Online media company Zango was in default on more than $44 million in bank loans, among other financial problems, before being forced into last week's layoffs and asset sale to the Blinkx video search engine. Those are among the details in a newly surfaced bankruptcy filing by Keith Smith, Zango's co-founder and chief executive.
"Due to deteriorating economic conditions and subsequent poor financial performance from Zango, today, my equity in Zango has no value and my notes are also without value," Smith said in the March 20 declaration (PDF, 5 pages) in federal bankruptcy court in Seattle. He blamed "the horrific economic downturn that was outside of the control of Zango or me."
The problems came to a head when a former Zango employee, Michael Lockhart, won a judgment of more than $4.6 million in a compensation dispute with the company. The Federal Trade Commission separately fined Zango $3 million in 2006 for unfair and deceptive online advertising practices
Smith and fellow Zango principal Daniel Todd both filed for bankruptcy after the Lockhart judgment. Smith's bankruptcy documents paint a stark picture of the financial turmoil inside the company. Read on for extended excerpts.
The dispute between Zango, Inc., myself and Daniel Todd arises from the fact that Michael Lockhart who was formerly employed by Zango, obtained a judgment in the amount of $4,655,163.11. As this Court is aware, we appealed this judgment, but have been unable to stay its execution by posting a supersedeas bond or other security. We had reached agreement with Mr. Lockhart to post $1 millon cash bond in lieu of supersedeas bond in order to pursue the appeal. These funds were being held in reserve by Zango to be deposited into the court's registry and in the eleventh hour after the judgment was entered in early January 2009, Zango's lenders reversed themselves and forbade Zango from posting the cash bond. This move by Zango's lenders was unexpected and resulted in Mr. Lockhart beginning his collection efforts against me as soon as he was able.
Unfortunately, given our collective financial condition, none of us (Zango, Daniel Todd and I) individually or collectively have adequate collateral to entice a bond company to post a supersedeas bond that would allow us to pursue the appeal.
The bank's action is not all that hard to understand as Zango is in default on debt [to] banks (a consortium comprised of KeyBank, Silicon Valley Bank, and Comerica Bank) in excess of $44 millon. They have a first-position secured interest in all of Zango's assets, have formally declared Zango' s debt in default and in a demand letter dated March 10th informed Zango that they will not provide any further financing or extend their voluntary forbearance unless they are paid in full or there is a firm purchase and sale commitment in place for Zango's assets on terms acceptable to ... them within the next couple of days.
It is my belief that the potential sale of Zango to any of the parties currently expressing interest in it would generate substantially less than the principal loan amount due to the banks, leaving nothing to satisfy the Lockhart judgment.
As to the matter at hand, I think it is worthwhile for the Court to have a deeper understanding of my financial circumstances leading up to my fiing. I founded Zango in 1999 and after years of lean times eventually grew the company to a size and scale that interested outside investors. In 2004 I sold a significant portion of my Zango holdings to a private equity investor. My income for 2004 was approximately $11,000,000, primarily resulting from sellng Zango stock. For 2005 my income was approximately $540,000, approximately $300,000 for 2006, approximately $550,000 in 2007 and about $425,000 in 2008.
In 2006 and 2007 Zango required cash infusions which I funded by taking out loans secured by my homes totaling about $3.1 millon dollars and investing back into Zango in the form of subordinated loans and preferred stock. Prior to that time, I had purchased my home in Somerset and my recreational property near Lake Kachess (collective purchase price and remodel about $6.3 millon) with the cash I received in 2004. ...
Again, for additional context, it is important for the Court to understand that when I took out the loans, it was my belief that the value of my remaining equity in Zango exceeded $20 millon and that the notes from Zango to me which are due in the first half of this year would be paid in full. My plan was that the payment from Zango would be used to retire the majority of my home loans.
Due to deteriorating economic conditions and subsequent poor financial performance from Zango, today, my equity in Zango has no value and my notes are also without value. It wasn't until the last 2 to 4 months that I reached this conclusion, which in large part is due to the horrific economic downturn that was outside of the control of Zango or me. Had this downturn not occurred and the debt from Zango to me been repaid, I in turn could have repaid my mortgages thereby reducing my monthly expenses by about $22,000.
With these Zango notes to me being without value and my future income uncertain presently, I am not entirely sure what actions I will take in the coming month or two. A big factor is whether Zango's assets are liquidated (in or out of a bankruptcy) or sold as a going concern to some third-party. If a going concern sale is effectuated, it is likely that I will continue to have employment with income substantially similar to my current income for some period of time. If on the other hand Zango is liquidated for the benefit of its lenders, I doubt that I will immediately have the sort of income I presently have and a conversion of this case to Chapter 7 may be in the best interest of all concerned.
Our efforts to reach Smith over the past week haven't been successful. Dan Brown, a lawyer for Lockhart, declined to comment this morning.
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