Healthtech startup OrbCare is in debt to the point of insolvency, according to documents obtained by BetaKit. This news comes just six months after OrbCare announced a $2 million seed funding round led by iGan Partners.
iGan is providing a $1.2 million loan to help keep OrbCare afloat as it looks to find an interested buyer.
According to documents filed with the Ontario Superior Court of Justice, OrbCare, along with its two subsidiaries Pariscribe Inc. and OrbCare US Inc., collectively owed creditors almost $1.5 million. This debt includes outstanding termination pay to former employees as well as money owed to the Canada Revenue Agency (CRA) in unpaid payroll source deductions, HST remittances, and corporate income tax for the fiscal year 2018.
According to court documents, OrbCare filed for and was granted a stay of proceedings on May 28 from the Office of the Superintendent of Bankruptcy Canada. In subsequent filings to the Ontario Superior Court of Justice, it was noted that the startup was set to run out of cash for its “essential business activities” within 13 weeks of the filing, which marked the end of August 2019.
Through court documents, BetaKit has learned that the Toronto-based startup and lead investor iGan are attempting to salvage OrbCare, with the VC firm providing a $1.2 million loan to help keep the company afloat as it looks to find an interested buyer.
On August 14, the court approved the ‘stalking horse’ sale of OrbCare, allowing the company to attempt to sell all of its assets (which consists primarily of intellectual property, accounts receivable, and subsidiaries) to interested bidders.
Misrepresented finances
Revelations of OrbCare’s debts came to light after a recent change in senior management, which saw iGan partner Olivier Giner leave the VC firm and join OrbCare as its chief operating officer (COO).
In September 2018, OrbCare closed its $2 million seed round, its first and only round of venture capital funding to date. During due diligence for the financing, OrbCare, which is led by founder Manny Abraham, reported its monthly revenue as $330,000, according to court documents. It also shared a 2018 fiscal year CRA tax filing.
It wasn’t until Giner received full access to OrbCare’s financial statements that he realized they “represented significantly lower revenue” than what had been presented.
OrbCare also reported the $330,000 in monthly revenues at an iGan annual general meeting on April 1, 2019. Just two weeks later, OrbCare reported the same numbers at the VC event organized by Framework Ventures.
As the deal’s lead investor for iGan, Giner became the director of OrbCare’s board, according to an affidavit from Giner submitted to the court. He subsequently became interested in leaving the VC world for a startup.
At the beginning of April, Abraham and Giner reached out to BetaKit to share the news that the investor was joining as COO. In what he presented as a personal decision to become more immersed in the entrepreneurial world, Giner told BetaKit in an interview prior to officially joining, that he voluntarily chose to join OrbCare because he saw a lot of potential in the startup and the market it was serving.
Giner told BetaKit in April that OrbCare was doing well, claiming that it had doubled its sales in the last six months, with plans to acquire two companies and raise a Series A – a claim seconded by Abraham in March, when he told BetaKit that OrbCare was looking to raise another round before the end of the year.
According to his affidavit, Giner signed an employment contract with OrbCare on April 9, and was meant to officially take on the role of COO July 1, 2019. Giner became more involved with OrbCare in mid-April, however, handling “day-to-day, business, accounting and sales activities of OrbCare.”
On May 3, Giner reached out to BetaKit again, stating that the announcement of him joining as COO would have to be put on hold. According to his affidavit, it was on May 1 that Giner, after months of asks, had finally gained access to OrbCare’s financial information, including recent bank and credit card statements, as well as financial statements filed to the CRA.
“I learned gradually that OrbCare’s financial reporting was quite out of date and that no recent monthly or annual statements were available,” Giner said in the affidavit. “OrbCare did not maintain adequate customer records and did not diligently keep track of customer invoicing and accounts receivable. I learned, for example, that certain entities which I had been told were current customers of OrbCare had in fact never been customers, or ceased to be customers of OrbCare or any of its subsidiaries.”
Giner said in the affidavit that it wasn’t until he received full access to OrbCare’s financial statements that he realized they “represented significantly lower revenue” than what had been presented during due diligence. Gross revenue was closer to $150,000 per month (including US operations) than the $330,000 that had been reported. Cash balances, which had been expected to be “significant,” according to reports provided for due diligence, were also “significantly lower than expected.” Giner found that OrbCare’s monthly expenses were in the range of $260,000 (including US operations).
There was also a discrepancy with OrbCare’s 2018 CRA tax filing that had been presented in due diligence. It was at this point that Giner said he learned “for the first time” of OrbCare’s disputed filings with the CRA, included a refiling of the original 2018 fiscal year tax return, which had not been presented to investors.
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According to the affidavit, on May 2, Giner swiftly reported his findings to iGan founder and managing partner Sam Ifergan. On May 6, Giner reported his findings to OrbCare’s fellow board of directors. On May 17, the board resolved to make changes to OrbCare’s management, including appointing Giner as COO and CEO, in order to stabilize the situation.
The state of OrbCare’s debt came as no surprise to Abraham, however, who, in a recent interview with BetaKit, admitted that OrbCare was aware of the debt months before Giner’s discovery.
“The bankruptcy came about because [OrbCare] was mismanaged earlier this year because my attention was not there,” Abraham stated, explaining that beginning in 2018 he was dealing with personal and family matters, making it hard for him to give much needed attention to his startup.
While the founder, who continues to work with OrbCare directing product and sales, explained that the company raised the seed round to help address its financial needs, he also claimed that a large amount of the debt (specifically surrounding payroll taxes) accumulated between November and April, after the seed round had already closed.
Abraham also stated that the $330,000 in monthly revenue presented consistently between September through April was a combination of current and potential revenue, including clients that, ultimately, never came to fruition. According to Abraham, OrbCare also had two large accounts this year that ended up negatively affecting its earnings.
“The company needed capital much sooner than anybody expected because of these financial irregularities.
– Sam Ifergan, managing partner, iGan
“The financials presented to [iGan] … were misrepresented. The company needed capital much sooner than anybody expected because of these financial irregularities,” Ifergan told BetaKit in a recent interview, confirming that OrbCare continually misrepresented until Giner discovered the truth.
OrbCare was not just misrepresenting its financials to investors, it was also misleading the public. As previously mentioned OrbCare closed its seed round in September 2018, but chose not to announce it until March 2019 (read the BetaKit story here). Since that announcement came less than two months before OrbCare went bankrupt, the startup was apparently announcing the $2 million at a time when it was likely that the majority of that money had already been spent.
“I’m not a CEO [and] never intended to be a CEO. I’m a product guy,” Abraham stated. “I ran [OrbCare] because there was nobody else to do it, plus when you bootstrap you can’t afford to get a CEO and a salary.”
Abraham claimed that in raising the seed round, OrbCare expected to bring on people like Giner who could help course-correct the startup.
“We were just out of control,” Abraham added. “It could have been done differently and it was too bad the way it ended.”
On May 27, Giner, as the new COO and CEO, came to the conclusion that OrbCare was insolvent “by reason of accumulated debt” and would have to negotiate with its creditors and put forth a plan to ensure the recovery of finances for the company’s creditors, employees, and shareholders. The following day, OrbCare, under MNP LLP (its trustee for the case), filed for the stay of proceedings, which allowed OrbCare to present a proposal for how it would resolve its debts.
The debt
Founded in 2013 by Abraham, OrbCare has developed software looking to fix inefficiencies that exist within the healthcare system. OrbCare’s platform includes features such as phone integrations, e-referral agents, and an AI chatbot.
Abraham also founded and led OrbCare’s subsidiaries, Pariscribe (in 2008) and OrbCare US Inc., which was founded in Delaware in 2016. Both Pariscribe and OrbCare US Inc. operate in the same business as OrbCare. According to court documents, the three companies have a combined 37 clients, with OrbCare directly working with 12, Pariscribe 19, and OrbCare US Inc. 6.
Through Giner’s investigations, it was discovered that OrbCare itself owed $775,000 to the CRA, with OrbCare US Inc. owing an additional $95,000. According to the legal documents, the startup has also had previous run-ins with the CRA dating back to 2015 and the CRA has previously taken collection steps against OrbCare for unpaid amounts due from 2017.
When asked about the 2018 CRA filing, Abraham admitted that OrbCare had, in fact, re-filled its 2018 fiscal report prior to closing the seed round. He claimed that OrbCare was unable to share the re-fill with investors, not because “we were trying to hide it, it was just the fact that we were away, it was September, and the rush to close was happening, and it was basically that,” Abraham told BetaKit.
The combined $870,000 owed to the CRA is just part of the debts owed by OrbCare and its subsidiaries, however. The list also includes outstanding payments for services including lawyers, advisory firms, as well as office space rent.
After Giner realized the full extent of OrbCare’s debts, he stated in his affidavit that he came to three conclusions:
- Cost of operations were too high, in part due to “unnecessarily large number” of employees (according to Abraham OrbCare hired 23 people in a 4 month period);
- OrbCare would lack liquidity to fund its essential business activities within a two month period, and;
- OrbCare was in imminent risk of further CRA collection efforts, “which would impair or cease OrbCare’s ability to continue as a going concern.”
Despite these findings, Giner told the court that he still considered OrbCare a viable company for a number of reasons including the “typically healthy profit margins” of the business it operates in, and the “paying and satisfied customers” of it and its subsidiaries.
“I believe that with appropriate focus on streamlining of expenses, including a reduction in employee headcount that has already taken place, OrbCare’s revenues are likely, over time, to exceed its going concern expenses … [and] OrbCare would be solvent in the normal course of business,” Giner stated in the court documents. “I accordingly believe … that its profits through continued operation will likely afford greater recovery to creditors than in a liquidation scenario.”
What followed was a number of changes within the operations of the company. In line with its May filing with the Superintendent of Bankruptcy Canada, OrbCare laid off four “unessential employees” and has been working with MNP and other service companies to improve its financial reporting.
The startup has also been working with the CRA regarding its tax returns. However, continued court filings show that issues around unpaid CRA fees are affecting OrbCare’s access to Scientific Research and Experimental Development (SR&ED) tax incentives and other federal reimbursements, that would have helped the startup repay part of its debts.
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Throughout the proceedings OrbCare has received ongoing support from iGan, which agreed to become OrbCare’s debtor-in-possession financing (DIP) lender, providing the $1.2 million in the form of a non revolving credit facility.
Prior to entering the legal proceedings, which are required after filing for insolvency, Abraham claimed that there was interest in OrbCare from potential buyers. In the court documents, it is noted that prior to signing the term sheet for the DIP loan, OrbCare was in discussions with an alternative lender, apparently a (undisclosed) affiliate of iGan.
“Given the emergency and the lack of available information, the discussions with the alternative lender were not fruitful and no alternative proposal was received,” the documents state.
After approval from the court in June, iGan provided OrbCare with a $1.2 million loan to help cover its operating costs, including rent, electricity, and payroll, as well as trustee and legal advisors services. OrbCare’s access to the loan, however, was limited to small increments and on August 8, OrbCare was provided its first and only “drawdown” of $225,000 from the $1.2 million.
Seeking acquisition
Following the loan, subsequent court filings and proceedings show that OrbCare’s team (through MNP) then presented a proposal to sell the company in a stalking horse sale/bid process.
iGan submitted an offer to purchase the right, title, and interest of OrbCare and its subsidiaries, in the form of a stalking horse bidder. The court approved the proposal on August 14, and OrbCare and its subsidiaries went up for sale.
“After we found out all these irregularities, we realized we didn’t know what we didn’t know.”
In a stalking horse scenario, a first bidder (known as the stalking horse), offers an initial bid to buy the assets of a bankrupt company. The stalking horse sets the low-end bidding bar in order to establish a minimum price for the assets. According to court documents, iGan offered up a $1.2 million bid (separate from the $1.2 million loan).
In its efforts to find a buyer, OrbCare’s team has published advertisements and a teaser letter, along with an NDA for potential buyers. The teaser presents OrbCare as “revolutionizing healthcare through technology.”
In the case that no other bids are received, iGan will take hold of OrbCare and its assets. While Abraham and Ifergan have both indicated that there has been interest from potential buyers, formalized deals will not be disclosed until after the sale closes on September 27. Any acquisition is also subject to court approval.
Ifergan told BetaKit that if iGan were to become the acquiring company, he would ensure that more thorough due diligence is done this time around.
“After we found out all these irregularities, we realized we didn’t know what we didn’t know, and what we were told, we believed,” Ifergan said, noting that the situation has made iGan reconsider some of its internal due diligence and investment policies.
“I think sometimes we should be less trusting, and enforce [iGan’s existing policies] more regularly,” he said. “This is the first time I’ve ever done anything like this and I hope it’s the last time.”
BetaKit reached out to Giner regarding the ongoing court proceedings and sale but the OrbCare CEO declined to comment.
Feature image source OrbCare and iGan.