June 16, 2022 – The Debtor requested the Court authority to (i) access $5.0mn of priming new money debtor-in-possession (“DIP”) financing ($1.5mn interim) to be provided by Serene Investment Management, LLC ("Serene" or the “Lender”) and (ii) use cash collateral [Docket No. 20]. The DIP Term sheet is filed at Docket No. 20.1.

Serene, a lower-middle market special situations lender, touts itself as a provider of "liquidity across the capital stack with totally discretionary capital." No stranger to involvement in Chapter 11 cases, Serene was also the prepetition lender, DIP lender and stalking horse bidder in the YogaWorks cases and a bank debt purchaser and DIP revolver lender for Sugarfina. In addition, a Serene affiliate provided DIP financing for Warrior Custom Golf.

On June 20, 2022, StorCentric, Inc. and six affiliated Debtors (“StorCentric” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors, a privately held, independent data management and storage solutions company, cited the devastating impact of the COVID 19 pandemic as forcing them to seek bankruptcy shelter and their intention to use Chapter 11 "to effectuate an eventual sale of their businesses."

The Debtors were compelled to seek rather rushed DIP financing arrangements with third-party lender Serene by a looming June 22nd payroll date after their preferred source of financing (prepetition lenders in respect of a fully drawn $25.0mn 2020 Loan Agreement (the "Note Group,") see further below) declined to offer it. The nature of the ongoing relationship amongst the Note Group, the Debtors and Serene (and to what extent the Note Group will go along with being primed) is not entirely clear. In a declaration in support of the financing [Docket No. 19], the Debtors' investment banker Force 10 notes that on June 20th "representatives from the Note Group consented to the Debtor obtaining one million dollars of debt capital from Serene" in order to make payroll (with this amount apparently to be rolled up), but neither the declaration or the motion gets into specifics as to what the Note Group has consented to in respect of priming beyond that emergency infusion of prepetition cash. The running on fumes Debtors (after making payroll their cash is back to $0) insist that their IP is valued between $50.0mn and $70.0mn and that the Note Group is therefore comfortably protected by an equity cushion, but that whether the Note Group is buying into that assessment remains to be seen.

The DIP motion [Docket No. 20] explains, “…for over twenty years, the Debtors have developed software and security systems to mitigate cybersecurity threats to ensure data is not compromised. The Debtors have been operating at a loss for some time, and have been sustained with ongoing prepetition loan advances and forbearance from their pre-petition secured lender over the last year. Following good faith, arms-length negotiations, the Debtors agreed to the terms of the DIP Facility with the DIP Lender Parties to provide the funding that their estates require to maintain operations and provide a sufficient runway to consummate a going concern sale and ultimately confirmation of a plan of reorganization. The Debtors are confident that, as a result of their prepetition efforts, the proposed DIP Facility is the only realistic funding option available under the circumstances. Absent the DIP Facility, the Debtors would no longer be able to operate as going concerns. The Debtors therefore believe that approval of the DIP Facility reflects the exercise of the Debtors’ sound business judgment.

Without the DIP Facility in place, the Debtors lack sufficient capital to continue operations. Accordingly, it is imperative that the DIP Facility be immediately approved to maximize the value of the Debtors’ estates as going concerns for the financial benefit of the Debtors’ economic stakeholders.

The pre-petition secured lender, UMB, is owed approximately $25 million. However, the value of its collateral is between $35 and $70 million. Consequently, UMB it is oversecured and adequately protected from the proposed priming of up to $5 million.”

The Force 10 declaration adds as to the DIP financing: "The Debtor was able to make payroll, late, on June 10, 2022. However, the Debtor’s projections clearly demonstrated it would fail to make the next payroll due June 22, 2022. Force 10 also joined the Debtor’s discussions with representatives of and counsel to Newlight Capital LLC, the servicer of the Debtors’ Fixed Rate Senior Notes 2020-3 (the ‘Notes’), and Argo Insurance, the risk underwriter of the Notes, (together, the ‘Note Group’). The Debtor and Force 10 requested that the Note Group recognize the dire straits the Debtor found itself in and advance additional capital.

Contemporaneous with these discussions, we continued discussions with potential financing sources.  Although there were expressions of interest, the only feasible term sheet the Debtor received was from Serene Investment Management, LLC (‘Serene’).

The Debtor and I negotiated and improved the terms of Serene’s initial proposed terms. However, we continued to believe the best alternative was for the Note Group to advance financing either in or out of chapter 11…During the week ending June 17, 2022, we held numerous conference calls and otherwise communicated with representatives of the Note Group, continuously asking them to provide direction and make a decision. I am aware that this was a substantial request on short notice, but the Debtor had no choice in order to make payroll on June 22, 2022….I informed the Note Group of the Debtor’s board meeting scheduled for the morning of June 17, 2022, whereby the Debtor would need to make a decision to seek bankruptcy protection without funds from the Note Group or a third-party.

Although the Debtors’ and I continued to talk to potential investors and DIP financing providers, as of June 17, 2022, the only feasible and fulsome terms we received were from Serene. With payroll approaching and the need to maintain the going concern for the benefit of all stakeholders, the Board decided to prepare for a chapter 11 filing. The Debtor and I continued to hold discussions with Note Group professionals on June 17, 2022, and over the weekend (June 18th and June 19th). During the morning of June 20, 2022, representatives from the Note Group consented to the Debtor obtaining one million dollars of debt capital from Serene, with priority to the Notes. Just prior to filing the Chapter 11 petition, the board met and determined that the Debtor would be back in the same place after paying payroll. Pursuant to the motions this declaration supports, the Debtor needs a clear path and the requested capital to maintain the going concern to effectuate a sale of its assets.

The Debtors are in need of an immediate infusion of liquidity to, among other things, pay employee wages and benefits, fund certain operational expenses, maintain ordinary course relationships with vendors, suppliers, and customers, and satisfy working capital needs in the ordinary course. As of the Petition Date, the Debtors only had $0 in cash on hand with which to operate their businesses and fund the Cases."

Key Terms of the DIP Financing:

• Borrowers: StorCentric, Inc.; Nexsan Technologies Incorporated; Nexsan Corporation; Connected Data, Inc.; Drobo, Inc.; Retrospect, Inc.; VS Acquisition Company, LLC (collectively, the “Borrowers” or “Debtors”), each as joint and several obligors, and as debtors and debtors in possession in cases (collectively, the “Bankruptcy Case”) under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) filed in the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”) on June 20, 2022 (the “Petition Date”).
• Guarantors: DIP Lender (defined below) reserves the right to request that each of the Debtors’ non-debtor subsidiaries (including, but not limited to, any subsidiaries located outside of the United States) guarantee the DIP Obligations and grant liens on their assets to support the DIP Obligations as a condition precedent to the making of any advances at any time after the entry of the Interim DIP Order, which such condition can only be waived by the DIP Lender in its sole discretion.
• DIP Lenders: Serene Investment Mangement, LLC (“DIP Lender”)
• Commitment: A superpriority senior secured priming term loan facility in the maximum aggregate amount on the DIP Closing Date of $5,000,000.00.
• Term: The DIP Loans shall mature upon the “Termination Date,” which shall be the earliest of (a) the date that is six (6) months after the Petition Date, (b) thirty (30) days after the entry of the Interim Order if the Final Order has not been entered by the Bankruptcy Court prior to the expiration of such period, (c) the consummation of a sale of the Borrowers, the direct or indirect owners of the Borrowers (including the Guarantors), or all or substantially all of the assets of the Borrowers, (d) the substantial consummation of a plan of reorganization or a plan of liquidation for any of the Loan Parties or any affiliated debtor in the Bankruptcy Case that is confirmed pursuant to an order entered by the Bankruptcy Court, and (e) the acceleration of the DIP Loans and the termination of the commitment with respect to the DIP Facility in accordance with the DIP Financing Documents. Upon the Termination Date, all obligations under the DIP Facility and the DIP Financing Documents, including principal, interest, fees, and expenses (if any) shall be due and payable.
• Interest Rate: Make Whole of $1 million or full DIP Facility Amount at Maturity or a sale closing. Make Whole will be in proportion to amounts actually funded. 
• Default Rate: $25,000 per month
• New Money: $5.0mn
  
• Roll-Up: $1.0mn of bridge financing from Serene
• Use of DIP Facility and Cash Collateral: Amounts that may be made available under the DIP Facility shall be used by the Borrowers to fund costs of the Borrowers of administering the Bankruptcy Case, including up to an amount reasonably satisfactory to the DIP Lender for the fees and expenses of professional advisors retained by the Borrowers and their affiliated debtors in the Bankruptcy Case, and for the general working capital of the Borrowers, provided that such amounts shall only be funded by the DIP Lender and allocated and spent by the Borrowers in accordance with the Approved Budget (described below); and to pay the fees and expenses incurred by the Borrowers pursuant to the DIP Facility and the DIP Financing Documents.
• Fees: Borrower shall be responsible for all fees, costs and expenses of DIP Lender including any and all expenses of DIP Lender’s counsel, professional advisors, or in house administration and shall reimburse such amounts promptly upon demand.
• Milestones:The DIP Financing Documents, including the Interim Order and the Final Order, shall require compliance with the following milestones in accordance with the applicable timing referred to below (or such later dates as approved by the DIP Lender in their sole discretion):
  • Deadline to file a bidding procedure motion; no later than twenty-one (21) calendar days after the Petition Date
  • Deadline to obtain a bidding procedure order; no later than forty-five (45) calendar days after the Petition Date
  • Deadline to consummate the sale of substantially all assets pursuant to the Sale Procedures Order; no later than sixty (60) days following the Bidding Procedures Motion.

Prepetition Indebtedness

• Agreement with UMB Bank, N.A. On February 19, 2020, the Company entered into a Proceeds Disbursing and Security Agreement with UMB Bank, National Association (“UMB”) as lender (the “2020 Loan Agreement”). The credit facility consists of a term advance of $25,000,000 to retire the 2018 Loan Agreement, pay certain insurance amounts and provide working capital funds for the Company. The Company drew down the total of $25,000,000 upon closing, and the entire amount is due on the maturity date of June 30, 2022.
• PayPal Loan The Company has a loan balance of $53,000 due to PayPal for working capital uses as of December 31, 2021. PayPal is used to facilitate payments from customers for the Drobo line of products.
• Related Party Line of Credit In February 2020, the Company received $417,000 from various insiders in the Company. These individuals also received 10,040,003 Series 2 convertible preferred stock warrants in connection with their line of credit 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 $0.8 million and was amortized as a debt discount over the original six-month period with the original due date in August 2020. The line of credit was extended to December 31, 2021 during fiscal 2021. Effective in February 2022, the line of credit was further extended to June 30, 2022.
• Related Party Promissory Note In December 2020, the Company entered into a $2 million interest-free Related Party Note Agreement with a current investor and member of the Company’s Board of Directors. The terms of the note included warrants to purchase Series 2 convertible preferred stock that expire in 30 months with an exercise price of $0.117 per share with a combined fair value of $0.3 million. The maturity date of the Promissory Note was originally April 5, 2021 with the Company holding the option to extend the maturity date with the issuance of additional warrants at twice the value of the original note warrant. The Company did not pay off the related party promissory note in April 2021 and, therefore, auto-extended the maturity of the note to December 31, 2021. The Promissory Note was not repaid as of December 31, 2021, and an amended and restated Related Party Promissory Note was entered into effective as of January 1, 2022. The amended Note is due on the earlier of June 30, 2022, or the date on which the Company enters into an equity finance transaction of not less than $10,000,000, or, if the Company enters into a SPAC transaction on or prior to March 15, 2022, then the amended Note may be extended to the earlier of August 31, 2022, or two days following the SPAC transaction date.
• Related Party Convertible Promissory Notes In February 2017 and July 2017, the Company received total proceeds of $1 million from the issuance of subordinated convertible promissory notes (“Convertible Notes”) to a related party lender. The maturity date was further extended to June 30, 2022 (the Extended Maturity Date) and certain optional conversion features under the notes were amended. Upon payment by the Company of all the principal amount outstanding and accrued unpaid interest, the lender will be issued warrants.  

About the Debtors

According to the Debtors: “StorCentric is a privately held, independent data management and storage solutions company. StorCentric’s operations are focused on providing comprehensive data security, mobility, governance and storage solutions for our customers. In the past four fiscal quarters, over 95% of StorCentric’s revenue was generated from the sale of data management and storage solutions and related support and maintenance agreements. StorCentric’s data management solutions enable our customers to manage and store their data in a secure environment protected from hackers and ransomware attacks. StorCentric enhances these capabilities further with subscription services, such as offline access management. StorCentric also optimizes its global customer support organization to address the needs of our customers, providing full-time support and staffing in multiple locations around the world.

In 2018, StorCrentric was incorporated in the State of Delaware in preparation for the merger and subsequent integration of two long-established data storage vendors, Nexsan and Drobo. Since its incorporation, StorCentric has acquired five companies – Nexsan and Drobo in August 2018, Retrospect and Vexata in June 2019, and Violin in October 2020."

Corporate Structure Chart

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