The story of NexInnovations may have come to an end last week when the assets of the solutions provider were acquired by SoftChoice for $10 million, but court documents filed in late September and early October show a rapidly deteriorating relationship between the company’s management and its strategic partner, distributor Tech Data Canada.
A series of affidavits were filed by the two companies with the Ontario Superior Court of Justice. Former Nex president and CEO Hubert Kelly was seeking creditor protection to allow Nex time to restructure while Howard Tuffnail, senior vice-president, finance for Tech Data Canada, sought the appointment of a receiver to take over Nex and allow Tech Data, Nex’s largest creditor, to recover monies it was owed.
Nex lays blame at TechData’s feet
In his affidavit of Sept. 27 in support of Nex’s application for creditor protection under the Companies’ Creditors Arrangement Act (CCAA), Kelly blamed difficulties with Tech Data for Nex’s inability to continue to implement the operating plan that brought it out of creditor protection in 2006. Under that plan Tech Data became the exclusive supplier to and a strategic partner of Nex and functions like logistics, configuration, distribution, approval and collection of accounts receivable were outsourced to the distributor, which also extended a $15 million credit facility to the solutions provider.
In his affidavit, Kelly said he believed Nex would have a viable business were it not for recent actions by Tech Data. “The actions and positions taken by Tech Data that imperil Nex’s ability to continue operating and giving rise to the likely need to replace Tech Data have only been taken by Tech Data very recently,” said Kelly, adding that as the relationship likely couldn’t be repaired, Nex required protection from its creditors, namely Tech Data, to have time to find a new financier and strategic partner.
According to Kelly’s affidavit, from time to time Tech Data would extend credit to Nex in access of the maximum amount in their loan agreement, but in a Sept. 14 conference call it advised Nex it was in “technical default” of the credit facility agreement. In a meeting on Sept. 19, at which time Kelly said Tech Data was obliged to forward $840,000 to Nex, the distributor indicated it would not do so, which would leave Nex unable to meet its payroll for the week of Sept. 24.
While Tech Data did agree to provide Nex $500,000 to meet that payroll, Kelly said Nex had to agree to allow Prowis Engagement access to fiscal records, management and staff to explore Tech Data’s options, including a possible wind down of the company. As well, Kelly was required to invest additional capital, forego any further salary, and the money had to be used to meet payroll only.
“Unfortunately, the choice for Nex was to agree or not be able to make payroll and immediately go out of business,” said Kelly. “Reluctantly Nex agreed to the terms imposed.”
Reinforcing his belief Nex was a viable business except for the actions by Tech Data, in his affidavit Kelly disputed Tech Data’s claim that Nex was in default of its obligations to the distributor. Noting that under their partnership Tech Data was responsible for the accounts receivable and the credit screening of Nex customers, if the accounts receivable were administered poorly that would be Tech Data’s fault, not Nex’s, said Kelly.
He added Tech Data refused to work with Nex to reconcile transactions, stopped providing vendor rebates and customer service and failed to communicate in timely manner, putting Tech Data in default of the terms of their partnership. In his affidavit, Kelly contends Tech Data engaged in behaviour designed to cause a cash shortfall at Nex and refused to provide additional temporary financing, using the crisis to terminate their agreement.
“Moreover, Nex believes were it not for the actions of Tech Data, it would not be in this current fiscal crisis,” said Kelly. “Nex can only assume, based upon the pattern of conduct to date by Tech Data, that this destruction of Nex’s business is deliberate.”
Tech Data says Nex the author of its own demise
A different view of events is presented in the affidavits filed by Tech Data’s Tuffnail, in support of the distributor’s application for the appointment of an interim receiver to help Tech Data recover the $52 million it claimed it was owed and in opposition to Nex’s application for creditor protection.
In a Sept. 27 affidavit, Tuffnail said the line of credit Tech Data extended to Nex was intended to only be a temporary measure to allow Nex to exit CCAA protection and find a long term financier. It was expected the line would be repaid and Nex would be self-financing by August 2007.
“Tech Data is a reseller of computer hardware and software; it is not a bank or financing company,” said Tuffnail.
However, since it emerged from protection in December Tuffnail said Nex has failed to overcome the financial difficulties that led to its initial insolvency and has failed to meet sales expectations. Costs remained too high, he said, and the company operated at a loss for seven of eight months.
“It is my belief that Nex’s recovery plan is not working,” said Tuffnail, adding that sales levels did not permit additional draws on the credit line. “Tech Data has even tried to assist Nex by bringing potential lenders to Nex, but there does not now seem to be sufficient time to explore other financing options as I believe that Nex is now unable to fund its operations until such time as a new financier can be found and start funding.”
In his affidavit, Tuffnail claimed Nex was in default of its loan agreement, had sales outstanding in access of 60 days, had not provided audited statements and was unable to meet its loan repayment obligations, all terms for severing the strategic partnership agreement and cause for Tech Data to seek liquidation of the company to recover its debt.
In a supplemental affidavit, Tuffnail dismissed Kelly’s claims it was actions by Tech Data that caused Nex’s demise.
“Mr. Kelly alleges that Tech Data has somehow contributed to Nex’s financial difficulties. That is not the case. Nex is the author of its own demise, and now is using the CCAA process to prevent Tech Data from exercising its rights as a secured creditor,” said Tuffnail.