In documents filed with Ontario Superior Court in late January, the company reported assets valued at about US$6.9 million and debts totalling about US$10.2 million.An Ottawa software company that raised millions of dollars in venture capital for its cybersecurity platform targeted at remote workers has entered into insolvency. According to court filings, Tehama applied for insolvency under the Companies’ Creditors Arrangement Act last month. A group of senior company officials led by founder and CEO Paul Vallée continue to fund the company and have submitted a bid of nearly $3 million for the firm’s assets while they try to get the embattled tech startup back on its feet. “The worst-case scenario is management is going to take over the business,” Vallée said in a recent interview with OBJ. “The company’s ability to continue to operate is on pretty solid ground right now.” In documents filed with Ontario Superior Court in late January, the company reported assets valued at about US$6.9 million and liabilities totalling about US$10.2 million. Internal financial statements for the year ending Dec. 31, 2022 show Tehama posted a net loss of US$7.7 million on revenues of about US$3.6 million – well below its budgeted sales of nearly US$7.8 million. The firm said it was “facing a severe liquidity crisis, has limited cash on hand, and is generally unable to meet its obligations as they become due.” Tehama is now in the process of auctioning off its remaining assets under the supervision of accounting firm Deloitte. Potential bidders have until this Thursday to announce their intention to make an offer, with a deadline of March 16 for submitting bids and deposits before a scheduled auction date of March 20. A group of investors that includes Vallée, CFO Rob White and fellow Tehama executives Kevin Haaland and Mick Miralis have entered a “stalking horse” bid of about $2.9 million to purchase the company’s assets. Although the offer is meant to set a minimum price for next month’s auction, Vallée told OBJ he doesn’t expect any other bidders to throw their hats in the ring. “It is a very tight market right now for companies like this one,” he said. Describing Tehama as still “very much in its startup stage,” Vallée said the company needs a significant influx of capital to turn it around. “Even post-restructuring, it will require cash to run this business,” he said. “If I had been able to attract an investor, I think I would have succeeded already.” Tehama was spun off from Pythian, an Ottawa-based IT consulting firm that Vallée previously headed, in 2019. The company specializes in a cloud-based platform that lets off-site employees securely access company data on their laptops and other devices. Within months of its launch, the pandemic hit, and Tehama’s products seemed ideally suited for the sudden shift to remote work as offices around the world were shuttered. As the pandemic raged in the spring of 2020, Tehama closed a US$10-million funding round led by OMERS Ventures and BDC Capital. The firm grew from fewer than 50 employees in late 2019 to about 80 by early 2022. Last April, Vallée told OBJ he felt “very bullish” about Tehama’s future – but cautioned that its long-term prospects for success weren’t guaranteed. “The dice are in the air,” he said in an interview with Techopia. “We don’t know how they (will) land yet. Whether this is a game-changer or not depends enormously on whether it captivates the imagination of our buying audience. I hope we create a giant here in Ottawa.” Soon after that, Tehama’s financial foundation began to fracture. In an interview with OBJ earlier this month, Vallée said a number of factors triggered the firm’s current cash-flow crisis. According to Vallée, Tehama’s efforts to raise additional capital last year were thwarted when “a large growth-equity concern” was “abnormally slow” to contribute its share of a proposed US$10-million funding round that would have been financed through convertible notes – debt that can be converted into shares or other equity as a company scales up. As a result, Vallée said, CIBC – which previously lent Tehama US$3 million and provided a US$1.5-million line of credit, along with a Visa credit card facility of up to US$150,000 – became “increasingly anxious.” The bank cancelled its line of credit with Tehama late last year, Vallée said, prompting the institutional investor to pull out of the financing deal. Up to that point, Vallée claimed, “Everything was going very well for us to tank up, raise capital and have enough cash on the balance sheet to fight another, call it, almost a year and a half.” According to company officials, Tehama’s relationship with CIBC continued to deteriorate. In his affidavit, White said the bank questioned the company’s monthly compliance report from August 2022, leading it to cancel Tehama’s line of credit. In December, CIBC said the company had breached the terms of its loan agreement and demanded the remaining balance be paid in full immediately. White said company officials met with CIBC representatives on Jan. 6 to try to resolve the matter. But that same day, he testified, the bank froze Tehama’s assets. White said he began receiving notices from vendors that the company’s credit card payments were being declined. CIBC did not respond to requests for comment from OBJ last week. Meanwhile, Tehama faces increasingly stiff competition from big-name software companies that are developing similar products. White acknowledged in his affidavit that the firm “has suffered the loss of some key customer contracts,” further adding to its financial woes. Vallée told OBJ that cloud computing heavyweights like Microsoft and Citrix began “very aggressively fighting for this sort of book of business” during the pandemic. As those “gigantic players” poured money and manpower into developing their own cybersecurity software for remote workers, Tehama’s revenues took a hit. “In the post-pandemic era, this is no longer Paul with a radical idea,” he explained. “There’s no doubt that there is a lot of competition.” Still, Vallée, who has invested millions of dollars of his own cash in Tehama, is trying to remain upbeat about the company’s future. He, White and others have reached an agreement with CIBC to settle the firm’s debt with the bank, he said. In addition, Tehama has trimmed its headcount to about 25 and instituted other cost-cutting measures. While the firm has yet to land any significant government contracts, Vallée said he sees “very encouraging” signs that it will soon meet all the necessary security clearances and other requirements to sell its software to federal departments – opening the door to potentially lucrative revenue streams. “It has taken years longer than I think it should for us to be able to qualify for selling to the federal government,” he said. “As a group, they are very difficult to sell into. There’s always some stumbling block.” Vallée said management also hopes to negotiate a partnership with Microsoft to make the software giant “a friend” rather than a competitor. While he concedes it won’t be easy, he said Tehama has to figure out a way to hold its own against the software industry’s 800-pound gorillas. “Microsoft is Microsoft,” Vallée said. “If you want to be a startup in this world, you have to learn how to win deals even against giants.” In court filings, White said Tehama recently signed two new customers and is in “active negotiations” with other potential clients, “demonstrating the value that the company’s platform continues to have in the marketplace.” Vallée said he remains convinced Tehama has the makings of a viable long-term enterprise. “If we can just execute on a very doable plan, we won’t need any more (outside) funding,” he said, adding he believes Tehama is on a “very clear path” to breaking even by the end of 2023. “If anything, I’m more optimistic now than I have been in several months. Things are looking good for a full recovery.”
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