Item
1.01
|
Entry
into a Material Definitive Agreement.
|
Convertible
Promissory Notes
On
August 28, 2020, Protagenic Therapeutics, Inc. (the “Company”) entered into a Convertible Note Purchase Agreement
(the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant
to which the Company issued and sold unsecured convertible promissory notes (collectively, the “Notes”) to the Investors
in the aggregate principal amount of $427,500.
The
Notes will be due on November 6, 2023 (the “Maturity Date”) and accrue simple interest at an annual rate of 6% on
the aggregate unconverted and outstanding principal amount, payable annually, beginning October 31, 2020. The Notes have the
same Maturity Date and interest rate as the set of convertible notes with an aggregate principal amount of $1,570,000 that the
Company previously issued and reported in the Current Reports on Form 8-K filed respectively on November 21, 2019, December 4,
2019, December 23, 2019, January 29, 2020, March 3, 2020, May 14, 2020, and July 8, 2020. The Company will pay (a “PIK
Payment”) the interest due by adding such interest (including interest at the Default Rate, as defined below, if any) to
the then-outstanding principal amount of the Notes on each interest payment date and on the Maturity Date. Each PIK Payment will
be preceded by written notice from the Company to each holder of the Notes setting forth in reasonable detail the amount
of such PIK Payment and the principal amount of the Notes following such PIK Payment. The Notes will bear interest at the
rate of 12% per year (the “Default Rate”) following a Default (as defined below).
Holders
may convert their Notes (including accrued interest) at their option, in whole or in part, at any time prior to the Maturity Date,
at a conversion price (the “Conversion Price”) of $1.25 per share of the Company’s common stock, par value $0.0001
per share (the “Common Stock”). The Conversion Price is subject to adjustment for any stock dividend, stock split,
combination or other similar recapitalization event. On the Maturity Date, the Company is required to repay the Notes (including
accrued interest) in their entirety in cash or, at its option, in shares of Common Stock at the Conversion Price.
The
Company may redeem for cash or shares of Common Stock all or any portion of the Notes, at its option, on or after November
5, 2021 if the last reported sale price of its Common Stock has been at least 120% of the Conversion Price then in effect for
at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the
trading day immediately preceding the date on which it provides notice of redemption. The redemption will be effected at a redemption
price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest up
to, but excluding, the redemption date. Any such redemption must be applied ratably among all Convertible Notes in proportion
to their respective outstanding principal balances, plus accrued and unpaid interest. Other than pursuant to this redemption right,
the Company may not pre-pay the Notes.
The
following events, among others, constitute an event of default (each, a “Default”) under the Notes: (i) failure
to pay when due any obligations under the Notes, (ii) any representation or warranty of the Company under the Purchase Agreements
and the other documents contemplated by the Purchase Agreement, including the Notes (collectively, the “Loan Documents”)
being untrue in any material respect as of the date made, (iii) any breach by the Company of any covenant in the Loan Documents,
after a cure period, (iv) a material judgment or judgments are rendered against the Company, (v) the Company makes an assignment
for the benefit of creditors or (vi) an involuntary proceeding in bankruptcy (or similar proceeding) is filed against the Company.
Defaults may only be declared by the holders of a majority of the principal amount of the Notes then outstanding (a “Holder
Majority”).
If
stockholder approval of the issuance of the Notes is required under applicable stock exchange listing rules in
order for the Company to issue shares of Common Stock upon conversion of the Notes, the Company is obligated to call one or more
meetings of the stockholders for purposes of such approval.
The
Notes and the shares of Common Stock underlying the Notes have not been registered under the Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Katalyst
Securities LLC acted as our placement agent (the “Placement Agent”) for the sale of the Notes.
We paid the Placement Agent, including its sub-agents, a commission of 10% of the funds raised from the Investors
introduced by the Placement Agent. In addition, the Placement Agent will receive warrants (the “Placement Agent Warrants”)
to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock issuable upon conversion of the Notes
sold to the Investors who were introduced to us by the Placement Agent. As a result of the foregoing arrangement,
the Placement Agent (including its sub-agents) was paid commissions of $21,470, and will be issued Placement Agent Warrants to
purchase 17,200 shares of Common Stock at an exercise price of $1.25 per share.
The
summary set forth above does not purport to be complete and is qualified in its entirety by reference to the forms of Purchase
Agreement and Note, which are incorporated by reference herein.
The representations,
warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement.
In addition, such representations, warranties and covenants (i) are intended as a way of allocating the risk between the parties
to the Purchase Agreement and not as statements of fact, and (ii) may apply standards of materiality in a way that is different
from what may be viewed as material by stockholders of, or other investors in, the Company. Accordingly, the Purchase Agreement
is being incorporated by reference herein only to provide investors with information regarding the terms of the transaction, and
not to provide investors with any other factual information regarding the Company. Stockholders should not rely on the representations,
warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company
or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties
may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in public
disclosures.
Guarantee
The
Company’s wholly-owned subsidiary, Protagenic Therapeutics Canada (2006) Inc., a corporation formed under the laws of the
Province of Ontario, Canada, has guaranteed (the “Guaranty”) the full and prompt payment of all obligations when due
under the Notes. All actions by the Note holders under the Guaranty may only be taken upon the written consent of a Holder Majority.
The
summary set forth above does not purport to be complete and is qualified in its entirety by reference to the Guaranty, which is
incorporated by reference herein.