8-K: Surf Air Mobility Secures $35.2 Million Convertible Security Agreement with GEM Global Yield

Surf Air Mobility has entered into a security purchase agreement with GEM Global Yield for a mandatory convertible security of up to $35.2 million, convertible into common stock.

Summary

• Surf Air Mobility has agreed to issue a mandatory convertible security to GEM Global Yield for up to $35.2 million.
• The security can be converted into a maximum of 8 million common shares, subject to adjustments.
• The transaction is expected to close by the end of the second quarter of 2024.
• The par amount of the security will be $35.2 million, less any common shares sold by GEM before closing, with a cap on the sale price at $4.45 per share.
• The security matures in five years, with the company having the option to pay in cash or common shares at maturity.
• GEM can convert the security into common shares at a conversion price that is the lesser of $4.45 or the average of the five lowest volume-weighted average prices over the 30 trading days before conversion.
• If GEM converts to 8 million shares and par amount remains, the company can increase the maximum shares, pay 115% of the remaining par amount in cash, or increase the remaining par amount by 15%.
• GEM's ownership is capped at 4.99% of outstanding shares, which can be increased to 9.99% with 61 days notice.
• Surf Air can redeem the security for 115% of the outstanding par amount.
• GEM will limit daily sales of common shares to 1/10th of the previous day's trading volume.
• As consideration, GEM will return 6.3 million common shares to Surf Air, less any shares sold before closing.
• The company's $400 million share subscription facility with GEM will be restored to full capacity after closing.
• Surf Air will file a registration statement for the resale of at least 8 million common shares by GEM within ten business days of filing its 2023 annual report.

Sentiment

Score: 7

Explanation: The document indicates a positive development for Surf Air Mobility as it secures a significant capital injection. However, the potential for dilution and the terms of the agreement introduce some uncertainty, resulting in a moderately positive sentiment.

Positives

• The agreement provides Surf Air Mobility with a significant capital injection of up to $35.2 million.
• The restoration of the $400 million share subscription facility provides additional financial flexibility.
• The convertible security structure allows for potential equity financing without immediate dilution.
• The agreement includes a cap on GEM's ownership, limiting potential control issues.
• The company has the option to redeem the security, providing flexibility in managing its capital structure.

Negatives

• The convertible security could lead to significant dilution if converted to common shares.
• The company may need to pay 115% of the outstanding par amount if it chooses to redeem the security.
• GEM's ability to increase its ownership to 9.99% could lead to increased influence.
• The agreement includes a cap on the sale price of common shares at $4.45, which could limit the company's potential gains.
• The company is required to file a registration statement for the resale of shares by GEM, which could create selling pressure.

Risks

• The transaction is subject to closing conditions, and there is a risk that it may not be completed.
• The conversion of the security could significantly dilute existing shareholders.
• The company's financial performance may not meet expectations, impacting its ability to repay or redeem the security.
• The company is subject to general economic conditions and market risks.
• The company is subject to risks associated with compliance with applicable laws and regulations.

Future Outlook

The company expects the transaction to close by the end of the second quarter of 2024, subject to the satisfaction of closing conditions. The company will also file a registration statement for the resale of shares by GEM.

Industry Context

This type of financing is common for growth companies seeking capital, particularly in the aviation and technology sectors. Convertible securities allow companies to raise funds without immediate dilution, while providing investors with the potential for equity upside.

Comparison to Industry Standards

• The use of convertible securities is a common financing method for companies in the growth phase, similar to companies like Virgin Galactic and Joby Aviation, which have also utilized convertible debt or equity instruments to fund operations and expansion.
• The conversion price of $4.45 is a key factor, and its attractiveness will depend on the company's stock performance relative to its peers. Companies like Archer Aviation have seen similar conversion prices in their financing rounds.
• The 4.99% ownership cap with a potential increase to 9.99% is a standard provision to balance investor influence and company control, similar to what is seen in other private placements and convertible offerings.
• The 115% redemption price is a typical premium to compensate investors for the risk of holding the convertible security, which is comparable to other similar deals in the market.

Stakeholder Impact

• Shareholders may experience dilution if the convertible security is converted to common shares.
• Employees may benefit from the company's improved financial position.
• Customers may see improved services and offerings due to the company's increased financial stability.
• Suppliers and creditors may have increased confidence in the company's ability to meet its obligations.

Next Steps

• The company will work to satisfy the closing conditions for the transaction.
• The company will file a registration statement for the resale of shares by GEM.
• The company will manage the potential conversion of the security and its impact on the capital structure.

Key Dates

Keywords

convertible security, GEM Global Yield, share subscription facility, common stock, capital raise, dilution, redemption, financial agreement, securities purchase agreement, Surf Air Mobility