CASE PROFILE: Business payment platform Plastiq files for Chapter 11 following failed de-SPAC transaction

Legal Analysis 24 May

CASE PROFILE: Business payment platform Plastiq files for Chapter 11 following failed de-SPAC transaction

by Kennedy Rose, Sara Tapinekis, Frederik Johnsrud and Jayjeet Sharma

Business payment platform company Plastiq filed for Chapter 11 bankruptcy protection on 24 May after a special purpose acquisition company (SPAC) transaction fell apart and a prepetition sale process proved fruitless. 

Plastiq entered Chapter 11 armed with a USD 27.5m stalking horse bid from Plastiq, Powered by Priority, LLC — an acquisition vehicle formed by Priority Technology Holdings, Inc, a payment processing technology company — and a USD 7.1m debtor-in-possession (DIP) facility from Blue Torch Finance. Factors contributing to the bankruptcy filing included the failed de-SPAC transaction, the collapse of Silicon Valley Bank (SVB) and liquidity strains, according to a first day declaration from Chief Restructuring Officer (CRO) Vladimir Kasparov, who also serves as a managing director at Portage Point Partners.

Judge Brendan Shannon of the US Bankruptcy Court for the District of Delaware scheduled a first day hearing for 25 May at 11am ET.

The company

Plastiq’s business focuses on transaction services for small and medium sized businesses. The company also offers a service for one-time or recurring payments for individuals, such as rent, mortgage, utilities, day care and other expenses. The debtors have five business lines: Plastiq Pay, Plastiq Accept, Plastiq Connect and Plastiq Credit, with Plastiq SmartPay to be launched later this year, according to Kasparov. 

The debtors’ main business is the “Pay” line, which allows individuals to make payments with credit cards even if the receiving party does not accept credit cards as payment. The Pay line also assists small and medium businesses with cash flow management and access to working capital. Plastiq collects a fee from customers for each transaction initiated. The company reported facilitating more than 347,000 transactions totaling an aggregate amount of about USD 3.6bn. Plastiq’s other business lines allow small and medium businesses to accept any form of digital payment via a link with no fees owed by the businesses, integrate Plastiq’s software into their own accounting software and marketplaces, gain access to short-term financing and automate accounts payable and receivable.

Plastiq was founded in 2012 by Eliot Buchanan and Daniel Choi in Boston, Massachusetts. The company received USD 2.35m in a seed round in 2012, and the business relocated to San Francisco in 2014 as it sought to secure more funding and investors. Plastiq raised about USD 142m across 10 rounds of funding between 2012 and 2021, and the company had more than 200 employees at its peak.

Plastiq acquired Nearside Business Corp. — an early-stage financial software company — for USD 59.6m, comprising about USD 57.2m in Plastiq’s common stock and USD 400,000 in cash, plus the assumption of certain liabilities. The company wholly owns PLV, Inc., Nearside, Plastiq Canada Inc., Plastiq Canada EP Inc., P4B Inc. and PBS Inc. Nearside wholly owns Nearside Business Software Canada Inc., as well.

The debt

Plastiq entered into a USD 40m prepetition credit agreement with Blue Torch as agent, with USD 35m of the funding given directly to the debtors and USD 5m held in an escrow account under which the debtors could receive amounts upon the satisfaction of certain milestones, according to Kasparov. About USD 43.3m was outstanding on the credit facility as of the petition date, comprising USD 41.3m in principal, USD 2m in accrued and unpaid interest and a USD 372,713 premium. The loans are secured by first priority security interests in and liens on the debtors’ collateral.

The debtors entered into a forbearance agreement in February 2023, which expired on 15 March. Certain of Plastiq’s prepetition lenders held warrants to purchase common stock and exercised put rights upon an event of default in February. Those warrants were due to be paid on 6 March, but the debtors did not make the payment, Kasparov said. The prepetition lenders delivered a default and acceleration notice to the debtors, and the parties agreed to amend the forbearance agreement to extend forbearance through 24 March. That forbearance agreement has since been extended several times through 19 May. The amendment also provides for the USD 3.5m in warrants to be considered prepetition obligations under the term loan agreement.

Plastiq also reported holding about USD 7.5m in outstanding trade debt.

The descent

Plastiq received USD 75m in funding in March 2020 and “weathered the COVID-19 pandemic well,” according to Kasparov. Amid the boom in de-SPAC transactions in 2020 and 2021, the debtors moved to pursue a de-SPAC with SPAC Colonnade Acquisition Corp. II. However, Colonnade decided that the debtors were not prepared to go public and the transaction did not move to the definitive documentation stage, Kasparov said. Plastiq moved to engage investment banker Qatalyst Partners in mid-2021 to begin a sale process, and the business was valued at USD 550m. Another party indicated interest in buying Plastiq, but the deal did not come to fruition.

Colonnade re-engaged with the debtors in 2022, and Plastiq determined that a de-SPAC would result in maximum value after weighing a traditional sale. The debtors and Colonnade entered into an agreement and plan of merger in August 2022 under which the Plastiq would go public via a de-SPAC transaction at an enterprise value of USD 480m.

Around the same time as the de-SPAC transaction, the acquisition of Nearside and the prepetition loan agreements, Plastiq also entered into a note purchase agreement to sell and issue up to USD 15m of convertible promissory notes that would convert automatically into shares of Plastiq’s preferred stock in a qualified financing or into SPAC shares after the closing of the de-SPAC transaction. Those convertible promissory notes have a 10% interest rate and have maturity dates one year from the date of the note purchase agreement. About USD 9.1m in convertible promissory notes were issued to new and existing investors in November and December 2022.

Plastiq determined in late 2022 that the de-SPAC was not viable, and Colonnade sent a letter alleging breach of agreement and threatening litigation in February 2023, Kasparov said. The debtors pivoted back to a traditional sale process but had to move into “cash preservation mode” as its liquidity suffered. Multiple companies have filed for bankruptcy in recent months after de-SPAC transactions brought in far less funding than anticipated, including Virgin Orbit, Pear Therapeutics and Starry Internet. The Debtwire Legal Analysis team wrote about the bursting of the SPAC bubble leading to a rise in Chapter 11 filings among SPAC-formed companies.

Plastiq laid off 85 more employees, bringing its headcount to about 128. The debtors also had several defaults under the prepetition term loan agreement. Despite making some cuts to its workforce and terminating some vendor agreements and contracts, Plastiq said it was not sufficient  to resolve its liquidity issues.

Further injuring the business was the collapse of SVB in early March. Plastiq asserted that it used the bank’s money transmitter license to operate its businesses in the majority of states in which it operates. As a result, the debtors had to pivot to an agreement with Priority.

Plastiq engaged Portage Point to conduct a prepetition marketing process for the sale of its assets, contacting about 14 potential buyers. Seven parties executed non-disclosure agreements, and the debtors eventually receiving a non-binding letter of intent from Priority for an out-of-court merger in March. Priority later informed the debtors in April that it was not willing to consummate the sale outside of Chapter 11 and that it had not completed its due diligence, and Plastiq terminated the letter of interest. The debtors continued discussions with Priority about a potential stalking horse bid, and Priority formed acquisition vehicle Plastiq, Powered by Priority LLC to put forth a USD 27.5m stalking horse bid.

The stalking horse, DIP and other first day motions

The stalking horse bid from Priority provides for a USD 27.5m cash payment, plus the payment of undisclosed “considerations” to Blue Torch and Colonnade. Blue Torch will be permitted to make a credit bid of its secured debt and any amounts owed under the DIP agreement. 

The debtors are also seeking court approval of a USD 7.1m DIP, with USD 1m to be delivered on an interim basis, from Blue Torch. The DIP agreement provides for the lender to receive a first priority lien on unencumbered assets and priming liens that will be senior to prepetition liens of the prepetition secured parties on prepetition collateral on all of the debtors’ property and assets to serve as collateral, as well as superpriority administrative expense claims.

Plastiq filed a bid procedures motion seeking to establish a timeline for the sale of its assets. The debtors asked the court to set a bid deadline for 14 July, an auction on 18 July and a sale hearing on 24 July. The stalking horse asset purchase agreement states that the agreement may be terminated if the asset sale does not close by 31 July. The debtors moved to schedule a hearing on the bid procedures on 16 June, with objections due on 9 June. 

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