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Violin Memory's sad song leads to bankruptcy

Cash-bleeding all-flash array vendor Violin Memory today filed for Chapter 11 bankruptcy, and will seek to sell off its assets at an auction next month.

After years of financial problems, Violin petitioned the U.S. Bankruptcy Court for the District of Delaware for Chapter 11 relief. In a prepared statement, Violin CEO Kevin DeNuccio said the vendor will continue operations during the bankruptcy period while hoping to sell its assets.

“We are taking this action, which should conclude by the end of January 2017, to bolster Violin’s ability to serve the needs of its customers,” DeNuccio said. “Violin intends to continue to sell solutions to customers and prospects as well as service and support customers during this restructuring.”

Violin’s problem is it doesn’t have enough customers, and has been unable to come close to profitability since becoming a public company in Sept. 2013. Violin has twice conducted extensive searches for a buyer without success, and its 2016 sales slowed to a trickle.

Failing to find a buyer, Violin has cut expenses through layoffs and pay reductions. The vendor reduced headcount from 437 employees in Jan. 2014 to 82 through several staff reductions.

DeNuccio took a pay cut last week, dropping his salary from $750,000 to $150,000. The bankruptcy filing placed Violin’s average monthly payroll at approximately $758,000 with another $109,000 per month in health benefits. The vendor said it also owes approximately $244,000 in sales commissions to employees.

According to the petition, Violin will have $3.62 million in cash at the end of this week and that total will drop to around $1.6 million by Jan. 20, 2017. Most of the operational expenses over those six weeks will be payroll-related. Violin has lost $25.5 million, $22.2 million and $20.1 million over the last three quarters.

Violin’s executive team and directors have tried in vain to find a buyer since late 2015. Violin hired Jefferies Group as its financial adviser in Nov. 2015. Jefferies contacted 39 strategic and eight financial sponsors, according to Violin’s court filing. Those contacts resulted in nine parties signing confidentiality agreements and 10 parties conducting management meetings. But none made offers and the search for a buyer ended in March, 2016 when Violin instead put restructuring plans in place.

Violin’s sales decreased, as it reported $10.9 million, $9.7 million and $7.5 million in revenue over the past three quarters. Those totals were especially disappointing considering the market for all-flash arrays is one of the hottest in the storage industry.

Violin’s last-ditch effort to increase sales with its launch of a new Flash Storage Platform array in September came too late to stave off bankruptcy.

Violin hired another financial adviser, Houlihan Lokey Capital, in September to seek a buyer for the company. Houlihan contacted 202 potential strategic buyers and 78 financial sponsors, according to court filings. A total of 26 parties signed confidentiality agreements and 13 conducted management interviews but none submitted letters of interest.

In recent weeks, Violin sought debtor-in-possession financing that would allow Violin to remain in control of its assets through Chapter 11. Again, it found no interest. Those failed proposals “have necessitated the filing of this case,” according to the filing.

Violin asked the court to approve a Jan. 13 bid deadline for the auction, and is looking to finalize any sale by Jan. 20.

One of the first all-flash vendors on the market, Violin claims 58 U.S. patents and 64 foreign patents. It has another 22 U.S. and 38 foreign patents pending.