Business Context and Reporting Period
Company: Air Industries Group
Filing Type: Form 8-K (Current Report)
Date of Report: August 19, 2016
Event: Entry into a Material Definitive Agreement and Unregistered Sale of Equity Securities.
The Company entered into a Placement Agency Agreement with Taglich Brothers, Inc. to conduct a private placement offering of up to $4,250,000 in 12% Subordinated Convertible Notes due December 31, 2017, accompanied by warrants to purchase common stock.
Key Financial Metrics and Transaction Details
Offering Structure:
- Total Offering Size: Up to $4,250,000 principal amount of Notes.
- Initial Closing Proceeds: $2,660,000 principal amount of Notes sold to accredited investors.
- Net Proceeds (Initial Closing): Approximately $2,366,300.
- Debt Conversion: $1,520,703 in Notes issued to Michael Taglich and $4,373 to Robert Taglich in exchange for the forgiveness of prior loans and accrued interest.
Cost of Capital and Fees:
- Note Interest Rate: 12% per annum (increases to 19% upon an event of default).
- Placement Agent Fee: 7% of gross proceeds ($291,200 paid at initial closing).
- Placement Agent Warrants: Warrants to purchase 67,642 shares at an exercise price of $6.15 per share.
- Investor Warrants: 5-year warrants issued to investors to purchase 108,118 shares at an exercise price of $5.00 per share.
Liquidity and Debt Status:
- The Notes are subordinated to the Company's senior indebtedness with PNC Bank.
- The filing does not provide specific data on total cash on hand, total debt outstanding, or operating cash flow for the period.
Material Changes and Terms
Conversion Mechanics:
- Holder Option: Notes are convertible into common stock at an initial price of $4.92 per share.
- Automatic Conversion: Notes automatically convert into Series A Convertible Preferred Stock at $10.00 per share upon the filing of a Certificate of Amendment (subject to stockholder approval expected in Q4 2016).
Series A Preferred Stock Terms:
- Dividends: Cumulative at 12% annually until May 26, 2018, then 16% annually.
- Payment in Kind (PIK): If cash dividends are not fully paid, the Company may issue additional shares. Failure to pay 8% in cash results in a total dividend rate of 15% (via PIK); failure to pay 10% in cash after 2018 results in a 19% total rate.
- Liquidation Preference: $10.00 per share plus accrued dividends, senior to common stock but junior to Notes.
Outlook, Risks, and Contingencies
Management Commentary and Outlook:
- The Company expects to close the balance of the $4,250,000 offering within one week of the initial closing.
- Stockholder approval for the Certificate of Amendment (required for automatic conversion to Preferred Stock) is expected at the 2016 Annual Meeting in the fourth quarter.
Risks and Contingencies:
- Default Risk: An event of default (e.g., missed payment or bankruptcy) allows majority Note holders to demand immediate payment and triggers an interest rate increase to 19%.
- Dilution: Significant potential dilution exists through the conversion of Notes, exercise of investor warrants, and issuance of PIK dividends on Preferred Stock.
- Dividend Restrictions: If any portion of Preferred Stock dividends is paid in PIK shares, the Company cannot declare or pay cash dividends on common stock for that period.
Investor Verification Checklist
- Verify the status of the stockholder vote for the Certificate of Amendment required for automatic conversion to Series A Preferred Stock.
- Confirm the total amount of the offering closed and the final net proceeds received by the Company.
- Review the Company's current cash position to assess its ability to service the 12% interest on the Notes and potential cash dividends on Preferred Stock.
- Assess the impact of the 19% penalty interest rate and immediate repayment clause in the event of a default.
- Calculate the potential dilution impact of the 108,118 investor warrants, 67,642 agent warrants, and potential PIK share issuances.