Top 10 Unanswered Questions From Lumenate's Chapter 11 Filing

From Fast-Growth Superstar To Chapter 11

Just four years ago, Lumenate, No. 148 on the 2017 CRN Solution Provider 500, was named the 2nd-fastest growing solution provider in all of North America. At its prime, Lumenate said it had annual sales approaching $175 million and 240 employees across 10 major metropolitan areas in the United States.

Now, one creditor claims the company is "hopelessly insolvent" and $50 million in debt, with the company owing $25.5 million to Avnet Technology Solutions, and as much as $24.5 million to a range of other creditors, including IT vendors and distributors such as Cisco, Westcon, Ingram Micro, Veritas, Pure Storage and Symantec.

The company also owes as much as $500,000 to the Texas state comptroller for unremitted sales tax, according to court filings from a creditor.

The startling turn of events left observers with a multitude of questions surrounding how the once-successful company found itself in this position. Lumenate President Reagan Dixon didn't respond to multiple requests for comment, while Tech Data -- which now owns Avnet Technology Solutions -- declined to comment.

10. Why did Lumenate shut down its website if it's planning to emerge from bankruptcy protection?

Lumenate's website was last viewable June 15, with a message now telling visitors that the HubSpot account associated with Lumenate's domain has expired.

It's very unusual for a company's website to be shut down in the wake of a Chapter 11 bankruptcy protection filing, with Ciber and Avaya -- both of which filed for reorganization earlier this year -- maintaining their websites throughout the process.

On June 9, U.S. Bankruptcy Judge Stacy Jernigan approved roughly half of Lumenate's requested $855,000 in spending for the first half of June. Under Judge Jernigan's order, Lumenate's right to use the approved $438,000 of cash terminated June 16.

9. What does the Chapter 11 filing mean for Lumenate's customers, suppliers and employees?

Prior to filing for Chapter 11 bankruptcy protection, the company told its customers they were "out of business," according to a Glassdoor review of the company.

Lumenate had achieved top-tier partner program status with the likes of Cisco, EMC, NetApp, AT&T, Hitachi, McAfee, Quantum and Riverbed, according to the company's website.

Creditor MidCap Financial claimed in early June that Lumenate's employees hadn't been paid since April 30. U.S. Bankruptcy Judge Stacy Jernigan allowed Lumenate on June 8 to compensate its employees, but only those doing work related to the company's managed services revenue or those needed to continue carrying out the collection of Lumenate's accounts receivable.

8. Why didn't Lumenate notify creditors about its plans to file for Chapter 11?

Creditors are very rarely caught off guard when a debtor files for bankruptcy, according to Adam Stein-Sapir of bankruptcy claim buyers Pioneer Funding Group.

The credit agreement between a borrower and lender typically requires the borrower to communicate any major changes in its operations -- such as an acquisition or change in a business line -- to its lender, according to Stein-Sapir.

Lumenate said in court filings that it was left with no other option but filing for a Chapter 11 reorganization. "After considering its various options, the debtor determined the bankruptcy filing was necessary to continue operations and preserve going-concern value," Lumenate wrote in a May 30 motion to the U.S. Bankruptcy Court for the Northern District of Texas.

Since the filing, Lumenate said it has focused on addressing immediate concerns related to employee payroll and money owed to the Texas comptroller, as well as working out a long-term budget that paves the way for either a successful reorganization or sale, according to a June 9 court filing.

7. Why did Avnet Technology Solutions stop providing vendor financing to Lumenate?

The loss of vendor financing is a fairly common reason for a bankruptcy, especially for firms with large working capital requirements, according to Adam Stein-Sapir.

This often happens in retail, should a vendor pull back on trade credit during the inventory-rich but cash-poor spring and summer months, Stein-Sapir said.

Vendors are typically loathe to cut off financing since it will have a detrimental effect on their own businesses. Therefore, they'll usually refrain from doing so unless they determine they don't have a good chance of recovering their investment in the goods they delivered to a customer.

"It seems that Avnet had some inkling of that, or else they wouldn't have taken the step of cutting their product off from Lumenate," Stein-Sapir said.

6. What impact did Lumenate's 2012-2013 M&A activity have on the balance sheet?

Lumenate rapidly scaled its operations by carrying out five deals between January 2012 and August 2013.

In 2012, Lumenate purchased network security solutions firms ANI Direct and Troubadour Ltd., and merged with healthcare technical consultancy International Computerware, Inc. The company said at the time that its revenues were expected to approach $175 million in 2013 because of the deals.

In 2013, Lumenate combined with Chicago-based solution provider Augmentity and merged with Cisco Gold technology consultancy DPSciences. This gave Lumenate roughly 240 employees across offices in 10 major metropolitan markets.

Lumenate's headcount had fallen to 146 employees in June 2015 and 131 in June 2016, according to LinkedIn data. By the time Lumenate filed for bankruptcy protection in May 2017, the company said it employed just 80 people.

5. How did the sale of Avnet Technology Solutions to Tech Data affect Lumenate's fate?

Lumenate was an Avnet partner for well over a decade, and the value-added distributor helped Lumenate showcase its healthcare IT capabilities to a broad variety of prospective customers.

Lumenate showed off its virtualization and automation management tools at Avnet's booth during the 2015 Healthcare Information and Management Systems (HIMSS) conference, sitting alongside multibillion-dollar Avnet channel behemoths like SHI International and Sirius Computer Systems.

The solution provider repeated the honor at HIMSS's 2016 event, and was quoted in Avnet's marketing materials on Feb. 20, 2017, praising the distributor's healthcare-focused breach assessment tool.

One week after quoting Lumenate, Avnet's Technology Solutions division was acquired by Tech Data for $2.6 billion, and in the subsequent three months, the distributor cut off its vendor financing to Lumenate, stopped selling or shipping equipment to them, and refused to engage in any further business activity, according to court filings.

4. Why did so many workers leave Lumenate in the weeks leading up to the filing?

LinkedIn data indicates that Lumenate had 91 employees at the start of June, down from 102 just one month earlier. Lumenate said at the time of its Chapter 11 filing that it employed 80 people, though creditor MidCap Financial said Lumenate's emergency motion to compensate its workforce appears to cover just 65 employees.

Four of the nine members of Lumenate's leadership team have left the company since the start of May, according to their LinkedIn profiles.

The departures include: Denisa Bravenec, VP of human capital, who left in June with no new position indicated; Terry Murray, CTO, who left in May and became president of Prescriptive Data Solutions; Jamie Shepard, SVP of transformative advisory services, who left in May and became a managing director at Accenture; and Sandie Zalud, director of data analytics, who left in May and became a program director at Alert Logic.

3. Why aren't creditors asking for a chapter 7 liquidation?

Creditors typically ask for a Chapter 7 liquidation rather than an outright dismissal so that there's a trusted third party managing the debtor, Stein-Sapir said.

When creditors take the unusual step of asking for dismissal, Stein-Sapir said they're typically looking to expedite the process or avoid the steep expenses associated with debtors' counsel, trustee fees and accounting fees.

"They just want to go in there, grab their equipment, and take it or sell in themselves," Stein-Sapir said. "It's a pretty extreme step to take. You don't normally see it."

2. Why was such a large portion of Lumenate's business tied to product sales?

At its prime, Lumenate had $150 million in annual sales and a dozen offices across the United States, and the company is trying to refocus its business around managed services, according to creditor MidCap Financial.

But Lumenate's managed services business is projected to generate $5 million in annual sales, according to MidCap, which said that amount of revenue would be insufficient for Lumenate to operate at even a break-even level.

Lumenate's forte had been designing and implementing customized solutions that enable its customers to transition to a more converged infrastructure. The solution provider has had dedicated teams focused on security, virtualization, storage, networking and consulting.

1. Why did Lumenate's accounts receivable drop by more than 70 percent in one month?

Lumenate's accounts receivable had decreased from $8.5 million at the end of April to just $2.5 million at the end of May, according to creditor MidCap Financial, with the creditor alleging that Lumenate has "essentially been in liquidation mode."

"The debtor is hopelessly insolvent and appears to be administratively insolvent," MidCap wrote in a June 9 motion to dismiss Lumenate's bankruptcy protection case. "The debtor has no reasonable likelihood of reorganizing."

Without any product to sell, Lumenate said in court filings that it was unable to generate any new sales or accounts receivable, which, in turn, generated a liquidity crisis.