8-K: Salarius Pharmaceuticals Amends Decoy Therapeutics Merger Agreement to Facilitate Debt-to-Equity Conversion

Salarius Pharmaceuticals, Inc. has entered into a Third Amendment to its merger agreement with Decoy Therapeutics Inc., allowing Decoy's promissory note holders to convert their debt into newly created Series B Non-Voting Convertible Preferred Stock.

Summary

• Salarius Pharmaceuticals, Inc. (the Company) signed a Third Amendment to its Agreement and Plan of Merger with Decoy Therapeutics Inc. (Decoy) on July 18, 2025.
• The amendment enables certain holders of Decoy's non-convertible promissory notes (Decoy Promissory Notes) to exchange their debt for shares of the Company's newly created Series B Non-Voting Convertible Preferred Stock (Series B Preferred Stock).
• The terms of the Series B Preferred Stock are largely identical to the Series A Preferred Stock, except for specific conversion and redemption provisions.
• The number of common shares underlying the Series B Preferred Stock will be calculated by dividing the principal and interest owed to participating Decoy Promissory Note holders by the per-share offering price in the Qualified Financing.
• The number of shares underlying the Series A Preferred Stock for existing Decoy stockholders and convertible noteholders will be reduced on a one-for-one basis by the Series B shares issued, ensuring the previously disclosed relative ownership percentages (7.6% for Salarius legacy stockholders and 92.4% for Decoy legacy stockholders, pre-Qualified Financing) remain unchanged.
• The merger agreement still requires a minimum $6.0 million qualified financing, which will dilute the combined company's ownership percentages.
• The Series B Preferred Stock has a conversion ratio of 1,000 shares of common stock per preferred share, subject to adjustment.
• Conversion of Series B Preferred Stock is contingent upon stockholder approval under Nasdaq listing rule 5635 and satisfaction of Nasdaq initial listing standards (Conversion Approval Date).
• Holders can optionally convert after the Conversion Approval Date, and automatic conversion occurs one year after this date.
• Fifty percent (50%) of net proceeds from post-closing drawdowns/sales under the Company's At-the-Market Program (ATM Program) or equity line of credit (ELOC) must be used for mandatory redemption of Series B Preferred Stock.
• The Company also has an option to redeem Series B Preferred Stock at any time post-merger closing.
• The redemption price per share of Series B Preferred Stock is the lower of (i) the S-1 Financing price multiplied by 1,000, or (ii) 1,000 multiplied by the weighted average effective per share offering price of any subsequent Company offering of at least $2.0 million.
• A beneficial ownership limitation is set at 4.99% of outstanding common stock, which can be increased up to 9.99% with 61 days' notice, but not exceeding 19.99%.

Sentiment

Score: 6

Explanation: The document details a necessary procedural amendment to a merger agreement, facilitating debt conversion and clarifying capital structure. It's a positive step towards merger completion, but doesn't provide new operational or financial performance data to significantly alter sentiment beyond neutral to slightly positive.

Positives

• The Third Amendment facilitates the merger by providing a mechanism for Decoy's promissory note holders to convert their debt into equity, potentially streamlining the transaction.
• The amendment ensures that the relative ownership percentages of the combined company (pre-Qualified Financing) remain consistent with previous disclosures, providing clarity to existing shareholders.
• The creation of Series B Preferred Stock with specific conversion and redemption terms offers flexibility in managing the combined entity's capital structure and debt obligations.

Negatives

• The Series B Preferred Stock is non-voting, which means the new equity holders will not have immediate voting influence, potentially concentrating power with common stockholders or other preferred classes.
• The mandatory redemption feature tied to future ATM Program or ELOC drawdowns could impact the Company's future liquidity or capital allocation flexibility, as 50% of such proceeds are earmarked for redemption.

Risks

• The conversion of Series B Preferred Stock into common stock is subject to stockholder approval and Nasdaq listing standards, which could delay or prevent full conversion.
• Future equity offerings (Qualified Financing, ATM Program, ELOC) will dilute the ownership percentages of existing Salarius and Decoy legacy stockholders.
• The beneficial ownership limitation on conversion (initially 4.99%, up to 19.99%) could restrict the ability of large Series B holders to convert their full holdings into common stock immediately.

Future Outlook

The Company anticipates completing the Note Exchange Agreements immediately following the closing of the merger. The conversion of Series B Preferred Stock is subject to future stockholder approval and Nasdaq listing standards, with automatic conversion occurring one year after these conditions are met. The Company also plans to use future proceeds from its ATM Program and ELOC for mandatory redemption of the Series B Preferred Stock.

Management Comments

• The Third Amendment to Agreement and Plan of Merger was approved by the respective boards of directors of Parent, each MergerSub, and the Company.
• Mark J. Rosenblum, Executive Vice President & Chief Financial Officer, signed the 8-K report on behalf of Salarius Pharmaceuticals, Inc.

Industry Context

This amendment is a common procedural step in biotech mergers, particularly when a target company has outstanding debt that needs to be addressed as part of the acquisition. Converting debt to preferred equity can help align creditor interests with the combined entity's future performance and manage immediate cash outflows, which is crucial for development-stage biotech companies. The use of non-voting preferred stock is a typical mechanism to manage immediate dilution of common stock voting power while still providing a path to equity for debt holders.

Comparison to Industry Standards

• The 7.6% retention for the acquiring company's legacy shareholders (Salarius) and 92.4% for the target company's legacy shareholders (Decoy) is a significant reverse merger ratio, common in biotech where a smaller, publicly traded company acquires a larger, private company with a more advanced pipeline or technology. For example, similar reverse mergers in the biotech space often see the private company's shareholders owning a substantial majority of the combined entity, such as the recent merger between Xencor and Viridian Therapeutics, or the acquisition of Forty Seven by Gilead Sciences, where the target's value and pipeline dictated the majority ownership in the combined entity or acquisition price.
• The use of convertible preferred stock to address outstanding debt is a standard financial instrument in M&A, particularly for private companies with complex capital structures. This approach is comparable to how companies like Sorrento Therapeutics or Athersys have restructured debt or raised capital through convertible notes or preferred shares in the past, aiming to convert liabilities into equity under specific conditions to strengthen the balance sheet post-merger.
• The inclusion of an At-the-Market (ATM) program and an Equity Line of Credit (ELOC) as sources for mandatory redemption is a common strategy for small-cap biotech firms to manage liquidity and debt, similar to how companies like Zymeworks or MacroGenics have utilized such facilities to fund operations or manage financial obligations, albeit with potential for dilution.

Corporate Governance

Related Party Transactions

• The exchange of Decoy's non-convertible promissory notes for Salarius's newly created Series B Non-Voting Convertible Preferred Stock can be considered a related party transaction in the context of the ongoing merger between Salarius and Decoy.

Stakeholder Impact

• **Shareholders (Salarius legacy)**: Their pre-Qualified Financing ownership percentage remains at 7.6%, but they will experience dilution from the required minimum $6.0 million Qualified Financing and future equity raises (ATM, ELOC). The non-voting nature of Series B Preferred Stock limits immediate voting power dilution.
• **Decoy Promissory Note Holders**: Benefit from the ability to convert their debt into equity (Series B Preferred Stock), offering a potential path to liquidity and participation in the combined company's upside.
• **Decoy Legacy Stockholders**: Their pre-Qualified Financing ownership percentage remains at 92.4%, and the amendment ensures their relative stake is maintained despite the debt conversion mechanism.

Next Steps

• The Company is required to effectuate the Note Exchange Agreements immediately following the closing of the Merger.
• Parent shall file each Certificate of Designation (including for Series B Preferred Stock) with the Secretary of State of the State of Delaware.
• Stockholder approval for the conversion of Series B Preferred Stock under Nasdaq listing rule 5635 must be obtained.
• The Company must satisfy the initial listing standards of Nasdaq for the conversion of Series B Preferred Stock.
• One year after the Conversion Approval Date, all outstanding shares of Series B Preferred Stock will automatically convert into common stock.
• Fifty percent of net proceeds from future drawdowns/sales under the ATM Program or ELOC must be used to redeem outstanding Series B Preferred Stock until fully redeemed.

Key Dates

Recommendation

Keywords

Merger Agreement, SEC Filing, 8-K, Salarius Pharmaceuticals, Decoy Therapeutics, Preferred Stock, Debt Conversion, Corporate Governance, Capital Structure, Nasdaq Listing, Biotechnology, Pharmaceuticals, Equity Financing, Promissory Notes