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December 15, 2020 – The Court hearing the NS8 case issued a final order authorizing the Debtor to (i) access $10.0mn in debtor-in-possession (“DIP”) financing and (ii) continue using cash collateral [Docket No. 165]. The DIP financing is being provided by Alter Domus in two tranches: (i) an $8.0mn Tranche A and (ii) a $2.0mn Tranche B, across the two term loans. On October 29th the Debtor was authorized to access $4.0mn of the facility on an interim basis [Docket No. 43].
The Debtor’s DIP financing motion [Docket No. 11] notes, “The Debtor has an urgent and immediate need to obtain post-petition financing. The Debtor does not have sufficient funds on hand or generated from its business to fund operations or the Case. Without the post-petition financing and the use of cash collateral that will be provided under the DIP Loan Agreement and the proposed DIP Orders, the Debtor would not be able to maintain its limited remaining operations (including paying its remaining employees), fund its post-petition expenditures) or pay the expenses necessary to administer this Case pending the outcome of an orderly sale process, asset recovery actions and a wind-down of its remaining operations that will maximize value for all constituents. Absent adequate funding, the Debtor would be required to cease operations and liquidate on a piecemeal basis, causing irreparable harm to the Debtor and its estate.”
Alternative financing specialist Alter Domus was the only source of financing, and the DIP facility comes with interest rates (15%-20% for Tranche A and 2x amount borrowed for Tranche B, see further below) that reflect the risk associated with lending to a fraud-stricken business with limited revenues and a very dire liquidity position. In a declaration in support of the DIP financing, investment banker FTI Consulting notes: “Initially, FTI tested the market by contacting mid-size and large traditional third party institutional lenders. However, it became apparent that such lenders would not be interested in providing financing to the Debtor, due to the Debtor’s limited assets and the discovery of the fraud that gave rise to the instant Case.
Accordingly, FTI contacted approximately ten (10) entities in the distressed and alternative lending industry, as well as the major investors of the Debtor, to gauge their interest in providing post-petition financing to the Debtor. Of those solicited, three (3) institutions provided proposals for third party DIP facilities and one (1) group of investors provided a proposal for a subordinated DIP facility, both of which were intended to supplement the Debtor’s post-petition liquidity needs. Indeed, no parties other than the DIP Lender provided a term sheet or expressed an interest in providing such financing under the circumstances, at the necessary borrowing limit, and in the time frame required by the Debtor given its liquidity issues.
As of the Petition Date, the Debtor lacks sufficient funds to operate and pursue an orderly asset and litigation recovery plan that strives to benefit all constituents harmed by this unfortunate situation. Moreover, the Debtor does not anticipate generating material funds from its operations to provide sufficient runway to achieve its Chapter 11 goals, which include (i) consummating a fast-track sale of some or all of its assets, (ii) investigating and prosecuting asset recovery claims, including but not limited to Chapter 5 claims against Rogas and others, (iii) assisting governmental authorities in connection with the Debtor’s ongoing investigation and (iv) completing an orderly wind-down of the Debtor’s affairs. Unless the Debtor obtains adequate additional funding, I understand that the Debtor would likely be forced to immediately convert this Case to Chapter 7 or dismiss the Case, resulting in a disorganized liquidation and dissolution that would cause irreparable harm to the estate and its stakeholders.”
Key Terms of the DIP Facility:
- Borrower: NS8 Inc.,
- Agent: Alter Domus (US) LLC
- DIP Lenders: The lenders from time to time party to this Debtor in Possession Senior Secured Multi-Draw Term Loan Promissory Note
- Type of Amount of DIP Facility: Term Loans in an aggregate principal amount not to exceed $10.0mn (comprised of $8.0mn of Tranche A Term Loans and $2.0mn of Tranche B Term Loans) (the obligations thereunder, the “DIP Commitments”), with such amount prior to entry of a Final Order not to exceed $4.0mn.
- Maturity Date: ”Maturity Date” means the earliest to occur of (i) the Stated Maturity Date, (ii) the first Business Day following the date on which the amount on deposit in the Recovery and Collateral Account equals or exceeds $14,000,00.00, (iii) the date the Bankruptcy Court orders the conversion of the chapter 11 Case to a liquidation under chapter 7 of the Bankruptcy Code, (iv) the acceleration of the Term Loans and termination of the DIP Lenders commitment to make the Term Loans, (v) the substantial consummation of a plan of reorganization filed in the chapter 11 Case that is confirmed pursuant to an order of the Bankruptcy Court, (vi) the date that is thirty-five (35) days after the Interim Order has been entered if the Final Order has not been entered by such date and (vii) any other event set forth in the Financing Orders and/or the other DIP Documents as triggering a Maturity Date.
- Interest Rates:
- The Tranche A Term Loans shall bear interest on the principal amount thereof from time to time outstanding, from the date of the advance of such Tranche A Term Loan until repaid, at a rate per annum equal to 15.00% per annum; provided that at the option of the Borrower (exercised by written notice delivered to the Agent not less than three (3) Business Days prior to the occurrence of an Interest Payment Date), all (but not less than all) interest payable on any Interest Payment Date may be paid in kind through the issuance of additional Tranche A Term Loans at the rate of 20.00% per annum.
- The Tranche B Term Loans shall bear interest on the principal amount thereof from time to time outstanding in an amount equal to two times the outstanding principal amount of such Tranche B Term Loans.
- Default Rate: 2.00% per annum above the rate of interest otherwise applicable.
- Administration Fees: The Borrower shall pay to the Agent for its own account the fees provided for in the Agent Fee Letter (as such term is defined in the DIP Loan Agreement).
- Put Option Premium: The Borrower shall pay to the DIP Lenders a put option premium equal to $750,000, which shall be added to the principal balance of the outstanding Tranche A Loans, upon entry of the Interim DIP Order.
- Early Termination Premium: If the Borrower repays the Tranche A Term Loans (or any portion thereof) at any time prior to the twelve (12) month anniversary of the Petition Date, in addition to repaying the principal of and any and all accrued and unpaid interest and other Obligations outstanding with respect to the Tranche A Term Loans so repaid, the Borrower shall pay the Agent, for the benefit of the DIP Lenders, an early termination premium (the “Early Termination Premium”) in an amount equal to the interest that would have been paid on such Tranche A Term Loans had such Tranche A Term Loans remained outstanding through the Stated Maturity Date.
- Milestones: The DIP Loan Agreement requires the Debtor to, among other things:
- obtain entry of the Interim Order no later than three (3) Business Days after the Petition Date;
- file the Sale Motion no later than five (5) days following the Petition Date;
- obtain entry of the Bid Procedures Order no later than twenty eight (28) days following the Petition Date;
- obtain entry of the Final Order no later than thirty-five (35) days after entry of the Interim Order;
- hold an auction and sale hearing no later than forty-five (45) days following the Petition Date;
- obtain entry of a Sale Order no later than fifty (50) days following the Petition Date; and
- close the sale no later than sixty (60) days following the Petition Date.
According to the Wikel Declaration [Docket No. 9], “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’).”
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