Faced with difficult competition in the market and inhospitable fundraising conditions, Ottawa-based Tehama, which provides a cloud-based software solution for remote teams, has entered into insolvency.
Court filings viewed by BetaKit show that Tehama applied for insolvency under the Canadian Creditors Arrangements Act as of January 20. Accounting firm Deloitte has been appointed to oversee Tehmaha’s insolvency.
The filings indicate that the insolvency application was triggered by a debt agreement between Tehama and CIBC falling through as the company also lost some key customer contracts.
Members of Tehama’s management team have entered into a deal to acquire the company’s debt.
“The kinds of giants and the sorts of resources that emerged created a stiff competitive landscape for Tehama.”
– Paul Vallée, Tehama
According to insolvency filings, as of December 31, 2022 Tehama showed a net loss of $7.6 million USD on revenue of approximately $3.6 million USD.
The startup possessed assets of $6.8 million USD against liabilities of $10.2 million USD. The latter consisted primarily of accounts payable and accrued liability, lease obligations, deferred revenue, convertible and term loan debt liabilities.
In an interview with BetaKit, Tehama founder and CEO Paul Vallée acknowledged that “restructuring like this is a dicey moment in a company’s business” but he remains optimistic given that Tehama is being advised by “a really top team of advisors through the process.”
For the time being, Vallée said the startup is forging ahead as its management team pursues internal restructuring while attempting to capture a “meaningful book of business” from the federal government that the CEO did not expand on but said is something Tehama has invested the majority of its sales and overall efforts to.
Vallée told BetaKit he knows the optics of the insolvency process is one that is fraught, but he chooses to focus on Tehama’s strengths and values rather than any perceived weaknesses. The startup’s goal is to aim for breakeven in 2023, with Vallée stating that Tehama sees “a very clear path” to that end within this year.
As it currently stands, Vallée, Tehama CFO Rob White, and some other company management have reached a deal to acquire the debt from CIBC. A numbered company created by the group for this purpose is also looking after critical payables on behalf of Tehama, including payroll. White testified in the filings the startup will need additional funding to make its critical payments going forward.
Even as the startup tries to move ahead with its business, it noted in the filing that it “suffered the loss” of some of its key customer contracts, including one terminating its month-to-month SaaS program due to that company’s own changes in spending.
Still, White noted that Tehama was able to sign two new SaaS agreements in the meantime. “Both of which will provide the Company with additional revenues to support the Business,’ White wrote. “I am also in active negotiations with additional new customers, demonstrating the value that [Tehama’s] platform continues to have in the marketplace.”
In the land of the giants
So what led Tehama to this position?
Founded in 2019 as a spin-off from Ottawa-based Pythian, Tehama was created out of a need to improve the software available to connect a remote workforce, and protect company information from the threat of security breaches. Pythian is a global IT services company that Vallée founded in the ‘90s.
In early 2020, Tehama raised a $14 million CAD Series A round just as the COVID-19 lockup got underway. The round, which was led by OMERS Ventures and included BDC Capital, was Tehama’s first external fundraise in its seven-year history. At that point, the pandemic looked as if it might be a boon for the remote working startup.
Tehama intended to use the funds to invest in its product, accelerate its roadmap, and respond to the increased need for remote working solutions during the pandemic. The startup touts itself as an “all-in-one platform to securely deliver hybrid work.” Its products include secure virtual desktops and workrooms. Unfortunately, Tehama wasn’t the only firm thinking along those lines, according to Valee.
Vallée claimed that just as Tehama began to accelerate its own growth plans, industry giants such as Citrix and Microsoft began hiring hundreds of people to focus on remote work and related technologies.
“The kinds of giants and the sorts of resources that emerged created a stiff competitive landscape for Tehama,” he said. Vallée emphasized that Tehama saw success and growth in recent years, “but the competitive landscape is stiff. We found ourselves behind plans.”
Tehama responded by trying to raise new funds, with Vallée noting that the company had plans to raise a Series B round. But securing a new equity raise in 2022 didn’t pan out. Tehama is hardly alone as startups increasingly try to negotiate a tough climate for investments that includes LPs not honouring capital calls, leading to Canadian VCs pulling back or out of deals.
Bank breakup
Tehama did secure debt funding in the spring of 2021 in the form of multi-million dollar debt facilities from CIBC.
Outlined in an affidavit by White, CIBC acted as the startup’s sole secured creditor until January 11, 2023. The two first signed a letter of credit agreement on April 21, 2021, making available to Tehama a demand operating facility to the maximum amount of $1.5 million USD. The bank also made available a term loan of $3 million USD and a Visa credit facility to the maximum amount of $150,000 USD.
However, relations between the startup and the bank soon began to deteriorate, filings indicate. Tehama was required to deliver monthly compliance reports to the bank, but in September 2022 the bank took issue with the startup’s compliance report. During that period, Tehama was also actively seeking investments from existing and new investors and kept CIBC informed of those efforts.
The reassurance wasn’t enough. Filings state that Tehama received a letter from the bank on December 14, 2022, alleging it was in breach of the financial agreement and declared the entire outstanding balance of the credit facilities “immediately due and payable.” As the bank continued to press the startup, Tehama management met with CIBC over the status of the startup’s business, operations, and efforts to gain investment or a “going concern” sale.
The meeting concluded with CIBC advising that it “would consider a more robust proposal but required that management put that revised proposal into a formal written offer by January 9, 2023.” The filings state that Tehama management agreed that it would do so and “understood, based on CIBC’s request, that CIBC would not take any enforcement steps in the interim.”
Despite that, shortly after the meeting, filings state that White received a phone call informing him that the CIBC had frozen Tehama’s bank accounts effective immediately. Shortly after, he began receiving notices from the startup’s vendors that its credit card payments were being declined. “At this time, it became clear to me that, despite our best efforts, the banking relationship as between [Tehama] and the Bank was for all intents and purposes, at an end,” White testified.
CIBC did not respond to questions regarding the innovation bank’s relationship with Tehama by time of publication.
Currently staffed with 25 employees, Tehama carried out a round of layoffs in December that saw half of its workforce eliminated. Vallée said no further layoffs will take place as part of the insolvency.
White also noted that the cash Tehama had on hand on January 6 to support operations on a go-forward basis (approximately $1.25 million CAD) was in the process of being seized by CIBC, “effectively crippling [Tehama] at that time.”
Over that weekend is when the numbered company that took over the debt was created.
Last year, Tehama was also given a $2.7 million CAD repayable contribution from FedDev Ontario that the startup is using on a project to integrate new technologies into its platform.
At press time, it was unclear what has happened to that money. The federal department only told BetaKit in an email statement: “In general terms, FedDev Ontario has very clear stipulations that are outlined in every contribution agreement. Businesses are reimbursed for project costs that are eligible under the specific terms and conditions of the agreement signed with the Agency.”