SoundHound AI, Inc. Form 8-K Summary
Business Context and Reporting Period
SoundHound AI, Inc. filed this Current Report on Form 8-K on April 17, 2023, reporting transactions completed on April 14, 2023. The filing concerns a new senior secured term loan, repayment and termination of existing credit facilities, issuance of a lender warrant, and related restrictions on security-holder rights.
Key Financial and Capital Structure Matters
- New term loan: The company obtained a senior secured term loan with aggregate principal of up to $100 million, funded in full on April 14, 2023.
- Additional commitments: The agreement permits the company to request up to an additional $25 million, subject to lender discretion and specified conditions.
- Interest: The loan bears interest at an applicable margin plus either SOFR plus 0.15% or the applicable alternate base rate. The margin is 8.50% for SOFR loans and 7.50% for ABR loans.
- Maturity and amortization: The loan matures on April 14, 2027, with no scheduled principal amortization before maturity.
- Use of proceeds: Proceeds were used to repay approximately $30 million of existing debt, fund an escrow account covering the first four interest payments, pay transaction fees and expenses, fund a collateral-protection insurance premium and related taxes, and support growth investments and general corporate purposes.
- Existing debt repaid: The Structural Facility was repaid for approximately $11.7 million, including approximately $11.0 million of principal, $0.2 million of prepayment premium, and $0.5 million of final payment fees. The SVB Facility was repaid for approximately $18.5 million, including $17.0 million of principal, $0.3 million of prepayment premium, $1.1 million of final payment fees, and approximately $0.1 million of accrued interest.
- Security and guarantees: The loan is secured by substantially all assets of the company and its subsidiaries other than excluded subsidiaries, and is guaranteed by non-excluded subsidiaries.
- Liquidity requirement: The credit agreement requires liquidity at least equal to the required interest escrow amount as of the last day of each fiscal quarter.
- Warrant: The company issued the agent a warrant to purchase up to 3,301,536 shares of Class A common stock at an exercise price of $2.59 per share. The warrant may be exercised, including on a cashless basis, until the 10-year anniversary of issuance and will be automatically cashless exercised immediately before a change in control.
Material Changes Versus the Prior Period
- The company replaced the Structural Facility and SVB Facility with a larger senior secured term loan.
- Existing debt totaling approximately $28.0 million of principal was retired, together with premiums, final payment fees, accrued interest, and transaction expenses.
- The refinancing introduced substantial new interest obligations, collateral requirements, financial restrictions, and a potential equity dilution obligation through the warrant.
- The credit agreement restricts dividends and other distributions to holders of the company’s capital stock.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no revenue, earnings, cash-flow, margin, or operating guidance.
- The loan agreement includes restrictions on additional indebtedness, restricted payments, investments, loans and advances, mergers and acquisitions, asset dispositions, affiliate transactions, and sale-and-leaseback transactions.
- Mandatory prepayments may be required following specified events, including certain capital raises by the company or its subsidiaries.
- Additional cash premium payments, based on single-digit percentages of outstanding loans, are required over three years from the closing date.
- Events of default include nonpayment, covenant breaches, cross-defaults, certain judgments, change-of-control events, and bankruptcy-related events. Subject to applicable notice and grace periods, obligations may be accelerated following an event of default.
- The warrant was issued in an unregistered transaction under Section 4(a)(2) of the Securities Act to an accredited investor and may result in dilution if exercised.
Important Facts for Investors to Verify
- Review the full credit agreement, guarantee and collateral agreement, and warrant when filed with the company’s Form 10-Q for the quarter ended March 31, 2023.
- Confirm the effective interest rate, including the applicable SOFR or ABR benchmark, and the resulting quarterly interest burden.
- Assess compliance with the quarterly liquidity requirement and other affirmative and negative covenants.
- Evaluate the impact of collateralization, mandatory prepayment provisions, additional cash premiums, and potential acceleration upon default.
- Assess potential dilution from the warrant for up to 3,301,536 shares and the effect of any future capital raise requiring mandatory debt prepayment.