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October 27, 2020 – NS8 Inc. (“NS8” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12702. The Debtor, a Las Vegas-based fraud protection platform, is represented by Stanley B. Tarr of Blank Rome LLP. Further board-authorized engagements include (i) Cooley LLP as general bankruptcy counsel, (ii) FTI Consulting, Inc. as financial advisor and (iii) Stretto as claims agent.
The Debtors’ lead petition notes between 200 and 999 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Hansen Networks ($298,976), (ii) Engineer Better ($36,322) and (iii) Paloalto Networks ($29,988).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Wikel Declaration” [Docket No. 9]), Daniel P. Wikel, the Debtors’ chief restructuring officer, detailed the events leading to NS8’s Chapter 11 filing. The Wikel Declaration provides: “NS8 was co-founded in 2016 by Adam Rogas ('Rogas') and five others with the guidance and assistance of Mach37, a Tysons, Virginia based start-up accelerator designed to facilitate the creation of the next generation of cyber product companies….
The Debtor has historically been dependent on its ability to raise additional capital to develop its technology, expand its workforce and maintain operations. As a result of the funding secured through its Seed Round, Convertible Notes and part of its Series A Round, by November 2019, NS8 had grown to include more than 54 employees and 6 office locations, including its corporate headquarters in Las Vegas, Nevada. Accordingly, and nominally to fund continued growth of its workforce, NS8 turned to the venture capital investment market again in late 2019 and throughout 2020 to raise the rest of its Series A Round. As of May 30, 2020, NS8 had grown to employ approximately 215 employees at office locations in Las Vegas, San Francisco, San Ramon, Miami, Amsterdam, Singapore and Melbourne. By June 2020, NS8 had obtained approximately $123 million in investor funds in the aggregate in connection with its Series A Round. Of these funds, approximately $72 million were utilized to capitalize a tender offer in which early stage investors were provided the opportunity to redeem their equity interests in the Debtor. Rogas received $17.5 million in proceeds from that tender offer, personally and through a company he controlled. The remaining funds were purportedly set aside for working capital purposes.
Unfortunately, it appears that the Series A Round was obtained by Rogas through deception and fraud. It is now clear that throughout NS8’s history, Rogas had intentionally and grossly overstated its revenue, gross margin and the extent and profitability of NS8’s operations to current and prospective investors, the other members of the senior management team, the board of directors and corporate partners. In August 2020, the Debtor’s newly-appointed President and Controller embarked on a process to rationalize and improve NS8’s internal controls and financial reporting mechanisms. Despite outwardly welcoming the endeavor, Rogas delayed the effort to complete reporting for July 2020 and cede his customary control over the Debtor’s bank accounts. Ultimately, the reasoning behind Rogas’s reticence became apparent – while Rogas had represented to NS8’s finance team that the company possessed over $60 million in cash on hand, in fact, NS8 was on the precipice of a severe liquidity crisis. Rather than attempt to explain the discrepancy, Rogas abruptly resigned from NS8 on September 1, 2020. NS8’s operations were thrown into turmoil.
The magnitude of Rogas’s alleged wrongdoing is outlined in a complaint filed against Rogas by the Securities and Exchange Commission in the United States District Court for the Southern District of New York on September 14, 2020 (the 'Complaint'). The SEC alleges in the Complaint that Rogas maintained control over the bank account into which NS8 received revenue from its customers and periodically provided monthly statements from that account to NS8’s finance department so that NS8’s financial statements could be created. The Complaint notes that Rogas also maintained control over spreadsheets that purportedly tracked customer revenue, which were also used to generate NS8’s financial statements. The SEC further alleges in the Complaint that Rogas altered the bank statements before providing them to NS8’s finance department to show tens of millions of dollars in both customer revenue and bank balances that did not exist. According to the Complaint, in the period from January 2019 through February 2020, for example, between at least approximately 40% and 95% of the purported total assets on NS8’s balance sheet were fictitious. During that same period, the SEC alleges in the Complaint that bank statements that Rogas altered reflected over $40 million in fictitious revenue and that during the fundraising process, Rogas provided the falsified bank records he had created to auditors who were conducting due diligence on behalf of potential investors. On September 17, 2020, Rogas was arrested and charged with one count of securities fraud, one count of fraud in the offer or sale of securities and one count of wire fraud. While the charges against Rogas remain pending at this time, I am informed that absent dismissal, they could result in a lengthy prison term.
In the immediate aftermath of these shocking revelations, and while assisting governmental authorities with all aspects of their investigation, the Debtor’s management and Board of Directors sought to address the Debtor’s looming liquidity crisis. NS8 shifted quickly away from its growth strategy into an aggressive cash preservation mode and began evaluating an orderly wind-down. NS8 retained restructuring counsel, Cooley LLP ('Cooley'), and FTI (who also began providing the Debtor with forensic accounting services) and began evaluating the short-term financial condition of the business, the state of cash flows and the viability of various strategic alternatives. The Debtor determined that it could not continue operating as a going concern in the ordinary course, and in order to conserve liquidity, a major reduction in NS8’s workforce was implemented in mid to late September 2020. The Debtor’s employee headcount has been reduced to six (6) as of the Petition Date. In connection with these aggressive efforts to preserve liquidity and in connection with its workforce reduction, the Debtor has also vacated all of its various office locations as of the Petition Date.
Contemporaneously with these efforts, FTI and members of the Debtor’s Board of Directors sought to maximize the value of the Debtor’s assets through a marketing process targeted at potential strategic acquirers. Under my direction, approximately 20 entities have been contacted, many of whom received due diligence information (including demonstrations of the utility of NS8’s technology) and management presentations. Although no formal offers have been received, multiple parties have expressed interest in consummating a Sale, albeit not for much value. I am optimistic that at least a portion of the Debtor’s assets along with some employees can remain operative as part of a going concern."
In a September 17, 2020 press release, the United States Attorney's Office for the Southern District of New York stated: "Audrey Strauss, the Acting United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation ('FBI'), announced today that Adam Rogas, the co-founder and former CEO, CFO and member of the board of directors of Las Vegas-based cyberfraud prevention company NS8, Inc. ('NS8'), was charged in a Complaint in Manhattan federal court with securities fraud, fraud in the offer and sale of securities and wire fraud. Rogas used fraudulent financial data to obtain over $123 million in financing for NS8, of which he personally obtained approximately $17.5 million.
FBI Assistant Director William F. Sweeney Jr. said: 'It seems ironic that the co-founder of a company designed to prevent online fraud would engage in fraudulent activity himself, but today that’s exactly what we allege Adam Rogas did. Rogas allegedly raised millions of dollars from investors based on fictitious financial affirmations, and in the end, walked away with nearly $17.5 million worth of that money.'"
The release further explained: "Rogas maintained control over a bank account into which NS8 received revenue from its customers and periodically provided monthly statements from that account to NS8’s finance department so that NS8’s financial statements could be created. ROGAS also maintained control over spreadsheets that purportedly tracked customer revenue, which were also used to generate NS8’s financial statements."
Goals of the Chapter 11 Filings
The Wikel Declaration further provided, "The Debtor, in consultation with its advisors, determined that the immediate commencement of the Case was the best path forward, and that the pursuit of a Sale of the Debtor’s assets, development of its litigation and asset recovery plan and simultaneous expeditious investigation and prosecution of claims against Rogas and others would deliver maximum recoveries to NS8’s stakeholders. With the assistance of FTI and Cooley, under the guidance of the board, NS8 sought and procured a debtor-in-possession financing facility to bolster its liquidity and enhance the estate’s ability to accomplish these essential tasks. In connection with this process, I understand that the Debtor’s non-operating Foreign Affiliates are engaged in a parallel dissolution process in the Netherlands."
According to the Wikel Declaration, "Prior to the Petition Date, the Debtor did not incur any secured indebtedness. In the ordinary course of business, the Debtor incurred unsecured indebtedness to various suppliers, trade vendors, landlords, utility providers and services providers, among others. As of the date hereof (the 'Petition Date'), the Debtor’s estimated outstanding unsecured indebtedness is approximately $600,000, which includes claims held by investors. In addition, numerous parties likely possess unliquidated claims against the Debtor arising from the various misrepresentations made by Rogas relating to the extent and nature of the Debtor’s prepetition operations….
Prior to the Petition Date, NS8’s operations were financed primarily through the sale of convertible preferred stock. NS8 conducted at least four (4) securities offerings prior to the Petition Date. Throughout 2016 and 2017, NS8 raised approximately $9.0 million from investors (the 'Seed Rounds'). In early 2019, NS8 raised approximately $11 million from investors through the sale of convertible notes (the 'Convertible Notes') and certain investors/institutions also exchanged holdings between one another. In late 2019 and the first half of 2020, NS8 raised over approximately $123 million from investors through the sale of preferred stock (the 'Series A Round')."
The Debtor's largest common shareholders include Adam Rogas (1,202,584 or 37.9%); NS8 FP LLC (904,758 or 28.5%); David William Hanna Trust 10‐30‐89 (524,412 or 16.5%); and Eric Kay (320,000 or 10.1%).
About the Debtors
According to the Debtors: “Our end-to-end protection platform combines advanced data analytics with real-time scoring to outsmart threats and approve more orders so you can focus on growing your business without the fear of fraud."
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