8-K: Snail, Inc. Secures High-Cost Convertible Note

Snail, Inc. has secured $2 million in new financing through a convertible promissory note with an effective 15.5% cost and significant dilution potential.

Summary

• Snail, Inc. (SNAL) entered into a Securities Purchase Agreement with CROM STRUCTURED OPPORTUNITIES FUND I, LP for an unsecured convertible promissory note.
• The note has a principal amount of $2,200,000, but the actual purchase price was $2,000,000 due to a $200,000 original issue discount (OID).
• A one-time interest charge of 5% ($110,000) on the principal amount is due at maturity, making the total cost of the $2,000,000 proceeds $310,000.
• The maturity date for the note is October 24, 2026, twelve months from the issue date.
• Any unpaid principal or interest will accrue default interest at 10% per annum or the maximum legal rate.
• The investor has the right to convert the outstanding principal and interest into Class A common stock.
• The conversion price is generally $5.00 per share, but for a $577,500 portion of the note, it is the lesser of $5.00 or 92% of the lowest volume-weighted average price (VWAP) over the five trading days prior to conversion.
• The company must reserve a sufficient number of shares for conversion, specifically the greater of 3,275,046 shares or 1.5 times the shares issuable upon full conversion at the lower of the conversion prices.
• The note is a senior unsecured obligation, ranking with priority over all existing and future unsecured indebtedness, except for other February 2025 and October 2025 notes which are pari passu.
• Upon an uncured event of default, the company must pay 120% of the outstanding principal plus accrued interest, in addition to costs and fees.
• The company is required to file a registration statement for the resale of the conversion shares within 90 days and have it effective within 120 days of October 24, 2025.
• Stockholder approval for the issuance of shares exceeding 20% of outstanding Class A Common Stock was obtained on February 20, 2025, for Nasdaq Listing Rule 5635(d) purposes.
• The investor's daily sales of converted shares are limited to the greater of $20,000 or 20% of the Daily Dollar Volume during the 'Leak Out Period' (until an Event of Default occurs).

Sentiment

Score: 3

Explanation: The financing terms are highly unfavorable for existing shareholders due to significant dilution potential and high cost of capital, indicating financial strain or limited options. The stringent covenants and default penalties further highlight the company's precarious position.

Positives

• Secured $2,000,000 in new capital to support business development, working capital, and general corporate purposes.
• The note is structured as a senior unsecured obligation, providing priority over most other unsecured debt.
• Stockholder approval was obtained for the potential dilution, addressing a key corporate governance requirement.

Negatives

• The financing carries a high effective cost of capital, with a $200,000 original issue discount and a $110,000 one-time interest charge on $2,000,000 in proceeds, equating to a 15.5% cost for 12 months.
• A portion of the note's conversion price is tied to the market price (92% of lowest VWAP), creating significant potential for dilution if the stock price declines.
• The company is subject to numerous stringent covenants and events of default, including a 120% repayment penalty on default, indicating a high-risk financing arrangement.
• The 'Leak Out' provision, while managing selling pressure, confirms the investor's intent to sell converted shares, which could create sustained downward pressure on the stock.
• The company is prohibited from entering into certain types of financing (Variable Rate Transactions, Section 3(a)(10) transactions) and other corporate actions without the holder's consent.

Risks

• **Dilution Risk:** The market-price-based conversion feature for a portion of the note means that a falling stock price could lead to the issuance of a significantly larger number of shares, substantially diluting existing shareholders.
• **Default Risk:** The extensive list of events of default, including failure to pay, conversion failures, breach of covenants, delisting, and registration statement failures, could trigger immediate repayment at a 120% penalty, potentially leading to severe financial distress or bankruptcy.
• **Liquidity Risk:** The 'Leak Out' provision, while intended to manage market impact, also signals the investor's intention to sell converted shares, which could create persistent selling pressure on the company's stock.
• **Financing Risk:** The high effective cost of this financing suggests the company may have limited access to more favorable capital sources, indicating potential underlying financial weakness.
• **Operational Restrictions:** Strict covenants limit the company's ability to incur certain types of debt, pay dividends, repurchase stock, sell significant assets, or engage in specific financing transactions without the holder's consent, potentially hindering future strategic flexibility.
• **Regulatory Compliance Risk:** Failure to maintain Nasdaq listing standards or to timely file and maintain an effective registration statement for the resale of conversion shares are events of default that could have severe consequences.
• **Market Volatility Risk:** The conversion price being tied to VWAP exposes the company to increased dilution if its stock price experiences significant volatility or decline.

Future Outlook

The company intends to use the proceeds from this financing for business development, working capital, and general corporate purposes. The structure of the convertible note, including the market-based conversion price for a portion, suggests an expectation of future stock price volatility and potential for significant dilution as the investor converts and sells shares. The requirement to file a registration statement for resale indicates that the company anticipates the investor will monetize the converted shares in the public market.

Management Comments

• Acknowledged that the company 'understands and acknowledges the potentially dilutive effect of the Conversion Shares to the Common Stock upon the conversion of the Note.'
• Confirmed that the company's 'obligation to issue, upon conversion of the Note, the Conversion Shares, are absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.'

Industry Context

This convertible note offering by Snail, Inc. reflects a common financing strategy for companies that may face challenges in securing traditional debt or less dilutive equity. The terms, including a significant original issue discount, a market-based conversion price for a portion of the note, and stringent covenants, are often indicative of a company perceived as higher risk or in urgent need of capital. The 'Leak Out' provision is a standard mechanism in such structured financings to manage the potential selling pressure from the investor's conversion and sale of shares, aiming to prevent an immediate collapse in stock price. However, the overall cost and dilutive nature of the deal suggest that Snail, Inc. is accessing capital under less favorable conditions compared to more established or financially robust industry peers.

Comparison to Industry Standards

• The effective cost of capital for this note, approximately 15.5% for a 12-month term (including OID and interest), is significantly higher than typical debt financing rates for established companies in the technology or gaming sector, which often secure loans or bonds at single-digit interest rates. This suggests a higher risk profile for Snail, Inc. compared to peers like Electronic Arts or Take-Two Interactive, which have access to more favorable credit markets.
• The inclusion of a market-price-based conversion feature for a $577,500 portion of the note (lesser of $5.00 or 92% of lowest VWAP) is a 'death spiral' type provision. This is generally considered highly dilutive and unfavorable for existing shareholders, contrasting with more traditional convertible notes that feature fixed conversion premiums, as seen in offerings by more stable companies.
• The extensive list of events of default and the 120% repayment penalty upon default are stringent, reflecting strong protective measures for the investor. Such terms are more common in distressed financing or for companies with elevated credit risk, rather than for industry leaders with robust balance sheets.
• The 4.99% beneficial ownership limitation is a standard feature to prevent the investor from triggering Schedule 13D filing requirements, which is common across various private placement transactions.
• The 'Leak Out' provision, limiting daily sales to the greater of $20,000 or 20% of Daily Dollar Volume, is a common protective measure in structured financings to mitigate immediate selling pressure. However, it also signals the investor's intent to liquidate shares, which can create sustained overhang on the stock, unlike a typical institutional investor who might hold for longer-term appreciation.

Corporate Governance

Legal Proceedings

• The company represents that there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the company's knowledge, threatened against or affecting the company or any of its subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. The SEC Documents contain a complete list and summary description of any pending or, to the company's knowledge, threatened proceeding against or affecting the company or any of its subsidiaries, without regard to whether it would have a Material Adverse Effect.

Related Party Transactions

• No new related party transactions are disclosed, other than existing arrangements for services as employees, officers, and directors, and stock options, as previously disclosed in SEC Documents. The use of proceeds explicitly prohibits repayment of indebtedness owed to officers, directors, or employees of the company or their affiliates.

Stakeholder Impact

• **Shareholders:** Face significant potential for dilution due to the convertible nature of the note, especially with the market-based conversion price for a portion. The 'Leak Out' provision suggests ongoing selling pressure from the investor, which could negatively impact share price.
• **Creditors:** The note is a senior unsecured obligation, granting it priority over most other unsecured indebtedness, which could be favorable for the noteholder but potentially less favorable for other unsecured creditors.
• **Employees/Management:** The capital infusion provides funding for business development and general corporate purposes, which could support job security and strategic initiatives, but the stringent covenants may limit management's operational flexibility.

Next Steps

• Company to file an initial Registration Statement covering the resale of Registrable Securities within 90 calendar days from October 24, 2025.
• Company to cause the Registration Statement to become effective within 120 calendar days from October 24, 2025.
• Company to make monthly amortization payments of $231,000 starting January 24, 2026.
• Company to repay the entire remaining outstanding balance of the note by the Maturity Date of October 24, 2026.
• Company to maintain its listing and trading of Common Stock on the Principal Market and comply with reporting obligations under the 1934 Act.

Key Dates

Recommendation

The terms of this convertible note offering are highly unfavorable for existing shareholders. The significant original issue discount and interest rate result in a high effective cost of capital. More critically, the market-price-based conversion feature for a substantial portion of the note creates a 'death spiral' risk, where a declining stock price leads to more shares being issued, further exacerbating dilution and downward pressure. The extensive and stringent covenants, coupled with a 120% penalty on default, indicate a company in a precarious financial position or with limited access to more favorable financing. While the capital infusion provides short-term liquidity, the long-term implications for shareholder value are severely negative due to the dilutive structure and the potential for ongoing selling pressure from the investor. This type of financing often signals underlying financial weakness and is typically avoided by companies with strong fundamentals and better access to capital markets.

Keywords

Convertible Note, Promissory Note, Private Placement, Debt Financing, Dilution, Snail Inc, SNAL, Corporate Finance, Registration Rights, Nasdaq, Original Issue Discount, Equity Line of Credit