without holder consent.
• Risk of legal disputes, with arbitration and exclusive venue clauses in Massachusetts.
• The Company's ability to continue as a going concern is implied by the need for such financing, but not explicitly addressed.

Future Outlook

The filing does not provide explicit forward-looking statements or guidance beyond the terms of the convertible note, which implies a need for capital to support ongoing operations or strategic initiatives. The highly dilutive nature of the financing suggests potential challenges in securing less costly capital in the future.

Management Comments

• The report was signed by David Koos, Chairman and Chief Executive Officer, indicating his authorization of the transaction.

Industry Context

Biopharmaceutical companies, especially those in early development stages or with limited revenue, frequently rely on external financing to fund research, clinical trials, and operational expenses. However, the terms of this convertible note, particularly the deep discount conversion price and high default penalties, are indicative of a company facing significant financial distress or limited access to conventional capital markets. Such financing structures are often seen in micro-cap or highly speculative ventures where traditional equity or debt financing is unavailable.

Comparison to Industry Standards

• The conversion price set at 60% of the lowest trading price over 20 days is significantly below typical market-based convertible notes, which usually feature conversion premiums above the current market price. This structure is highly unfavorable to existing shareholders, leading to substantial dilution.
• The Original Issue Discount (OID) of 15% ($15,000 on a $100,000 note) effectively means the company received only 85% of the face value, increasing the true cost of capital. This is a common feature in distressed financing but is not standard for healthy companies.
• The default penalty of 150% of outstanding principal and interest is exceptionally high compared to standard corporate debt agreements, which typically involve acceleration of principal and accrued interest, but rarely such a punitive premium.
• The restrictive covenants, such as the prohibition on selling significant assets or changing business nature without holder consent, are more stringent than those found in typical financing agreements for established companies, reflecting the lender's need for control in a high-risk situation.
• The right of participation in future equity raises and associated liquidated damages for non-compliance are also aggressive terms, limiting the company's flexibility in future capital-raising efforts and potentially deterring other investors.

Corporate Governance

Legal Proceedings

• The note includes provisions for binding arbitration for all claims arising under the note or any other agreement between the parties, with the exclusive venue for arbitration in the Commonwealth of Massachusetts.

Stakeholder Impact

• **Shareholders:** Face significant dilution risk due to the deeply discounted conversion price and the potential for the note to convert into a large number of shares. The punitive default terms also pose a risk to shareholder value.
• **Company Management:** Will operate under restrictive covenants that limit strategic flexibility regarding asset sales, business changes, and future capital raises.
• **Creditors:** The note is an unsecured obligation, ranking below any secured debt the company might have.

Next Steps

• The Company will need to manage its cash flow to either repay the note by August 5, 2026, or face potential conversion by the holder.
• The Company must ensure compliance with the various covenants outlined in the note to avoid triggering Events of Default and associated penalties.
• The Company will need to reserve sufficient shares of common stock to accommodate potential conversions by the holder.

Key Dates

Recommendation

The terms of this convertible note are highly predatory and indicative of severe financial distress. The deep discount conversion price (60% of the lowest 20-day trading price) guarantees massive dilution for existing shareholders. The $15,000 Original Issue Discount on a $100,000 note means the company received only $85,000, making the effective cost of capital extremely high. Furthermore, the 150% default penalty and numerous restrictive covenants severely limit the company's operational and financial flexibility, increasing the risk of further value destruction. This financing structure suggests the company has exhausted more favorable capital-raising options, signaling a dire outlook for current equity holders. Investors should consider exiting their positions to avoid substantial future losses from dilution and potential financial collapse.

Keywords

Convertible Note, SEC 8-K, Regen Biopharma, Labrys Fund, Dilution, Promissory Note, Unregistered Securities, Corporate Finance, Biopharma, Capital Raise