CASE SUMMARY: Facing ‘Severe Liquidity Crisis,’ Avaya Use of Convertible Note ‘as a Weapon,’ collab9 Seeks to Run Sale Process

Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Notice

Summary
collab9 is a cloud security and unified communications services provider
Attributes filing to liquidity challenges, which it pins primarily on contract party Avaya, who the debtor says deceived the debtor in an attempt to “sabotage” its business
Seeks to run a sale process that would be funded by $1.2 million of new money DIP financing from SecureComm, which purchased certain debt from the debtor prepetition and lent other funds

collab9, LLC, a Torrance, Calif.-based a cloud security service provider for managed voice, collaboration, conferencing and contact center services for U.S. public sector and U.S. commercial customers, filed for chapter 11 protection on Friday, March 19, in the Bankruptcy Court for the Central District of California. The bankruptcy has roots in collab9’s deteriorated business relationship with Avaya Holdings, Inc., which the debtor says was at the heart of its operations and was unilaterally terminated prepetition by Avaya. The debtor’s allegation that Avaya has acted in bad faith with a “hidden goal” of obtaining collab9’s expertise to enter the public sector cloud-based “unified communications” market is the subject of separate and ongoing arbitration. For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the collab 9 chapter 11 filing and sale process Request a Trial here.

The debtor seeks to run a sale process that would be funded by DIP financing from SecureComm. LLC (the members of which - Dollab, LLC and Dinco, Inc. - are the members of the debtor). SecureComm purchased a $200,000 loan issued by Dollab in February 2021, and funded an additional $380,000 to the debtor earlier this month in the lead-up to the bankruptcy filing. Absent such funding, collab9 says it would have already had to cease operating. SecureComm is slated to provide approximately $1.2 million of DIP financing, plus a rollup of the $580,000 in prepetition debt.

Because of the “mission critical nature of collab9's communications services to essential government agencies,” the debtor says it is forging a path forward including through the DIP financing, “a commitment for additional essential financing,” and implementation of a sale process.

“As of today, collab9 believes it has built a valuable business and platform, cultivated important relationships, and entered significant contracts,” the debtor says. “However, faced with a liquidity crisis, and in order to maintain business operations, preserve and protect what it has built, maximize the value of its business and assets, and ensure continuity of operations of critical government communications systems and avoid extended (i.e., several months) service interruptions, it was necessary for collab9 to commence this chapter 11 case.”

The first day hearing has been scheduled for Wednesday, March 24 at 1 p.m. ET.

The company reports $1 million to $10 million in assets and $10 million to $50 million in liabilities. The company’s prepetition capital structure includes:

• Secured debt:
  
  
  
  • Dollab February 2021 loan (assigned to SecureComm): $200,000
  
  
  • SecureComm March 2021 loan: $380,000
  
  
  
  


• Unsecured debt: $20 million
  
  
  
  • Avaya Inc. convertible unsecured note (disputed): $10 million
  
  
  
  

• Equity: The debtor’s equity is held equally by Dinco Inc. and Dollab, LLC.

The debtor says that it obtained the prepetition secured loans from insiders and needed “immediate” funding for operations and professional fees associated with anticipated litigation against Avaya and the chapter 11 case, and it was not able to obtain funding from other sources.

The debtor is represented by SulmeyerKupetz in Los Angeles. The case has been assigned to Judge Ernest M. Robles (case number 21-12222).

Background and Events Leading to Bankruptcy

Collab9 is a unified communications as a service, or UCaaS, company, that provides “best-of-breed, cloud-based services to those that wish to migrate their unified communications (‘UC’) infrastructure to a managed, contractor-owned solution that resides off the customers’ premises,” according to the first day declaration. The company’s secure unified communication services follow strict federal guidelines for voice, video, collaboration services and contact center solutions for U.S. public sector and commercial customers.

The company houses its servers and equipment in two Equinix data center facilities in Los Angeles and Chicago. collab9 intends to maintain and continue the data center operations at these facilities as well as its Network Operations Center in Boulder, Colo.

The company currently provides critical communication services to U.S. Customs and Border Protection, hosting the internal call centers for CBP’s internal human resources, the CBP Information Center, and the Traveler Communications Center. collab9 also provides critical services to U.S. Health and Human Services, the Defense Nuclear Facilities Safety Board and the CenturyLink Internal Helpdesk for the Commonwealth of Pennsylvania. The prime contractors on federal contracts under which collab9 provides services include Verizon (HHS) and Presidio (CBP and DNFSB).

According to the debtor, collab9 was one of the first companies to receive Federal Risk and Authorization Management Program, or FedRAMP, authorization for unified communications as a service in 2016, adding that the FedRAMP authorization process is costly and time consuming and requires a high level of engineering expertise. The debtor also stresses that the lead time required for collab9 to deploy communications services from old telephone technologies to cloud hosting can be many months, or even years, due to coordination with the customer and multiple vendors, and resolving unpredictable connectivity issues.

The company attributes the bankruptcy filing to a “liquidity crisis,” with the bulk of blame pointed in the direction of Avaya, who the debtor accuses of deceiving and attempting to “sabotage” collab9’s business. In August 2017, collab9 and Avaya entered into agreements centered around leveraging collab9’s experience with FedRAMP to obtain FedRAMP compliance for Avaya’s UC products. Collab9 committed to Avaya that it would be FedRAMP authorized by Oct. 8, 2017. In support of the agreements, Avaya lent the debtor a $10 million convertible note, and collab9 repurposed “a large percentage” of its business toward Avaya.

The debtor accuses Avaya Director of Cloud Service Development and Delivery Patrick Goins of misrepresenting himself as an “advocate” of collab9 while “repeatedly” attempting to gain access to the debtor’s FedRAMP-related trade secrets, despite assurances that Avaya’s internal competing platform was no longer being developed and that the collab9 platform was Avaya’s chosen route to market. “Just months after signing the agreement with collab9,” however, Avaya launched its own process of seeking FedRAMP authorization without consulting or informing collab9. In the meantime, “believing that their contract counterparty was acting in good faith,” collab9 moved ahead with building its infrastructure and marketing to potential government customers.

In May 2020, “after collab9 and Avaya were poised to secure a position as a leader in the federal marketplace and were poised to reap great rewards based on the previous three years of hard work,” the debtor says, “Avaya notified collab9 that it was winding down its relationship with collab9 and immediately beginning the process to transition all joint business opportunities and its existing customers hosted by collab9, including Loudoun County, from collab9 to Avaya’s internal platform, which they said was finally ready.” The customers collab9 had been marketing its products and services to, “and the entire focus of collab9's prospects and operations,” were through Avaya, the debtor says, adding that, “for Avaya to pull the rug out from under its relationship with collab9, and for Avaya to terminate at the time that it did, was egregiously damaging to collab9.”

Ultimately, Avaya’s $10 million convertible note would be used as a “weapon” to prevent collab9 from obtaining the capital necessary to keep its doors open and ensure continuity of operations,” the debtor says. With capital running out in February 2021, and with the only source of funds coming from the current interest holders of the company, “a Chapter 11 filing became mandatory because of the need to seek the debt financing's approval under the Bankruptcy Code and the protection of the law from any further destructive action that Avaya might take, particularly in consideration of the filing of the Arbitration against them which seeks a recovery of eight figures.”

The debtor's largest unsecured creditors are listed below: