8-K: Presto Automation Secures Forbearance Agreement Amidst Liquidity Concerns, Plans Capital Raise

Presto Automation has entered into a forbearance agreement with its lenders, contingent on raising capital, to avoid immediate default and restructure its debt.

Summary

• Presto Automation has entered into a forbearance agreement with its lenders to avoid immediate default on its credit agreement.
• The agreement is contingent on the company raising capital, with different terms applying based on the amount raised.
• If Presto raises at least $6 million by January 29, 2024, the forbearance period extends to February 29, 2024, and the interest rate on the loan will be reduced from 15% to 8% through December 31, 2024.
• Raising $12 million by February 29, 2024, extends the forbearance to September 30, 2024, and includes an additional $3 million loan from the lenders.
• If the company raises $18 million by June 30, 2024, the loan maturity is extended to September 30, 2025, and lenders have the option to convert $5 million of the loan into warrants.
• The company is also pursuing a joint venture for its Touch Business, which is expected to reduce monthly expenses by $0.3 million to $0.7 million.
• Presto's Voice AI technology is currently installed in 122 restaurant locations, with 44 using the most advanced version, where approximately 30% of orders are completed without human intervention.
• The company has contracts for an additional 184 Voice AI installations.
• The company is also pursuing collection of a $11.1 million judgment against XAC Automation.

Sentiment

Score: 3

Explanation: The document indicates significant financial distress and reliance on a large capital raise to avoid default. While there are some positive developments, such as the joint venture and Voice AI rollout, the overall tone is negative due to the company's precarious financial situation.

Positives

• The forbearance agreement provides a pathway for Presto to avoid immediate default and restructure its debt.
• The tiered capital raise structure offers incentives for the company to secure more funding.
• The reduction in interest rates and the option to pay interest in kind (PIK) provide short-term financial relief.
• The formation of a joint venture for the Touch Business is expected to reduce monthly expenses.
• The company has a growing number of Voice AI installations and contracts, indicating market traction.
• The successful judgment against XAC Automation provides a potential source of funds.

Negatives

• The company is facing significant liquidity issues and may not be able to sustain operations without additional capital.
• The forbearance agreement is contingent on raising substantial capital within tight deadlines.
• The company has existing defaults on its credit agreement, including failure to pay a monitoring fee and deliver an approved plan for its Touch Business.
• The company's accounts payable are over $1 million past due.
• The company is required to maintain a minimum unrestricted cash amount of $1 million from January 30, 2024, through February 28, 2024, and $2.5 million from February 29, 2024.
• The company's previous capital raise was insufficient to sustain operations beyond January 2024.

Risks

• The company may fail to raise the required capital to meet the forbearance agreement conditions.
• The joint venture for the Touch Business may not be finalized or may not achieve the expected cost savings.
• The company may not be able to collect the full amount of the judgment against XAC Automation.
• The company's Voice AI technology may not achieve widespread adoption or may face competition.
• The company is subject to various risks and uncertainties, including those related to securing additional capital, regulatory approvals, and market conditions.
• The company is required to develop a strategic plan to address its obligations under the credit agreement if it cannot raise the necessary capital.

Future Outlook

The company's future is heavily dependent on its ability to raise capital and successfully execute its strategic plan, including the joint venture for the Touch Business and the continued rollout of its Voice AI technology. The company is exploring alternatives and in discussions with potential investors to raise capital.

Management Comments

• The Board has considered strategic alternatives for the Touch Business given its desire to focus on the Companys Voice AI product line.
• The Transaction is intended to constitute a Touch Business Plan within the meaning of such term within the Credit Agreement.
• The Company intends to pursue full collection of this award from XAC in Taiwan.

Industry Context

The company's focus on Voice AI technology aligns with the growing trend of automation and AI adoption in the restaurant industry. The move to divest the Touch Business suggests a strategic shift towards higher-growth areas. The company's financial difficulties highlight the challenges faced by technology companies in the competitive restaurant tech market.

Comparison to Industry Standards

• Presto's situation is comparable to other tech companies that have experienced rapid growth followed by financial challenges, such as those in the food delivery and restaurant tech space.
• The company's reliance on a significant capital raise to avoid default is similar to other companies that have struggled with profitability and cash flow.
• The move to form a joint venture for the Touch Business is a common strategy for companies looking to divest non-core assets and focus on core competencies.
• The company's Voice AI technology is competing with other similar solutions in the market, such as those offered by Hi Auto, which is powering 347 Checkers locations.
• The company's need for a forbearance agreement and restructuring is similar to other companies that have over-leveraged or failed to meet financial targets.

Corporate Governance

Legal Proceedings

• The company obtained a favorable verdict in its case against XAC Automation Corp, with a total award of approximately $11.1 million plus $32,000 for appeal costs.
• The company intends to pursue full collection of this award from XAC in Taiwan.

Related Party Transactions

• The joint venture for the Touch Business involves I2BF and Remus Capital, both of which are greater than 5% shareholders of the company.
• The forbearance agreement includes waivers of anti-dilution protection from entities affiliated with Cleveland Avenue and other significant stockholders.

Stakeholder Impact

• Shareholders face significant risk due to the company's financial difficulties and potential dilution from capital raises.
• Employees may be impacted by potential restructuring or layoffs if the company fails to secure funding.
• Customers may experience disruptions if the company's financial situation affects its operations.
• Suppliers and creditors face increased risk of non-payment if the company's financial situation does not improve.
• Lenders are taking on additional risk by providing forbearance and potentially additional funding, but also have the opportunity to convert debt into equity.

Next Steps

• The company needs to secure a capital raise of at least $6 million by January 29, 2024, to avoid the termination of the forbearance agreement.
• The company needs to finalize the joint venture agreement for the Touch Business.
• The company needs to continue the rollout of its Voice AI technology.
• The company needs to pursue collection of the judgment against XAC Automation.
• The company needs to develop a strategic plan to address its obligations under the credit agreement if it cannot raise the necessary capital.

Key Dates

Keywords

forbearance agreement, capital raise, credit agreement, voice AI, joint venture, liquidity, debt restructuring, Touch Business, warrants, Metropolitan Partners Group