Second loan from 38 Studios program in trouble

State can't say how much taxpayers could lose with $2.25M unpaid

PROVIDENCE, R.I. (WPRI) – Top state officials have been put on notice about problems with another taxpayer-backed loan that was given out through the same program that backed Curt Schilling’s 38 Studios, the Target 12 Investigators have learned.

The R.I. Commerce Corporation sent a formal notification to the governor’s office Dec. 17 disclosing “an insufficiency of funds to pay the full principal amount” on a $4-million loan approved for The Corporate Marketplace Inc. in 2011. The Commerce Corp. used its Job Creation Guaranty Program to effectively co-sign on the loan.

Commerce Corp., a quasi-public agency, pegged the shortfall on the loan principal at $2.25 million.

Joy Fox, a spokeswoman for Gov. Gina Raimondo, said Tuesday it’s “too early” to say whether the governor will have to include taxpayer money in the next state budget to cover loan payments on Corporate Marketplace’s behalf. That’s already happening in the case of 38 Studios, which went bankrupt two years after getting a $75-million state-backed loan.

“The amount of any estimated loss related to the State’s moral obligation for this borrower under the JCGP is not presently determinable,” Rhode Island officials disclosed in the annual state audit released this month.

Corporate Marketplace CEO Chris Crawford told Target 12 his North Kingstown tech company’s problems began last spring when it lost two major clients who accounted for $10 million of its annual revenue. The company was initially forced to lay off employees but subsequently hired “many” of them back and remains profitable, he said.

“I think we’re doing all the prudent things that we need to do,” Crawford said. “I don’t think there’ll be any exposure to the taxpayers. Everybody is working their tails off to find that $10 million. I’m optimistic.”

Bridge Bank, which provided the $4-million five-year term loan, first sent the Commerce Corp. a “notice of nonpayment” on Aug. 27. The agency then made a $75,335.94 payment to Bridge Bank in early September, Commerce Corp. spokeswoman Melissa Czerwein told Target 12, with the money coming from its Job Creation Guaranty Program reserve fund.

Corporate Marketplace drew down about $3.7 million of the $4 million in loan money, with $1 million of it set aside in a reserve account, Crawford said. The company paid back roughly $500,000, and the Commerce Corp. has used the $1 million reserve fund to further reduce the principal, leaving the balance at $2.25 million, according to Crawford and Czerwein.

“Corporate Marketplace continues to operate,” Czerwein said Tuesday. “Commerce RI is working with Bridge Bank and the company to restructure their debt. It is our goal to make the company viable while minimizing the exposure to the taxpayers of Rhode Island.”

Czerwein declined to say when the agency might need to make another payment on the Corporate Marketplace loan or estimate how much it would cost. “Payments are subject to the restructuring of the company’s financials,” she said.

A spokesman for Bridge Bank did not respond to a request for comment.

Crawford praised Bridge Bank and Commerce Corp. officials for working with him during a challenging time for the company, which helps other businesses manage their rewards programs, particularly by authorizing the use of the $1 million reserve fund.

“What we just agreed is that the $1 million is really our money that’s sitting there … and it’s just silly to have it sitting there when it could be in effect used to help us in this situation,” he said.

Crawford said he is asking Bridge Bank to extend the loan from five years to 10, and is simultaneously working to drum up new business and raise up to $5 million in additional equity financing.

“That $2.25 million, which is the remaining loan, I think the bank is going to extend it out and give us a much longer period of time to pay back, which we’ll be able to do, and in the process we’ll rebuild the company back up quickly,” he said. “Taxpayers won’t be on the hook.”

“I’m very optimistic,” he added. “We just needed that runway.”

Fox, Raimondo’s spokeswoman, had little to say about the Corporate Marketplace loan.

“It is no secret that certain Commerce Corp. initiatives have had challenges and have faced scrutiny,” she said. “As we foster innovation in state government, we will closely examine the way the state carries out its economic development efforts.”

The $4-million loan guarantee for Corporate Marketplace was authorized by the board of the Commerce Corp., which was then called the R.I. Economic Development Corporation and chaired by Gov. Lincoln Chafee, in a unanimous vote in the fall of 2011. The board approved a modification of the loan in May 2013.

The Commerce Corp. board met behind closed doors multiple times last year to discuss the situation at Corporate Marketplace after Bridge Bank informed the agency that a payment had been missed.

State lawmakers created the Job Creation Guaranty Program in June 2010, authorizing the then-EDC to back up to $125 million in loans to technology companies. The following month, the EDC board guaranteed a $75-million loan to 38 Studios. The company went bankrupt within two years, leaving taxpayers on the hook for roughly $90 million in principal and interest payments. The General Assembly repealed the program entirely in 2013.

The 38 Studios and Corporate Marketplace loans were two of four that the Commerce Corp. guaranteed before the program was eliminated.

The program also provided a $1.5-million loan guarantee to NuLabel Technologies Inc. NuLabel CEO Max Winograd told Target 12 his company allowed the guarantee to expire without using it, though he said it gave the startup a boost at the time. NuLabel has since raised roughly $14 million in private capital, Winograd said.

“Business is great,” he said.

The fourth Job Creation Guaranty Program loan guarantee was for $1 million and went to eNow Inc., a Warwick solar technology company, in 2012. Its CEO, Jeff Flath, told Target 12 the company is current on all payments and has raised an additional $3 million in private capital.

“Business is very good,” he said.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim

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