😬Not Quite WeWork But...😬
One Would-Be Disruptor Falls; One Disruptee Falls. Good Times.
|Dec 18, 2019|| 21|
🚀Another Example of the Tech Hype Machine Getting a Fast and Furious Reality Check (Short “Founder Friendly?”; Long #BustedTech)🚀
We’ve been rather bored with energy and retail distress these days and so we looked on with great interest when Arizona-based Vector Launch Inc. and its subsidiary, Garvey Spacecraft Corporation, filed for bankruptcy in the District of Delaware. Sure, sure, it’s not a big name like McDermott International ($MDR) — the excitement there awaits us in ‘20 — but it’s meaningful nonetheless. Why? Because Sand Hill Road is known for its moonshots. And they often come crashing down to earth. Just not usually in bankruptcy court.
Yet this one did. Vector, a space technology company that was producing rockets and satellite computing technology, has an interesting history. Founded in 2016 by two of the original team members behind Elon Musk’s SpaceX, the company shared Mr. Musk’s vision and penchant for exaggeration. The company launched in 2016 and, in retrospect, the laudatory coverage of the ambition is laughable. Here’s Techcrunch:
With small rockets carrying single 20-40 kg payloads launching weekly or even every few days, the company can be flexible with both prices and timetables. Such small satellites are a growing business: 175 were launched in 2015 alone, and there’s plenty of room to grow. It’ll still be expensive, of course, and you won’t be able to just buy a Thursday afternoon express ticket to low earth orbit — yet.
Customers will, however, reap other benefits. There are less restrictions on space: no more having to package your satellite or craft into a launch container so it fits into a slot inside a crowded space bus. Less of a wait between build and launch means hardware can be finalized weeks, not years, in advance — and expensive satellites aren’t sitting in warehouses waiting for their turn to go live and get that sweet return on investment.
Sounds dope AF, we admit. Even more exciting, Techcrunch reported that Vector hoped to make its first real flights in 2017. At the time, it had raised government grant money (DOD and NASA) and a small amount of angel money. Straight out of the Musk playbook: fund your company and get rich off of the government teat. Brilliant.
But you don’t get government money without pedigreed founders and highfalutin promises to change the world (literally via rockets). Just imagine how that package looks to the outside investment community.
Investors are knocking down the front door looking to get in, he said, though he declined to name any. Perhaps they smell profitability: Vector’s business plan has it cash positive after just a few launches.
Oof. That bit looks REALLLLLLY REALLLLLY bad now, huh? It gets worse.
Here are some of the things that subsequently transpired:
The company finalized an agreement to conduct 21 launches for Finland-based Iceye’s commercial Synthetic Aperture Radar satellite constellation. 👍
Quartz published a flattering piece about the shift to smaller rockets, giving heavy prominence to Vector. 👍
The company won $2.5mm worth of contracts from the Defense Advanced Research Projects Agency (DARPA) and NASA. 👍
The company announced a Tucson headquarters and manufacturing plant, celebrating the potential creation of 200 jobs with the hope of reaching as many as 500; the “direct economic impact of the facility could be $290 million over five years” (citing $2.5mm in contracts and revenue in ‘16 and $160mm-worth of signed contracts for launches “once the plant starts producing rockets…”). 👍
Vector announced “an agreement with York Space Systems, an aerospace company specializing in small and medium class spacecraft, to conduct six satellite launches from 2019 through 2022 with the option for 14 additional launches”; the contract was reportedly worth a staggering $60mm. 👍
These guys were rockin’ and rollin'.
But, wait, there’s more!
After several more government grants and a number of angel infusions, the company finally raised a $21mm Series A round in June 2017 — which included money from vaunted Silicon Valley venture capital firm, Sequoia Capital (as well as Shasta Ventures and Lightspeed).
By August of 2017, the hype machine was in full effect. Here is a CNBC piece championing the company’s first completed “mission.” Around the same time, Techcrunch, The Los Angeles Times and Ars Technica all wrote about the promise of small rockets. Size doesn’t matter, they said!!
By October 2018, the company was back fundraising; it secured a $70mm Series B raise from Kodem Growth Partners, Morgan Stanley Alternative Investment Partners and participation from its existing trio of VC firms. Now nothing and nobody could get in these guys’ way!!!!!
Well, except Sequoia Capital.
Per the company’s CHAPTER 11 BANKRUPTCY PAPERS(!!!!):
“In early August 2019, a member of Vector’s board of directors…appointed by Sequoia…abruptly resigned and informed Vector that Sequoia had decided to no longer support Vector via funding for future operations. Almost immediately after the…resignation, the Debtors’ CEO resigned. The fallout from Sequoia’s decision and the CEO’s resignation spooked the investor community and doomed the Debtors’ efforts to raise additional capital.”
These events could not have been timed more poorly for the Debtors. In addition to preventing the Debtors from attracting new capital, they occurred when the debtors had almost expended all of the capital from their prior capital raises. Indeed, the Debtors’ cash balances barely exceeded their secured debt, which principal amount totaled $11.5 million.
HOLD ON. So, the company lit $70mm of new funding on fire in less than a year and didn’t have enough money to clear its secured debt. And SECURED DEBT? Where was the press release for that?!?!
After evaluating its options, the Board determined that if it did not immediately cease operations, the Debtors would be unable to pay their employees if their secured lenders declared a default and froze the Debtors’ cash (which is precisely what occurred). With no access to capital to fund ongoing business needs and to satisfy the Debtors’ outstanding secured debt, the Board voted to cease operations and to terminate most of the Debtors’ employees and pay all owed wages…
This ain’t exactly WeWork but still. Life comes at you fast: one moment you’re a media darling garnering all kinds of favorable coverage, raising millions upon million of dollars with investors “knocking down the door” and, the next, your pesky venture capitalists are pulling the plug and high-tailing for the exits!
Less than two weeks later, the Debtors’ secured lenders froze the approximately $12 million in cash deposited in the Debtors’ bank accounts as expected. The Debtors’ secured lenders subsequently swept the cash from Debtors’ bank accounts, leaving the Debtors with no cash, a single employee (the acting CEO), and, after assessing fees and other charges, approximately $500k in secured debt. The Debtors’ remaining assets essentially consisted of three leased facilities, transporter-erector launcher, launch vehicle parts (including rocket engines and ground support equipment), satellite computer technology, patents, and other intellectual property.
So much to unpack here.
First, what the hell is a “transporter-erector launcher” and where does Johnny get one?
Second, at what point did this thing sh*t the bed so badly that it needed to tap a credit facility? That it had to (maybe?) jettison its founder-CEO?? Tap bridge financing???
It turns out that TriplePoint Capital LLC committed to lend the company $15mm back in October 2018 alongside the company’s Series B raise (PETITION Note: this is not in and of itself crazy…many startups take on venture debt in conjunction with a fundraise generally as a safety net; usually they hope NOT to use it because they’ll just go on to their next equity raise). The loan was secured by basically all of the company’s collateral and was structured as two draws in equal $7.5mm installments. With the sweep, TriplePoint ensured that its claim would be minimized: at the time of filing, they are owed $500k.
To bridge to a filing, the company secured a $500k bridge loan from Lockheed Martin Corporation — now the proposed stalking horse purchaser. The company also issued $1.6mm in convertible notes in connection with what it thought would be a Series C raise prior to Sequoia backing out. Whoops.
The big question, then, is why did Sequoia so abruptly quit the board and split?* Why, then, did the CEO, James Cantrell, quit the next day? It sounds like there’s a lot more here to uncover:
Mr. Cantrell subsequently filed a lawsuit against Vector claiming that he was terminated. The Debtors dispute Mr. Cantrell’s claims regarding his departure. Moreover, the Debtors believe they hold claims against Mr. Cantrell that they intend to pursue for the benefit of the Debtors’ creditors.
Some shady-a$$ sh*t must’ve been discovered around August 5. Just as fervently as investors were, at one point, trying to invest in this company, parties in interest were now eager to save themselves. Silicon Valley Bank (over $4mm owed) and TriplePoint issued notices of default and swept the Debtors’ cash (PETITION Note: that’s why they say that possession is half the battle!).
Lockheed is the White Knight here salvaging what’s left of this hot mess. It provided the bridge loan; it will provide a $2.5mm DIP (yay bankruptcy pros getting paid!); and it will purchase the debtors’ GalacticSky assets for $4.25mm. The offer is cash and equity.
Interestingly, despite all of this, optimism abounds here. The debtors note that they hope to pursue the Lockheed sale followed by other sales of assets:
If consummated, the Debtors believe that the proceeds from Sales will provide for payment in full of the Debtors’ secured obligations, administrative expense claims, and priority claims. In addition, the debtors believe there will be sufficient funds for (i) a liquidation trust to pursue the Debtors’ claims against certain parties, including its former CEO and (ii) distributions to general unsecured creditors.
That claim against the former CEO ought to be interesting. Stay tuned.😬
*Axios’ Dan Primack wrote:
Per a source: Sequoia decided to stop investing due to a high burn rate and the company not meeting projections. That decision was followed by two lenders opting against giving Vector new debt lines — something Sequoia didn't instruct, but which Vector nonetheless blames on the VC firm.
Have any predictions for 2020 that you want to share with us? Feel free to email us at email@example.com and several lucky writers may see their input published in a future a$$-kicking edition of PETITION. Cheers!
📱New Chapter 11 Bankruptcy Filing — Clover Technologies Group LLC (a/k/a 4L Holdings Corporation)📱
Score one for the mainstream media. Back in July, Bloomberg reported the following:
The value of 4L Technologies Inc.’s debt plunged after the recycler of inkjets and mobile phones disclosed cutbacks by two customers and hired advisers to consider strategic options.
The company, which operates under the name Clover Technologies Inc., brought in law firm Kirkland & Ellis LLP and investment bank Jefferies LLC to evaluate balance sheet alternatives and strategic options, according to people with knowledge of the matter. They cited a July 9 preliminary earnings report that cut guidance and invited lenders to organize and hire their own advisers. The people asked not to be identified discussing the confidential report.
Confidential? In the restructuring space?? HAHAHAHAHA. The company’s term loan had been quoted in the high 90s prior to the earnings update; it fell to the mid 70s. Per Bloomberg:
The term loan, which has around $693 million outstanding, was issued to fund a $178 million dividend to shareholders in 2014, and to refinance its existing debt and pay fees and expenses related to the transaction, according to a ratings report at the time.
Dividend to shareholders? You betcha. Golden Gate Private Equity Inc. bought out the company in 2010. Query this: what was the equity check they wrote? How much of that equity check was covered by that dividend recapitalization? 🤔
It doesn’t matter. The company and its affiliate debtors filed a (straddle) prepackaged bankruptcy on December 17, 2019. Pursuant to the proposed plan, term lenders will exchange the outstanding $644mm term loan debt for equity in the company, $80mm of take-back term paper and “excess cash” from, among other things, the $215mm sale of the Clover Imaging Group business segment (all of which, if you believe the debtors’ valuation, equates to a 65-77% recovery to lenders). Nobody seems primed to go after Golden Gate for any dividends given that this deal appears wrapped in a bow (though there has been an independent director appointed and he has retained counsel…wink wink). Indeed, they’re actually getting warrants for being good boys. Preserving upside is low key slick.
In fact, this thing is SO CONSENSUAL that people feel comfortable cracking jokes. Per the company:
More than six months of stakeholder engagement and coordination finds Clover on the brink of making the impossible the possible—landing the “Triple Lindy”—a dive so difficult that even the great Thornton Melon had his doubts. With two of three “diving boards” already in play, these cases are filed on the backs of (1) a $50 million acquisition; (2) a $215 million sale; and (3) an agreed upon prepackaged restructuring and recapitalization.
Are we witnessing the PETITIONIZATION of first day filings or are we giving ourselves too much credit? Either way, this reference (⬆️)is B.E.A.U.T.I.F.U.L.
Clover completed its acquisition of Teleplan International N.V. for $50 million on December 4, 2019. And, just hours before filing these cases, Clover closed the $215 million sale of its printer supply services business to NEP. The foundation for these transactions, as well as a holistic balance sheet restructuring, is a restructuring support agreement and a prepackaged plan supported by more than 70% of Clover’s secured lenders and its equity sponsors. It represents a deliberate effort by Clover and its sponsors, in the face of shifting market trends, customer contraction, and a May 2020 maturity, to proactively organize stakeholders in an effort to truly maximize value.
It’s like all of the parties in interest are like:
Which is particularly amusing because we’re talking about a company that, prior to the aforementioned sale, had, since 1996, been in the business of (i) refurbishing and reselling toner cartridges (the Imaging Business) and (ii) servicing after-market technology devices via trade-in, resale and buyback programs (as well as repair and reclamation)(the Wireless Business). Sexy sh*t!!
Disrupted sh*t!! Per the company:
Despite Clover’s success in the technology device industry and its competitive market share, industry-wide changes have directly and negatively affected Clover’s ability to provide services to some of its largest customers. Major OEMs have exponentially grown or consolidated, and wield more influence than ever before. These consolidated OEMs have introduced aggressive pricing programs and imposed rigorous quality standards, reducing the demand for after-market suppliers and remanufacturers like Clover. Technical progress has also taken its toll on Clover—as a result of the dramatic improvement in the quality of mobile devices, devices remain in the market longer, resulting in decreased demand for remanufactured and remarketed devices. And in June 2019, Clover lost two major customers.
Naturally, Clover doesn’t disclose who those two customers are. But, have no fear folks!! Bankruptcy folks already disclosed this!!! In August, The Wall Street Journal reported:
Although Clover didn’t reveal the names of the major companies referenced in the disclosure, AT&T Inc. is the major wireless-segment customer, while Xerox Holdings Corp. is the major imaging-segment customer, the people continued.
Power to “the people”!!
The company hopes to have the plan confirmed on or around January 21, 2020; it will use its lenders’ cash collateral to fund the cases until then, obviating the need for DIP financing. Another quick one in the books for Kirkland & Ellis LLP! 😎
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
McDonald Hopkins LLC, through its Chicago office, seeks an energetic and ambitious associate to join its Business Restructuring Services Department. The ideal candidate will have up to 4 years of law practice experience; intelligence, drive, creativity, and adaptability; as well as an interest in bankruptcy and restructuring matters. Interested candidates should apply here.
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