May 24, 2023 – Plastiq Inc. and two affiliated debtors (together “Plastiq” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 23-10671 (Judge Brendan Linehan Shannon). The Debtors, who "provide a leading software platform for business-to-business payment automation," are represented by Matthew B. Lunn of Young Conaway Stargatt & Taylor, LLP. Further Board authorized appointments include: (i) Triple P RTS, LLC (“Portage Point”) to provide a CRO, as financial advisors and (ii) Kurtzman Carson Consultants LLC as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) BREX ($3.3mn trade claim), (ii) Deloitte & Touche LLP ($2.0mn professional services claim) and (iii) Donnelley Financial, LLC ($854k professional services claim).
- "Leading software platform for business-to-business payment automation," files for bankruptcy with over $50.0mn of liabilities
- Will pursue in-court sale process, with service provider Priority Technology Holdings, Inc. to play stalking horse after pulling out of earlier out-of-court transaction
- Debtors cite failure to consumate planned merger with SPAC Colonnade Acquisition Corp. II and multiple corporate/financing mis-steps as necessitating bankruptcy shelter
- Debtors line up $7.1mn of DIP financing ($1.0mn interim) from prepetition lenders fronted by Blue Torch
Goals of the Chapter 11 Filing
The Kasparov Declaration (defined below) provides: "[On or around April 22nd]…the members of the Board determined that the only viable path to preserving and maximizing the value of the Debtors’ assets was to commence these Chapter 11 Cases….the Board [also] determined that it was in the Debtors’ best interest to sell some or substantially all of their assets through a Court-approved marketing and sale process …"
Stalking Horse Bid
The Kasparov Declaration provides: "On May 23, 2023, the Debtors and Plastiq, Powered by Priority, LLC. (the 'Stalking Horse Bidder'), an acquisition vehicle formed by Priority [ie Priority Technology Holdings, Inc., or “Priority,” which operates a technology platform allowing customers, including the Debtors, to process credit and debit card transactions and business-to-business payments], agreed on the terms of a stalking horse bid, and executed the asset purchase agreement [supposedly attached at Exhibit B to the Kasparov Declaration but in fact not yet filed]. The Stalking Horse APA provides that the Stalking Horse Bidder will provide the following consideration to acquire substantially all of Debtors’ Assets, in addition to the assumption by Stalking Horse Bidder of certain assumed liabilities:
- a cash payment to the Debtors equal to $27.5 million;
- pay to Blue Torch the consideration as described in the Exchange Agreement Terms attached to the Stalking Horse APA as Exhibit A [not yet filed], in accordance with the terms and conditions of the Exchange Agreement; and
- pay to Colonnade the consideration as described in the Letter Agreement Terms attached so the Stalking Horse APA as Exhibit B [not yet filed], in accordance with the terms and conditions of the Letter Agreement."
The Priority bid comes after it pulled out of a deal to purchase the Debtors out-of-court, with the Kasparov Declaration noting: "On March 9, 2023, the Debtors received a non-binding letter of intent (the 'LOI') from Priority to pursue a potential out-of-court merger transaction….On April 22, 2023, after being informed by Priority that it no longer was willing to consummate the proposed transaction outside of a chapter 11 process and that it had not completed its due diligence, the Debtors, after consultation with the Prepetition Secured Parties, terminated the LOI."
The Debtors have commitments for $7.1mn ($1.0mn interim) of debtor-in-possession ("DIP") financing from prepetition lenders led by Blue Torch as administrative agent and collateral agent.
Events Leading to the Chapter 11 Filing
What a mess; if there was a corporate finance or strategic mistake to be made…these Debtors made it.
Failed SPAC transactions; a $60.0mn acquisition where the Debtors discovered, after the acquisition, that the acquired company "lacked the technology, security, and controls to sell into [its] customer base" (wherepon it was shut down); the default of a senior credit facility within months of entering it; large, reactive and unsuccessful slashing(s) of its workforce; and (unsurprisingly) the tanking of multiple out-of-court sales efforts…litter the recent history of these serially "not quite ready to go public" Debtors. Still Kasparov remains persistently buoyant throughout his declaration, preferring, even in hindsight to view the SPACtacular disaster as "a unique – and unexpected – opportunity" and commented as to the management's pluckiness after one in a string of failures (this time when Colonnade first walked away from the SPAC altar having not been happy with diligence): "Undeterred and continuing to seek to make the most of the surging market for tech companies…the Debtors engaged Qatalyst Partners as investment banker in mid-2021 to pursue [another failed] sale process…"
In a declaration in support of first day filings (the “Kasparov Declaration) [Docket No. 2], Vladimir Kasparov, the Debtors’ CRO (via Portage Point) commented: “The Debtors weathered the COVID-19 pandemic well. Armed with a $75 million investment that closed in late March of 2020, the Debtors began to deploy their full suite of automated financial products to SMBs. Although they were forced to slightly reduce their headcount, the Debtors otherwise used the pandemic as an opportunity to right-size their business and continued to develop their SMB offerings.
The pandemic provided the Debtors with a unique – and unexpected – opportunity. After an initial pullback, financial markets quickly recovered and de-SPAC transactions were booming. In 2020, SPACs raised $79.87 billion in gross proceeds, surpassing the previous record of $13.6 billion in 2019. Many of the de-SPAC transactions driving the 2020 uptick consisted of companies in the technology sector. And by the beginning of 2021, the NASDAQ was nearing, and would eventually hit, an all-time high.
Seeking to capitalize on these favorable market conditions, in early 2021, the Debtors decided that they would pursue a de-SPAC transaction. To that end, they entered into a letter of intent with Colonnade Acquisition Corp. II ('Colonnade'), a special purpose acquisition company. After performing diligence, however, Colonnade decided that the Debtors’ businesses were not yet prepared to go public, and the transaction did not advance to the definitive documentation stage.
Undeterred and continuing to seek to make the most of the surging market for tech companies, the Debtors engaged Qatalyst Partners as investment banker in mid-2021 to pursue a sale process. While the Debtors received a $550 million market valuation and entered into an indication of interest with a potential purchaser, the transaction failed to materialize.
Shortly thereafter, in 2022, Colonnade re-engaged with the Debtors, believing that the businesses were now ready for a public offering. At the same time, the Debtors explored traditional sale transactions with potential purchasers, but eventually determined that a de-SPAC transaction with Colonnade would provide maximum value. On August 3, 2022, Plastiq, Inc. entered into an Agreement and Plan of Merger (the 'Colonnade Agreement') with Colonnade. The Colonnade Agreement contemplated that the Debtors would go public through the de-SPAC transaction, and provided an estimated enterprise value of $480 million.
In September of 2022, the Debtors completed an acquisition for Nearside and certain subsidiaries, for an aggregate purchase price of $59.6 million, which consisted primarily of approximately $57.2 million in shares of common stock of Plastiq, Inc., $0.4 million paid in cash, and the assumption of certain liabilities. Founded in 2019, Nearside was an early-stage technology company focused on building software to provide financial products and services to SMBs with free and simple bank accounts and incorporation service. Nearside’s suite of financial services targeted towards SMBs provided a potential strategic compliment to the payment services offered by the Debtors. Plastiq acquired Nearside primarily for its technology, the ability to offer business bank accounts to customers, and the $21.9 million of cash on Nearside’s balance sheet at the time of the transaction.
Subsequent to the acquisition, however, the Debtors discovered that Nearside lacked the technology, security, and controls to sell into Plastiq’s customer base. Given the gaps in the technology and the cost/time it would take to achieve commercial feasibility, the Board ultimately made the decision to completely shut down Nearside in November of 2022.
Around the same time, the Debtors entered into the Prepetition Loan Agreements, pursuant to which the Debtors incurred term loans in the aggregate principal amount of $40 million. In addition, in November of 2022, Plastiq entered into a Note Purchase Agreement (the “Note Purchase Agreement”) to sell and issue up to $15.0 million of convertible promissory notes (the 'Convertible Promissory Notes') that would convert automatically into shares of preferred stock issued by Plastiq, Inc. in a qualified financing or into SPAC shares after the closing of a de-SPAC transaction. The issued Convertible Promissory Notes have interest rates of 10% and maturity dates one year from the date of the Note Purchase Agreement. Additionally, a prior $5 million investment from July 2021 was converted into Convertible Promissory Notes. In total, Plastiq, Inc. issued $9.1 million of Convertible Promissory Notes to new and existing investors in November and December 2022. 35. The Debtors spent months preparing their businesses for the de-SPAC transaction.
In late 2022, however, it was determined that the de-SPAC transaction was not viable. In an attempt to address the viability of the de-SPAC transaction, the Debtors worked to optimize their business.
In December, 2022, the Debtors informed the Prepetition Lenders of a default under the Prepetition Term Loan Agreement for a failure to maintain a minimum cash balance. On December 28, 2022, the Prepetition Lenders and the Borrowers entered into a waiver agreement, waiving this default.
On February 1, 2023, Colonnade delivered a letter to the Debtors alleging certain breaches of the Colonnade Agreement and threating litigation. With the Colonnade Agreement unlikely to close, the Debtors pivoted for a second time to a traditional sale process. However, with limited cash on hand, the Debtors were forced into cash-preservation mode. To that end, they conducted a second and more significant reduction in force of approximately 85 employees and contractors, reducing their workforce to approximately 128 employees."
- Prepetition Term Loan Agreement. The Debtors are party to a November 2022 Credit Agreement with Blue Torch as administrative agent and collateral agent, further to which Blue Torch (and other pepetition lenders) made term loans in the aggregate principal amount of $40.0mn, $35.0mn of which was funded directly to the Debtors and $5.0mn of which was funded into an escrow account. As of the Petition date, approximately $43.3mn of indebtedness was outstanding under the Prepetition Term Loan Agreement, comprised of $41.3mn in principal and $2.0mn in interest/premiums.
On February 13, 2023, the Debtors and the Prepetition Lenders entered into a forbearance agreement which expired on March 15, 2023. On March 8, 2023, the Prepetition Lenders delivered a default and acceleration notice to the Debtors. On March 17, 2023, the Debtors and the Prepetition Lenders entered into an amendment to the forbearance agreement, which extended the forbearance period through and including March 24, 2023. The forbearance period and related deadlines in the forbearance agreement have been consensually extended multiple times through May 19, 2023.
- Trade Debt. As of the Petition date, the Debtors had @$7.5mn in trade liabilities.
About the Debtors
According to the Debtors: “Plastiq is at the forefront of digital transformation for the SMB economy. We enable SMBs to scale faster with easy access to working capital, freedom of choice in B2B payments, and modern payments automation. It all adds up to what SMBs need most – healthy cash flow.“
The Kasparov Declaration adds: "Plastiq is at the forefront of digital transformation of the small and medium business economy. The Debtors provide a leading software platform for business-to-business payment automation that powers all aspects of accounts payables and accounts receivables operations for small and medium businesses ('SMBs'). Their proprietary software allows clients to automate payments, workflows, and processes, and access new credit sources. Thus, the Debtors’ services solve two primary needs of SMBs: (i) automation at an affordable price; and (ii) assisting with healthy cash flow. In addition to the services aimed towards SMBs, the Debtors facilitate one-time or recurring payments for individuals for bills such as rent, mortgage, utilities, day care, homeowners association fees, and other expenses. To that end, the Debtors operate through five business lines: Plastiq Pay, Plastiq Accept, Plastiq Connect, Plastiq Credit, and in 2023, the Debtors plan to launch Plastiq SmartPay.
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