In the surprise turn of the week in payments and commerce - it looks like the deal between Urban FT and embattled digital financial services firm Digiliti is on hold and quite possibly off the table entirely.
According to a release issued by Urban FT yesterday (August 29) - talks between the two firms ended abruptly on Monday with a rejection of Urban FT’s offer by Digiliti.
The deal would have given Digility and its subsidiary an immediate line of credit for it to meet all current and ongoing working capital requirements including its upcoming payroll due at the end of this month. That would allow the firms an additional 90 days to negotiate a potential sale of Digiliti’s assets to Urban FT - or a merger of the two firms.
August has particularly difficult for Digiliti. Digiliti’s CEO Jeffrey Mack quit abruptly in early in the month - pushing CFO Bryan Meier into the role as interim CEO. Shortly after that bombshell hit, Digiliti announced that - among other problems - its independent auditors had withdrawn reports for the most recent quarter, strategic options for the year were being considered and that bankruptcy might be an option.
“If the Company (Digiliti) is not able to achieve a combination of such financing and sufficient positive cash flow from operations, in the near term, it may not be able to continue as a going concern,” it noted in a mid-August statement.
But - within a day or two of that news going public - it seemed that Digiliti had caught a break in the form of the Urban FT bid. At the time, Urban FT CEO Richard Steggall noted that despite Digiliti’s difficulties with capital efficiency the firm’s technology and strengths were a natural fit for Urban FT.
“They have attained some good clients with their RDC [Remote Deposit Capture] Service, their Prepaid Program Management Services and their white label mobile applications. We are confident that, with our own offerings and using our platforms, we can deliver enhanced opportunities for their clients, expanded customer penetration and … reduce costs of revenues — thus having a material, positive impact on the gross margin.”
But, it seems that that “positive impact on gross margin” is not in the cards.
After Urban FT submitted a revised offer that would have been binding had it been accepted. Digiliti board rejected it and proposed alternative terms.
Those alternate terms were described by Urban FT and its attorney as “unreasonable and unacceptable under the circumstances,” in a press release about the breakdown of the deal. Moreover - the Digiliti’s board, via their advisors, made it clear it was not interested in negotiating and, in an email, noted that Urban FT is “too far off at this point” for a deal to be concluded in the time frame it is working toward.
So What Went Wrong?
Speaking to Richard Steggall shortly after the deal’s apparent dissolution, PYMNTS learned the issue isn’t just simple reluctance to do a deal at all. Steggall notes that it has become clear over the last 24 hours that Digiliti’s board would vastly prefer to conclude a deal with Urban FT than face a future where it’s ability to “continue as a going concern” is in question.
However, Steggall noted, due to the firm’s already tenuous position, the board’s responsibilities in this case have become far more complex.
“[Digiliti’s] board has responsibility to look out for the interest of all shareholders - not just preferred, but common ones too. But when a company gets into a position where it may not be able to meet its financial obligations as and when they become due - the board’s obligation must switch to looking out for the best interests of the creditors.”
The Urban FT deal would keep the Digiliti business funded for at least the next 90 days through a credit facility extended by Urban FT while the parties continue negotiating a broader transaction. that could either sees the Digiliti assets sold to Urban FT, or one where the two firms complete a merger. If a deal with Urban FT goes through - everything is fine. But, if no agreement can be made after good faith negotiations, Digiliti could potentially face a situation where they’ve taken on more debt and be unable to repay it.
“What happened last night - and early this morning - was the result of Digiliti’s board getting very complex advice from its attorneys and advisors - and an apparent inability to then decide what course of action they are going to take. In the circumstances, I sympathize with the Board, but decisions still need to be made”
This apparent paralysis on Monday evening was enough to end negotiations.
But...It May Not Really Be Over Just Yet
Though the deal is for now stalled - it remains on the table and will until the last day of the month - August 31st and the Urban FT team has not quite given up on Digiliti just yet.
Digiliti has recently - as in within the last 24 hours - has retained new legal counsel to provide them with more relevant advice on the deal put forward by Urban FT. Moreover, Steggall noted - in the last 24 hours the firm’s acting CEO has also reached out to indicate that they would like to continue, and hopefully advance the discussion.
“He is hopeful that we can find some common ground that addresses sensitivities that they have raised while also ensuring that we are not simply putting further funds into a firm that is otherwise unable to function.”
It seems there is much still to be discussed - and while the deal is on hold, that might well change in the next 24 hours that the deal is still on the table.
Stay tuned - updates almost certainly to follow.