Wed 06/22/2022 12:36 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
 
Summary
Storcentric and its affiliates have developed software and security systems to mitigate cybersecurity threats to avoid compromising data
Requests $5 million in priming DIP financing from third party Serene Investment Management LLC
Seeks to run sale process targeted to end by mid-September
 
Storcentric Inc., a Sunnyvale, Calif.-based developer of software and security systems designed to mitigate cybersecurity threats to ensure data is not compromised, filed for chapter 11 protection on Monday, June 20 in the Bankruptcy Court for the Northern District of California, seeking to run a sale process. The case would be funded by $5 million of priming DIP financing from third party Serene Investment Management LLC, to “provide an opportunity to consummate a going concern sale of the Debtors and for the Debtors to confirm a plan of reorganization.” The DIP financing is conditioned on the filing of a bid procedures motion by July 11 and sale consummation by Sept. 9.

The first day hearing has been scheduled for today, June 22 at 5 p.m. ET.

The debtors are represented by Jones Walker in Atlanta and New Orleans as counsel and Force 10 Partners as financial advisor. Donlin Recano is the claims agent. The case has been assigned to Judge M. Elaine Hammond (case number is 22-50515).

Prepetition Capital Structure

The company reports $10 million to $50 million in both assets and liabilities. The company’s prepetition capital structure includes:
 
  • Secured debt:
    • Fixed Rate Senior Notes Series 2020-3 (Collateralized Loan Insurance Program) (UMB Bank as trustee): $25 million (June 30 maturity date)
  • Unsecured debt:
    • PayPal: $53,000
    • Related party line of credit (insiders): $417,000
    • Related party promissory note (current investor and board member): $2 million (plus $60,000 of interest as of Dec. 31, 2021)
    • Related party subordinated convertible promissory notes: $1 million

The debtors have no cash on hand.

The debtors’ proposed financial advisor, Force 10, prepared a preliminary going concern valuation of the debtors saying the value of the bank group’s collateral in excess of $35 million. The note group’s insurance binder has said that the initial collateral value was $70 million.

UMB Bank is trustee under the notes and Newlight Capital LLC is servicer. Peleus Insurance Company has issued a lender collateral residual value insurance policy to collateralize payments under the notes and equal to the initial principal amount of the notes. The insurance policy expires Feb. 15, 2023.

The insiders that provided a line of credit in February 2020 also received approximately $10 million in series 2 convertible preferred stock warrants with an exercise price of $0.0001 per share, which expire 10 years from the date of grant. The fair value of the warrants at issuance was $800,000.

The promissory note provided by an investor and board member included warrants to purchase Series 2 convertible preferred stock with an exercise price of $0.117 per share with a combined fair value of $300,000.

The related party subordinated convertible promissory notes were, issued in 2017 and have the conversion features below:
 

The debtors also have entered into six series of Simple Agreement for Future Equity, of SAFE, transactions, which they classify as a liability because they require the company to settle the obligation by transferring assets (the company’s stock) to the holder of the SAFE. Each series of SAFE financing had its own conversion metrics and termination events, with a total liability of $10.9 million.

Events Leading to the Bankruptcy Filing

The debtors have been operating at a loss “for some time,” and have stayed afloat through prepetition loan advance and forbearance from their secured lender over the past year. Despite efforts to deleverage and enhance liquidity prepetition, the Covid-19 pandemic “took a devastating impact on the Company’s business,” including causing the closure of the company’s assembly and integration facility. The company attempted an initial public offering by filing two confidential S1s with the U.S. Securities and Exchange Commission, but that the “market conditions eliminated a traditional IPO path.” Subsequently, in the first quarter of 2022, Storcentric turned to an alternative solution to access the public markets, during which time “several” special purpose acquisition companies, or SPACs, approached the company. The debtors signed a letter of intent to be acquired by a SPAC in February 2022 that was updated in April 2022, pursuant to which the SPAC sponsors were working to “assemble bridge financing that would satisfy the capital needs of the business,” including an additional $2 million SAFE investment. However, the funding failed to materialize, and the debtors “notified the servicer of the bonds of the failed funding and refocused its attention to payroll,” putting the company in payment default and accelerating the note. Throughout this time, Storcentric used merchant cash advances and SAFE-type investments for funding. The debtors also pursued other options including asset-based lending, but with the upcoming June 30 maturity on the UMB note, the company has not been able to find any sources of new investment.

Background

Storcentric provides independent data management and storage services, focused on data security, mobility and governance. More than 95% of StorCentric’s revenue was generated from the sale of data management and storage solutions and related support and maintenance agreements over the past four fiscal quarters. The company’s main office is in Sunnyvale, Claif., with another office in Colorado Springs, Colo. The company also has employees that work in offices in Canada and the United Kingdom, and also has remote employees, including in India. The debtors have 125 full-time employees, and also supplements its workforce through independent contracts to assist the engineering, finance, IT, marketing, operations and sales departments. As of the petition date, the debtors were utilizing 24 independent contractors. None of the debtors’ employees are represented by a union or covered by a collective bargaining agreement.

The company’s corporate organization chart is below:
 
 
The debtors' largest unsecured creditors are listed below:
 
10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Libertas Funding Greenwich, Conn. Loan $   2,756,101
JabilInc. dba Stack Velocity
Squire Patton Boggs (US) LLP
New York Litigation 2,235,145
Comerica Bank Dallas Acquisition 1,239,500
Incap Electromics Slovakia s.r.o Vavrecka, Slovakia Trade 1,005,185
Crowell & Morring LLP Los Angeles Professional
Services
723,941
Exertis Enterprise Hampshire, U.K. Trade 659,656
BPM LLP Walnut Creek, Calif. Professional
Services
539,657
EID Loan Washington Loan 500,000
Adysis Corporation Sunnyvale, Calif. Rent 394,182
Source Support Services Inc. Lawrenceville, Ga. Trade 195,341

The case representatives are as follows:
 
Representatives
Role Name Firm Location
Debtors' Counsel Mark A. Mintz Jones Walker New Orleans
John W. Mills, III Atlanta
Debtors' Claims Agent Nellwyn Voorhies Donlin Recano Brooklyn, N.Y.
Debtors' Financial Advisor Adam Meislik Force 10 Partners Irvine, Calif.
Counsel to Serene Investment
Management, as DIP Lender
Vadim J. Rubinstein Loeb & Loeb New York
Lance N. Jurich Los Angeles
Counsel to UMB Bank,
as Prepetition Lender
Paul S. Jasper Perkins Coie San Francisco
Tina N. Moss New York
United States Trustee Trevor Ross Fehr Office of the
U.S. Trustee
San Jose, Calif.
Elvina Rofael
Jason Blumberg

DIP Financing Motion

The debtors seek approval of $5 million in priming DIP financing ($1.5 million on an interim basis) from Serene Investment Management LLC. In a declaration in support of the DIP financing, Adam Meislik of Force 10 Partners, the debtors’ proposed financial advisor, says that the debtors approached Newlight Capital LLC, the servicer of the debtors’ fixed rate senior notes 2020-3 and Argo Insurance, the risk underwriter of the notes (along with keeping indenture trustee UMB Bank informed) to advance additional capital to meet payroll in June. However, despite expressions of interest from potential financing sources, the only “feasible” term sheet was from Serene. Ultimately, on June 20, the note group consented to the debtor obtaining $1 million of debt from Serene, with priority over the notes.

“The DIP Lenders agreed to permit the Pre-Petition Draw with the understanding the Debtors would request a ‘roll-up’ of the Pre-Petition Draw into the DIP Facility,” according to the motion, which also says that the “Pre-Petition Draw enabled the Debtors’ to continue as a going concern and file these chapter 11 cases.”

The DIP financing bears interest at a “Make Whole of $1 million or full DIP Facility Amount at Maturity or a sale closing” to be “in proportion to amounts actually funded.” There is a $25,000 monthly default rate. The loan matures on the earlier of six months after the petition date, 30 days after entry of the interim order if a final order has yet to be entered or other customary events.

Meislik states that despite the debtors’ financial challenges, they are “well-positioned to capitalize on continued growth in the data storage and security markets.”

Meislik says that the note group’s secured claim is protected by a “substantial” equity cushion, as it is secured by $9.3 million of inventory, $1.4 million in accounts receivable, net of estimated uncollectible amounts, furniture, fixtures and equipment, and goodwill, intellectual property, intangibles and other collateral. The debtors do not propose any adequate protection for UMB, asserting that it is oversecured. The debtors also assert that the insurance policy issued in connection with the notes provides adequate protection.

The carveout for professional fees is $85,000.

The proposed budget for the use of the DIP facility is HERE.

The DIP financing is subject to the following milestones:
 
  • July 11: Filing of bid procedures motion;
  • Aug. 25: Entry of bid procedures order (which must include an “Allocation Requirement” reasonably satisfactory to the DIP lender); and
  • Sept. 9: sale consummation.

There is no challenge period.

Other Motions

The debtors also filed various standard first day motions, including the following:
 
 
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