CASE SUMMARY: TenFour Seeks Going Concern Sale With Acuative as Stalking Horse; Company Hit by Supply Chain Issues

Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
Press Release
First Day Hearing Agenda

Summary
Alliant Technologies does business as TenFour, which provides subscription-based networking, communications and security services for businesses
Seeks to sell substantially all assets as a going concern to Acuative Corporation
Case would be funded by the use of cash collateral, with the consent of prepetition secured lender Valley National Bank

Morristown, N.J.-based Alliant Technologies, which does business as TenFour, a provider of turnkey, subscription-based networking, communications and security services for businesses, filed for chapter 11 protection today in the Bankruptcy Court for the District of New Jersey. According to the first day declaration of Mark Cantaluppi, the CEO of debtor Technology Keiretsu LLC, which serves as parent of the other debtors, the company filed chapter 11 to effectuate a sale of substantially all of its assets, with Acuative Corporation as stalking horse.

Acuative’s bid includes the payment of $3.25 million at closing, “then additional earn-out payments at twelve and twenty-four months after closing, depending on whether certain revenue targets are met.” Based on recent financial performance and current trends, the debtors say, “it is possible that the final, all-in payment total from the Stalking Horse Purchaser could potentially be $6,000,000.” In addition, the stalking horse would assume certain of the debtors’ liabilities, including all of its capital leases (the debtors’ capital lease obligations were $6.9 million as of Sept. 30). Cantaluppi submits that a several-month marketing and sale process was “ultimately fruitful” and the debtors “now stand on the threshold” of consummating a going concern sale “designed to maximize recoveries for creditors, continue uninterrupted service to the Debtors’ customers, and preserve employment for TenFour’s workforce.”

The debtors seek to conduct an auction on an expedited timeline, cautioning that the debtors “continue to burn cash and liquidity is limited.”

The debtors seek to proceed under subchapter V of chapter 11.

The first day hearing has been scheduled for Thursday, Dec. 23 at 11 a.m. ET.

According to the first day declaration, the debtors have approximately $21.7 million in assets and $21.6 million in liabilities as of Sept. 30, 2021. The company’s prepetition capital structure includes:

• Secured debt:
  
  
  
  • Valley National Bank: $2.4 million
  
  
  
  


• Unsecured debt:
  
  
  
  • Subordinated convertible promissory notes (Jan. 31, 2022 maturity): $6 million
  
  
  • Capital lease obligations: $6.9 million (as of Sept. 30)
  
  
  • Trade debt: $3.3 million (as of Sept. 30)
  
  
  
  

• Equity: Alliant Technologies LLC’s equity is held 99.99% by debtor Technology Keiretsu LLC and 0.01% by non-debtor TenFour LLC.

Valley National Bank and TenFour entered into two forbearance agreements prepetition on Nov. 5 and Dec. 9, each of which required a $50,000 paydown to Valley Bank, with the last agreement running through Dec. 17.

The debtors describe the subordinated noteholders as “rescue” investors, which include Technology Keiretsu, NSG IV Unblocked AIV, L.P. and NSG IV Subsidiary AIV, L.P. Technology Keiretsu also issued a series of convertible subordinated notes to certain members of management. The notes were provided in lieu of bonuses and salary, with $73,000 in total principal outstanding under the deferred salary notes as of the petition date. The subordinated executive compensation notes are subordinated to the Valley National Bank debt, accrue interest (that remains unpaid) of 12% and mature on Jan. 31, 2022.

The debtors are represented by Faegre Drinker Biddle & Reath in Florham Park, N.J. as counsel, Stout Risius Ross as investment banker and Eisner Advisory Group as restructuring and financial advisor. Donlin Recano is the claims agent. The case has been assigned to Judge John K. Sherwood (case no. 21-19748).

Events Leading to the Bankruptcy Filing / Prepetition Restructuring Efforts

The first day declaration says that despite the debtors’ fundamentally strong business, it is “one of the many companies” severely affected by the Covid-19 pandemic and its impact on global supply chains. “While many sectors of the economy have recovered from the pandemic, the IT industry continues to suffer major supply chain shortages,” the first day declaration adds, noting a “major worldwide shortage” of microchips. Toward the end of 2019, the debtors raised approximately $2.1 million of capital from a private investor group and sought to implement a new go-to-market strategy and repay outstanding trade balances and the balance under the letter of credit loan with Valley National Bank.

The company applied for and received a $1.8 million PPP loan, which was forgiven in May 2021 under the CARES Act.

“As the economy ground to a halt during the second quarter of 2020,” Cantaluppi writes, customer payments slowed, TenFour’s operating revenue fell and outstanding payables grew. In response, the debtors’ management initiated an “aggressive” cost control campaign. In July 2020, management salaries were reduced by 20% and many rank and file employees were moved to a four-day work week at reduced compensation.

During the third quarter of 2020, the debtors began negotiations with vendors to structure payment terms on outstanding balances and by September 2020 implemented labor cost settings by furloughing 12 employees, temporarily reducing leadership compensation by 40% and reducing compensation for “most other employees” by 20%. Also in September 2020, the debtors, in consultation with Valley National Bank, arrived at an agreement for the terms of a three tranches, each in the amount of $2 million, of subordinated “rescue capital” from NSG IV Unblocked AIV LP, NSG IV Subsidiary AIV LP and the other investors. This funding allowed the debtors to pay their vendors and landlord and to pay down $350,000 of the Valley indebtedness.

The debtors’ senior management collectively agreed to defer cash compensation of $345,000 that was owed to them in March 2021, and up to an additional $106,000 owed through the remainder of 2021. In lieu of paying their salaries and bonuses in cash, the senior management now holds the subordinated executive compensation notes. By Aug. 1, all employees were brought back to full compensation levels and only five employees remained on furlough. Under the CARES Act, the debtors availed themselves of the employee retention credit program, which allowed the debtors to reduce payments to the IRS for employment taxes by $422,000 in the second quarter of 2021 and by $482,000 in the third quarter.

As an example of the supply chain issues the debtors face, the debtors explain that TenFour entered into a “significant new customer contract” in July 2021, and that usually, the equipment necessary to implement the new system would arrive in less than 30 days, “typically closer to twenty days.” However, “given the current supply delays, TenFour does not expect that its revenue streams will return to normal until at least the second quarter of 2022.” The debtors' management believes that the supply chain interruptions are causing delays in buying decisions, resulting in fewer closing opportunities in the fourth quarter of 2021.

Background

TenFour is a provider of comprehensive turnkey, subscription-based networking and communications services “for companies around the world.” The company handles hardware, software, connectivity, and services from design to deployment to monitoring and problem mitigation. “Founded in 1998 as Alliant Technologies and headquartered in Morristown, N.J., TenFour has a legacy of solving challenging problems in complex IT environments,” the debtors say.

The debtors say that TenFour’s competitive advantage is based on its positioning “at the forefront of the Network-as-a-Service (‘NaaS’) trend,” which it describes as an emerging model for organizations to consume network infrastructure through flexible operating expense subscriptions that bundle hardware, software, management tools, licenses and service into a single package. The company’s comprehensive services include all of the networking and communications technology needed to securely and reliably manage employees and resources paired with “24x7x365” support from TenFour’s “Network Operations Center,” which the debtors note is located at the debtors’ headquarters. TenFour’s NaaS capabilities are built upon its proprietary reference architecture and system designs, allowing the business to efficiently customize and scale its services to meet each customer’s unique needs.

The company’s revenue pipeline includes national retailers and manufacturers “representing key customer demographics with increasing recognition of the compelling advantages of NaaS solutions—proven to be efficiently adapted across distributed environments while offering maximum flexibility with no up-front costs as new locations come online.” TenFour has long-standing relationships with key industry players Cisco and AT&T and notes that it has identified additional partnership opportunities for expanding the debtors’ marketing and service delivery capabilities “specifically for the mid-market.”

The debtors' largest unsecured creditors are listed below: