New Chapter 11 Filing - Product Quest Manufacturing LLC

Product Quest Manufacturing LLC

9/7/18

Product Quest Manufacturing LLC, a contract manufacturer of sunscreens and other sun care products, OTC drugs, prescription drugs, topical animal health products and cosmetics has filed for bankruptcy in the Middle District of North Carolina. At one point, the company produced $125mm worth of units per year, servicing the likes of drug store retailers (e.g., Walgreens, Rite Aid), big box retailers like Walmart and Target, and discount retailers like Dollar General. With an impressive customer list like that, what could've gone wrong?

The company provides a shockingly blunt reason:

These chapter 11 cases have been caused by ineffective senior leadership, employee turnover, extensive product quality issues and the subsequent recall of many products manufactured in the Daytona Facility due to stability and contamination issues and regulatory compliance issues affecting the Daytona Facility and the Kannapolis Facility.

Wowsers. You don't typically see such a harsh and to-the-point statement like that. But, the company apparently "suffered from operational cost overruns, ineffective production standards and poor pricing practices leading to significant margin erosion." Consequently, the senior lenders called a default and replaced the company's board of managers. It also received a Form 483 notice from the Food and Drug Administration regarding potential FDA violations that include, among other things, "potential cross contamination of human health and animal health products." And we were wondering why we recently started moo'ing. Now we know: it must've been the OTC treatments we purchased at CVS. This is f*cked up. And, accordingly and (apparently) appropriately, the company CEO got binned as a result. 

An investigation by King & Spalding revealed that there were, in fact, quality control issues. A little microbial contamination here. A little compliance deficiency there. Some out of specification products here. A little Staphylococcus aureus here and a little Pseudomonas aeruginosa there. The company implemented quarantines and initiated product recalls (including a CVS nasal spray product). The company also ceased operations at its two facilities. Jokes aside, we hope that no one was severely hurt. Luckily these issues were discovered before things became worse. 

The company will seek to sell its assets in chapter 11. 

  • Jurisdiction: M.D. of North Carolina
  • Capital Structure: $153.6mm secured debt (Madison Capital Funding LLC)    
  • Company Professionals:
    • Legal: Northern Blue LLP (John Northern, Vicki Parrott, John Paul H. Cournoyer)
    • Financial Advisor/CRO: Conway MacKenzie Inc. (Joe Geraghty) 
    • Board of Directors Legal: King & Spalding LLP
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Financial Sponsor: Kainos Capital LLC
    • Prepetition Secured Lender: Bank of America NA

New Chapter 11 Filing - Duro Dyne National Corp.

9/7/18

Duro Dyne National Corp., a manufacturer of sheet metal accessories and equipment for the heating, ventilating and air conditioning industry has filed for bankruptcy in the District of New Jersey. It constitutes one of those rare instances where an otherwise healthy business requires bankruptcy protection to ward off potential liability. 

The company reported steadily increasing sales and profits as steel prices fell to historic lows and construction activity continued to rebound from the recession. In 2017, the company had $69mm in sales and $5.2mm in EBITDA. In 2018, steel prices have increased -- in part due to tariffs -- and so the Company also raised prices. It expects $73.6mm of sales and $5.2mm of EBITDA. So what's the issue here? 

Per the company:

Beginning in the mid to late 1980s, the Company was sued on account of Asbestos Personal Injury Claims in various jurisdictions alleging liability for bodily injury allegedly sustained as a result of exposure to products containing asbestos allegedly manufactured and/or distributed by the Company from the 1950s through the 1970s.

Consequently, due to the increasing costs of defending and resolving the asbestos personal injury claims and the decline of insurance proceeds covering them, the company filed for bankruptcy to establish a plan that institutes a "channeling" injunction that directs all present and future asbestos-related demands to a funded trust for handling and payment. 

  • Jurisdiction: D. of New Jersey (Judge Kaplan)
  • Capital Structure: $1.29mm funded secured debt     
  • Company Professionals:
    • Legal: Lowenstein Sandler LLP (Kenneth Rosen, Jeffrey Prol)
    • Financial Advisor: Getzler Henrich & Associates LLC
    • Claims Agent: BMC Group Inc. (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Exit Lender: Bank of America NA
    • Ad Hoc Asbestos Claimants Committee
      • Legal: Caplin & Drysdale Chartered (James Wehner, Jeffrey Liesemer)
    • Prepetition Future Claimants Representative
      • Legal: Young Conaway Stargatt & Taylor LLP (Edwin Harron, Sara Beth Kohut)

New Chapter 11 Filing - Open Road Films LLC

Open Road Films LLC

9/6/18

Rough year for movie production houses. After Relativity Media and The Weinstein Company filed chapter 11 cases earlier this year, Open Road Films LLC now finds itself in bankruptcy court. The company behind Jobs, Nightcrawler and other mostly forgettable films has had a dramatic fall from grace after being acquired by current equityholder TMP Holdings from Regal Entertainment Group and AMC Entertainment merely a year ago. Though contemplated at the time of acquisition, the company was unable to secure funding to, among other things, restructure the company (in the out-of-court sense) and streamline operations. The question is why? Why couldn't the company secure funding? 

The company notes:

Among other things, increased volatility in overall film performance exacerbated investor concerns regarding the probability and predictability of studio financial success, especially outside of the major studios. This overall volatility was exacerbated by the specific underperformance of certain of the Company’s recent motion picture releases, most of which were initiated by prior management. In addition, competitive options for consumers limit interest in theatrical distribution and the traditional film business model, imposing additional pressure on companies like the Debtors, and further fueling investor skepticism.

In other words, blame Reese Witherspoon ("Home Again" flopped), Jodie Foster ("Hotel Artemis" completely bombed) and Netflix ($NFLX). 

With no incoming funding and a resultant inability to obtain a "going concern" qualification, the company defaulted on its loan with Bank of America. BofA, therefore, limited access to certain deposit accounts, all the while vendors were seeking payments. Already this drama is more interesting than "Home Again." 

The company intends to use the chapter 11 process to market and sell its assets; it does not yet have a stalking horse bidder, though FTI reports that 11 parties have submitted indications of interest. 

The top 40 general unsecured creditors list is a who's who of media elites, including "old media" firms like Viacom Inc. (owed $7mm), The Walt Disney Company (owed $5.1mm), NBCUniversal (owed $4.4mm), Turner Broadcasting System (owed $3.5mm). Other top creditors include Google, Facebook, Snap, Twitter, Amazon, Spotify, and Pandora Media. And Latham & Watkins, which appears to be getting hosed on a half million dollar legal bill. 

  • Jurisdiction: D. of Delaware (Judge Silverstein)
  • Capital Structure: $90.75 mm secured debt (Bank of America NA)     
  • Company Professionals:
    • Legal: Klee Tuchin Bogdanoff & Stern LLP (Michael Tuchin, Jonathan Weiss, Sasha Gurvitz, Whitman Holt) & (local) Young Conaway Stargatt & Taylor LLP (Michael Nestor, Sean Beach, Robert Poppiti Jr., Ian Bambrick)
    • Financial Advisor/CRO: FTI Consulting Inc. (Amir Agam)
    • Claims Agent: Donlin Recano & Company Inc. (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Prepetition Lender: Bank of America NA
      • Legal: Paul Hastings LLP (Andrew Tenzer, Shlomo Maza) & (local) Ashby & Geddes PA (William Bowden)
    • Prepetition Creditor: East West Bank
      • Legal: Akin Gump Strauss Hauer & Feld LLP (David Staber) & (local) Whiteford Taylor & Preston LLC (Christopher Samis, L. Katherine Good, Aaron Stulman)
    • Prepetition Creditor: Bank Leumi USA
      • Legal: Reed Smith LLP (Marsha Houston, Christopher Rivas, Michael Sherman

😷New Chapter 11 Filing - Verity Health System of California Inc.😷 

Verity Health System of California Inc. 

8/31/18

Verity Health System of California Inc. ("VHS"), a California nonprofit public benefit corporation that operates six acute care hospitals, filed for bankruptcy today. The system suffered from decades of operating losses and too much debt. Unfortunately, it also appears to have suffered from a lack of vision, admittedly maintaining the status quo in the face of robust headwinds. 

In 2015, BlueMountain Capital Management LLC purchased the system for $100mm while also arranging for $160mm in loans (subject to a variety of conditions imposed by the California Attorney General). The health system, however, did not turn around. In 2017, NantWorks LLC acquired a controlling stake in the system's management company, Integrity, from BlueMountain and loaned the company an additional $148mm. Did this do the trick?

Of course not. We wouldn't be writing about it if it did. 

Per the company:

Despite the infusion of capital and new management, it became apparent that the problems facing the Verity Health System were too large to solve without a formal court supervised restructuring. Thus, despite VHS’ great efforts to revitalize its Hospitals and improvements in performance and cash flow, the legacy burden of more than a billion dollars of bond debt and unfunded pension liabilities, an inability to renegotiate collective bargaining agreements or payor contracts, the continuing need for significant capital expenditures for seismic obligations and aging infrastructure, and the general headwinds facing the hospital industry, make success impossible. Losses continue to amount to approximately $175 million annually on a cash flow basis.

Indeed, the company cites the following factors for its fall into bankruptcy: (i) below-market Medicare reimbursement rates (~20-43% below market), (ii) an approximate 5% increase in labor rates annually, (iii) underfunded pension plans and ongoing pension funding requirements in the millions of dollars, (iv) the need for tens of millions of dollars in IT investment, (v) millions of dollars of expenditures required under the conditions imposed by the California state AG and (vi) needed medical equipment expenditures. 

Accordingly, to confront its debt and preserve the value of the system as a going concern, the system filed for bankruptcy to pursue a sale to new ownership/leadership. 

  • Jurisdiction: C.D. of California 
  • Capital Structure: $461.4mm of secured debt     
  • Company Professionals:
    • Legal: Dentons US LLP (Samuel Maizel, John Moe II, Tania Moyron)
    • Financial Advisor: Berkeley Research Group LLC
    • Investment Banker: Cain Brothers
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:

New Chapter 11 Filing - Hooper Holmes Inc. (d/b/a Provant Health)

Hooper Holmes Inc. (d/b/a Provant Health)

8/27/18

Kansas-based Hooper Holmes Inc. ($HPHW), a provider of comprehensive health and wellbeing programs, e.g., biometric screening services, flu shots, lab testing and more, filed for bankruptcy in the Southern District of New York. The company does business as Provant Health Solutions LLC ("PHS), an entity it merged with as recently as 2017. And that is part of the problem: the company incurred tens of millions in debt over the last few years in connection with the PHS merger and a prior acquisition of Accountable Health Solutions Inc., a provider of, among other things, telephonic health coaching and wellness portals. 

The company will use the bankruptcy process to effectuate a sale of substantially all of its assets to a stalking horse bidder, Summit Health Inc., for $27mm in cash and the assumption of certain liabilities. The company's prepetition secured lenders will finance the cases via a proposed $13.6mm DIP credit facility. 

  • Jurisdiction: S.D. of New York (Judge Drain)
  • Capital Structure: See below.   
  • Company Professionals:
    • Legal: Foley & Lardner LLP (Richard Bernard, Timothy Mohan, Jill Nicholson, Geoff Goodman, Michael Riordan, John Melko) & Halperin Battaglia Benzija LLP (Christopher Battaglia)
    • Financial Advisor: Phoenix Management (James Fleet, Albert Mink)
    • Investment Banker: Raymond James & Associates Inc. (Geoffrey Richards)
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Term Lender: SWK Funding LLC
      • Legal: Holland & Knight LLP (Arthur Rosenberg)
    • Stalking Horse Bidder: Summit Health Inc., a subsidiary of Quest Diagnostics Inc.
      • Legal: Bass Berry & Sims PLC (Paul Jennings) & Weil Gotshal & Manges LLP (Gary Holtzer, Jessica Liou, John Conte)
 Source: First Day Declaration

Source: First Day Declaration

😷New Chapter 11 & CCAA Bankruptcy Filing - Aralez Pharmaceuticals US Inc.😷

8/10/18

Publicly-traded Ontario-based Aralez Pharmaceuticals US Inc. ($ARLZ), a specialty pharma company focused on the development and commercialization of cardiovascular products, filed for bankruptcy to pursue sales of its main operating businesses in the US and Canada. The company will use the bankruptcy process to sell its TOPROL-XL franchise, a beta-blocker used to treat high blood pressure, chest pain and heart failure, to its secured lender, Deerfield Management Company LP, for approximately $140mm; it will also sell its VIMOVO royalties and Canadian operations to Nuvo Pharmaceuticals Inc. ($NRI) in a transaction valued at $110mm. The company purchased the former franchise in late 2016 for $175mm so a sale for $140mm is a bit of a slap in the face.

The company blames its chapter 11 filing on Amazon. Just kidding. These pharma deals are so technical and boring that we had to write that just to see if you were still paying attention.

The company REALLY blames its chapter 11 filing on a “highly competitive”pharmaceuticals market “characterized by rapidly changing markets and technology, emerging industry standards and frequent introduction of new products.” It notes:

The market is dominated by a small number of highly-concentrated global competitors, many of which boast substantially greater resources than the Company, and competition is based on, among other things, product safety, reliability, availability, and price.

The company seeks approval of a $15mm DIP credit facility provided by Deerfield.

  • Jurisdiction: Southern District of New York (Judge Glenn)

  • Capital Structure: $203.1mm 12.5% term loan (plus $2.7mm in PIK interest); $75.5mm 2.5% ‘22 senior convertible secured notes (plus $200k in PIK interest).

  • Company Professionals:

    • Legal: Willkie Farr & Gallagher LLP (Paul V. Shalhoub, Robin Spigel, Debra C. McElligott)

    • Financial Advisor: Alvarez & Marsal Healthcare Industry Group LLC

    • Investment Banker: Moelis & Company (Barak Klein)

    • Claims Agent: Prime Clerk LLC

  • Other Parties in Interest:

    • DIP Agent: Deerfield Management Company LP (Legal: Katten Muchin Rosenman LLP, Steven Reisman, Shaya Rochester, Peter Siddiqui, Paul Musser)

New Chapter 11 Filing - Red Fork (USA) Investments Inc.

8/7/18

Red Fork (USA) Investments Inc., a Texas-headquartered oil and gas exploration and production company focused on five counties in Oklahoma, filed for bankruptcy after capitulating under the weight of its debt and inability to generate enough revenue to cover it. The company is also the subject of a number of legal actions asserting that the company owned and/or operated saltwater disposal wells that "caused or contributed" to certain earthquakes. Given the costs of the latter and the lack of revenue from E&P initiatives, the company commenced its chapter 11 cases. 

  • Jurisdiction: W.D. of Texas 
  • Capital Structure: $119.5mm debt (Guggenheim Corporate Funding LLC)    
  • Company Professionals:
    • Legal: Dykema Gossett PLLC (Deborah Williamson, Patrick Huffstickler, Jesse Moore)
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
    • Independent Board Director: Eugene Davis
  • Other Parties in Interest:
    • Prepetition Secured Lenders: Guggenheim Corporate Funding LLC
      • Legal: Haynes and Boone LLP (Charles Beckham Jr., Martha Wyrick, Matthew Ferris)

💍New Chapter 11 Filing - Samuels Jewelers Inc.💍

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Let’s start by all agreeing that the pictured $900 engagement rings are outright hideous. Nobody wants those. Literally. Nobody. And so…bankruptcy.

Ok, so we’re being a bit flip here (as always) but the truth is that in addition to people not going to malls anymore, people have become increasingly comfortable purchasing jewelry over the internet. Don’t believe us? The list of growing Instagram-dominant direct-to-consumer jewelry brands seems to be growing longer than the list of professional athletes President Trump has insulted. There’s Vrai & OroAurate, and several others. When a company is facing this kind of onslaught, it simply cannot be distracted by other externalities like…say, fraud at the parent level. That’s right. Per Reuters back in May:

U.S. jewelry chain Samuels Jewelers has hired a turnaround adviser at the request of its creditors in a bid to avoid the fate of brick-and-mortar retailers that filed for bankruptcy amid intensifying competition, according to people familiar with the matter.

Samuel Jewelers’ action comes as its Indian parent company, Gitanjali Gems Ltd, finds itself in legal hot water. Gitanjali’s chairman, Mehul Choksi, was accused by state-run Punjab National Bank in India of defrauding it of nearly $2 billion.

Or, even more significant, burdensome leases on its 120 leased stores in 23 states. Per the company:

The Debtor's headquarters and retail stores are leased. The Debtor does not own any real property. The aggregate monthly rent due under the leases (collectively, the "Leases") is approximately $1.7 million. The Debtor's retail store Leases generally have initial terms of ten years with varying options to extend. As of the Petition Date, the remaining terms under the Debtor's existing store Leases were widely variant, but the majority of the Leases currently will expire in or before 2023. The remainder of the Leases currently will expire between 2024 and 2028. As of the Petition Date, the Debtor owes approximately $3.0 million in unpaid current lease obligations.

And so, against this backdrop, the “bid” clearly failed because, today, Texas-based Samuels Jewelers Inc. has, indeed, filed for bankruptcy. The filing essentially marks a fitting new chapter for an enterprise so accustomed to bankruptcy court that it probably ought to be paying annual dues. Predecessor entities filed for bankruptcy in 1992, 1997, and 2003. With that historical perspective, we suppose that Gitanjali ought to be commended for extending the company’s streak outside of bankruptcy court beyond five or six years to a…gulp…commendable fifteen.

Why bankruptcy? Why now? To elaborate on our preface, a few reasons. First,“increasing competition in the retail jewelry industry, including competition by discount and other retailers, including online retailers.” So, like we said. And, second, the aforementioned fraud allegations and related India National Company Law Tribunal injunctive order against Gitanjali and other former principals of the company had the affect of (a) cutting off a major source of product historically sourced from Gitanjali or other non-debtor affiliates, (b) eliminating an oft-tapped short-term funding source, and (c) spooking third-party vendors and suppliers. Given these issues, the company opted to seek chapter 11 protection with the hope that it could stabilize operations, enhance liquidity and preserve value. In that vein, the company — despite having neither an investment banker nor a stalking horse bidder at the time of filing — hopes to sell the business as a going concern. Contemporaneously, the company hopes to assume an agreement to retain Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC as consultants to dispose of excess inventory and conduct store closing sales. Accordingly, major creditors include, as you might expect, the usual array of landlords, General Growth Properties ($GGP)Simon Property Group Inc. ($SPG), and Macerich Co. ($MAC).

Finally, the company will also seek approval of a poorly-named $100mm DIP Working Capital Facility — the majority of which will be used not for working capital but to roll-up Wells Fargo and Gordon Brothers’ loans — to fund the case until a buyer is found or the company liquidates. Anyone want to place bets on which scenario plays out?

  • Jurisdiction: D. of Delaware (Judge Carey)

  • Capital Structure: $84mm revolving credit facility (Wells Fargo Bank NA), $10mm term loan (GB Credit Partners LLC)

  • Company Professionals:

    • Legal: Jones Day (Greg Gordon, Amanda Rush, Jonathan Fisher, Paul Green) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)

    • Financial Advisor: Berkeley Research Group (Robert Duffy)

    • Liquidators: Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC

    • Claims Agent: Prime Clerk LLC

  • Other Parties in Interest:

    • Prepetition RCF Lender: Wells Fargo Bank NA (Legal: Morgan Lewis & Bockius LLP, Julia Frost-Davies, Christopher Carter, Sandra Vrejan & (local) Reed Smith LLP, Kurt Gwynne, Jason Angelo).

    • Prepetition Term Agent & DIP Term Agent: Gordon Brothers Finance Company (Choate Hall & Stewart LLP, John Ventola, Jonathan Marshall & (local) Womble Bond Dickinson US LLP, Matthew Ward, Morgan Patterson)

👗New Chapter 11 Filing - J&M Sales Inc./National Stores Inc.👗

Another day, another retailer in bankruptcy. Today, J&M Sales Inc., a “leading discount retailer” with $5-average-price goods in 344 stores in 22 states — operating under the names Fallas, Fallas Paredes, Fallas Discount Stores, Factory 2-U, Fallas and Anna’s Linen’s by Fallas — finds itself in bankruptcy court. The company offers value-priced merchandise, including apparel, bedding, household supplies, decor items and more; it generally supports underserved, low-income communities and can be found in power strip centers, specialty centers and downtown areas. All of its locations are leased.

The company blames (i) general retail pressures, (ii) bad weather (specifically hurricanes Harvey and Maria), (iii) a data breach (and a attendant $2mm reserve account set up by the credit card companies) and (iv) poor integration of growth acquisitions (e.g., Conway’s) for its chapter 11 filing. These company-specific factors may help explain why this company is apparently bucking the national trend of discount retail success (see, e.g., Dollar Tree).

The company intends to use the chapter 11 process to shop itself as a going concern and close at least 74 stores. The company makes no mention, however, of the extent of the sale process and there is no stalking horse bidder currently lined up. The company will seek approval of a (no new money?) $57mm DIP credit facility as well as credit support from certain “Critical Vendors” on a second and third lien basis.

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $57mm ABL (Encina Business Credit LLC/Israel Discount Bank of New York), $30mm term loan (Gordon Brothers Finance Company), $13.4mm Letters of Credit, $10mm Fallas Loan

  • Company Professionals:

    • Legal: Katten Muchin Roseman LLP (WIlliam Freeman, Karen Dine, Jerry Hall) & (local) Pachulski Stang Ziehl & Jones LLP (Richard Pachulski, Peter Keane)

    • Financial Advisor: SierraConstellation Partners LLC (Curt Kroll)

    • Investment Banker: Imperial Capital LLC

    • Real Estate Advisor: RCS Real Estate Advisors

    • Liquidation Agent: Hilco Merchant Resources LLC

    • Claims Agent: Prime Clerk LLC (click on company name above for free docket access)

  • Other Parties in Interest:

    • DIP Agents: Encina Business Credit LLC (Legal: Choate Hall & Stewart LLP, Kevin Simard) & Discount Bank of New York (Legal: Otterbourg PC, Daniel Fiorillo)

🌮New Chapter 11 Filing - RM Holdco LLC (Real Mex)🌮

In April's piece entitled "🍟Casual Dining is a Hot Mess🍟" and then in a follow-up in July creatively and originally entitled "🍟Casual Dining Continues to = a Hot Mess🍟" we noted that...well...casual dining is a hot mess. As of today…A. Spicy. Hot. Mess. Actually.

Late last night, RM Holdco LLC, the owner of a portfolio of 69 company-operated and 11 franchised restaurants and contemporary taquerías including Chevy's Fresh Mex, Siniqual, El Torito Grill, Las Brisas and Alcapulco filed for bankruptcy to effectuate a "363 sale" of substantially all of its assets to an affiliate of one of its pre-petition equityholders, Z Capital Partners LLC for $46.75mm. Interestingly, this filing also marks the third — that’s right, THIRD — chapter 22 filing in the last week following Home Heritage Group Inc. and Brookstone Inc. This is how we previously described a “Chapter 22”:

For the uninitiated, Chapter 22 in bankruptcy doesn’t actually exist. It is a somewhat snarky term to describe companies that have round-tripped back into chapter 11 after a previous stint in bankruptcy court.

Real Mex previously filed for bankruptcy in October 2011 and sold to Z Capital and Tennenbaum Capital Partners LLC in March 2012. At the time of that previous chapter 11 filing, the company operated approximately 128 restaurants.

This time, the signs of an imminent bankruptcy filing were out there shining for all to see as the company has been sending smoke signals for months. Back in May, Bloombergreported that the company hired Piper Jaffray to pursue a sale — including one that could be consummated in bankruptcy. Thereafter, in June, the company filed a WARN Notice with the Department of Labor indicating that it intends to close its Times Square location and lay off 134 employees. Perhaps the signs were in place even earlier when the company hired the former CFO of Wet Seal, a retailer that, itself, found its way into bankruptcy court twice.

The company highlights various macro factors as reasons for this chapter 11 filing:

For the past six (6) years, the Debtors have struggled with certain industry-wide and company-specific pressures that have negatively impacted their operations. Trends in the greater restaurant industry, including increases to minimum wage and commodity costs, have created substantial pressure on the entire sector, as evidenced by the numerous brands that have filed for bankruptcy in recent years, including Ignite Restaurant Group (Brick House and Joe’s Crab Shack), Macaroni Grill, Garden Fresh, Bertucci’s, Crumbs, Cosi, and Buffets.

And:

In addition, increased competition, especially in the form of available, quality Mexican fast casual options, has had a significant impact on traffic in the Debtors’ restaurants.

For anyone keeping track of the “What Caused Bankruptcy” standings, this would be Amazon Inc. ($AMZN) 282,499,209 and (now) Chipotle Inc. ($CMG) 1.

Compounding matters here is (i) the company’s $200+ million in debt, (ii) an expensive workers’ compensation program, (iii) long-term lease burden (it leases all of its locations, the majority if which are in California), (iv) an expensive-yet-unconsummated-growth-strategy (the company attempted but failed to pursue expensive M&A processes with bankrupted Garden Fresh Restaurant Intermediate Holdings, among others), and (v) poor risk management procedures. On the latter point, it seems the company was a wee bit cavalier about not-at-all-serious matters like alcohol awareness, sexual harassment and food handling safety; therefore, it “experienced higher-than-normal litigation and enforcement-related expenses.” Yikes.

Now, back in October 2016 — in the context of Garden Fresh’s chapter 11 filing — we asked “Are Progressives Bankrupting Restaurants?” Therein we highlighted the following:

…Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.  

It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.

Points for PETITION’s bullseye?

Notably, here, the company also underscores that employee costs were a significant contributor to its liquidity constraints. It states:

While struggling with the specific issues discussed above, the Debtors have also suffered from rising employee wage costs, which are particularly high in California, where the vast majority of the Debtors’ restaurants are located. In an attempt to minimize these costs, the Debtors have implemented a scheduling program that has reduced employee hours and has optimized both front-of-house and back-of-house staffing.

Welcome to the party, Mr. Unintended Consequences.

The company seeks to use the bankruptcy process to effectuate the afore-mentioned sale to Z Capital. While the purchase price is a mere fraction of the debt on balance sheet, Z Capital’s proposed stalking horse asset purchase agreement also provides that it will “offer employment to all Company employees at purchased restaurants who are employed at the closing, and may offer employment to other Company employees as well.” In other words, this may be one of those instances where the funds lose on their investments but the (remaining) employees come out relatively okay. Z Capital and Tennenbaum are also providing the company with a $5.5mm DIP credit facility to finance operations during course of the cases.

  • Jurisdiction: D. of Delaware (Judge [ ])

  • Capital Structure: $41.7mm first lien credit facility (Wells Fargo Bank NA), $195.1mm second lien credit facility (Wells Fargo Bank NA), $17.53mm in secured reimbursement obligation loans (from Letters of Credit), $53.62mm unsecured subordinated convertible debt (Z Capital = large holder)    

  • Company Professionals:

    • Legal: Sidley Austin LLP (Vijay Sekhon, Christina Craige, Ariella Thal Simonds) & (local) Young Conaway Stargatt & Taylor LLP (Robert Brady, Elizabeth Justison, Andrew Magaziner, Edmon Morton, Michael Nestor)

    • Financial Advisor: Alvarez & Marsal LLC (Jonathan Tibus)

    • Investment Banker: Piper Jaffray & Co. (Jean Hosty, Terri Stratton, Michael Sutter) 

    • Claims Agent: KCC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Stalking Horse Bidder & DIP Lender: Z Capital Group LLC (Legal: Cleary Gottlieb Steen & Hamilton LLP & (local) Morris Nichols Arsht & Tunnell LLP)

    • DIP Lender: Tennenbaum Capital Partners (Legal: Schulte Roth & Zabel LLP & (local) Landis Rath & Cobb LLP)

    • DIP Agent: Wells Fargo Bank NA (Thompson & Hine LLP)

New Chapter 11 Filing - Brookstone Holdings Corp.

Wellness, Entertainment & Travel Retailer Now Bankrupt

Brookstone Holdings Corp.

8/2/16

 Source: Brookstone.com

Source: Brookstone.com

Almost exactly a month ago we asked “Is Brookstone Headed for Chapter 22? and wrote the following:

Go to Brookstone’s website for “Gift Ideas” and “Cool Gadgets” and then tell us you have any doubt. We especially liked the pop-up asking us to sign up for promotional materials one second after landing; we didn’t even get a chance to see what the company sells before it was selling us on a flooded email inbox. Someone please hire them a designer.

On Friday, Reuters reported that the company has hired Gibson Dunn & Crutcher LLP(remember them?) to explore its restructuring options. What’s the issue? Well, retail. Need there be any further explanation?

The company has roughly 120 stores (20 are in airports), approximately $45mm of debt and a Chinese sponsor in Sanpower Group Co Ltd.

This is a big change from when it first filed for bankruptcy in April 2014. At the time of that filing, the company had 242 stores and approximately $240mm in debt. The company blamed its over-levered capital structure for its inability to address its post-recession challenges. It doesn’t appear to have the same excuse now.

Upon emergence, it reportedly still had 240 stores. Clearly the company ought to have used the initial bankruptcy for more of an operational fix in addition to its balance sheet restructuring. While this could be a costly mistake, the company’s sponsor is a bit of a wild card here: Chinese sponsors tend to be more disinclined to chapter 11 proceedings than American counterparts. Will they write an equity check then?

Well, we now have our definitive answers. Yes. The company filed for bankruptcy earlier today. And whether Sanpower was disinclined to file or not, well…it’s in bankruptcy. And, it will not, at least not as of now, be writing an equity check.

The New Hampshire-based company describes itself as “a product development company and multichannel retailer that offer a number of highly distinctive and uniquely designed products. The Brookstone brand is strongly associated with cutting-edge innovation, superior quality, and sleek and elegant design.” Which is precisely why we plastered a “videocassette” emoji in our title. Because that description comports 100% with the way we view the brand. But we digress.

The company has clearly engaged in some downsizing since emerging from bankruptcy a few years ago; it notes that it currently operates 137 retail stores across 40 states with 102 of those stores located in malls and 35 in airports; it also carries 700 SKUs, the majority of which fall in one of three product categories (wellness, entertainment and travel). It sells across four product channels: mall retail, airport retail, e-commerce (brookstone.com and Amazon.com), and wholesale (including TV shopping which, we believe, means home shopping network sort of stuff). For fiscal year 2017, the company had net sales of $264mm and negative EBITDA was $60mm. For the first half of 2018, net sales were $74mm and negative EBITDA was $29mm. Annualize that first number and you’re looking at a pretty precipitous drop in revenue!

The company highlights the juxtaposition between its mall and retail sales channels. Whereas the former generated ‘17 net sales of $137.9mm and negative EBITDA of $30mm, the latter generated net sales of $37.7mm and “adjusted” EBITDA of $1.4mm. We haven’t seen the numbers but we’re guessing the adjustment takes this statement into account:

Moreover, the net sales and adjusted EBITDA figures do not tell the whole story with respect to the productivity of the Airport retail outlets. As described further below, supply chain issues have limited the sales potential that would otherwise be captured with a healthy network of suppliers. The Debtors believe that through the bankruptcy they can correct the supply chain issues and allow the airport stores to greatly increase their profitability.

🤔🤔 Seeing a lot of adjustments on the basis of “belief” these days.

Likewise, the company claims that aberrational externalities affected its e-commerce operations as well. There, the company claims $55.2mm in net sales and negative adjusted EBITDA of $1mm. The company believes that the discontinuation of its catalog mailings had a detrimental impact on its e-commerce (and store retail) numbers. It notes:

As with the airport retail segment, the net sales and adjusted EBITDA associated with the Debtors’ ecommerce segment is not reflective of its true potential due to supply chain difficulties. In addition, and as described further below, technology issues and a turnover of senior level management at the e-commerce segment led to underperformance at a segment that should be performing at a significantly higher level. The Debtors believe that the bankruptcy filing will afford the Debtors the opportunity to right the operational defects that have artificially stymied the overall profitability that should be incumbent to the Debtors’ online presence.

Finally, the company claims its wholesale business has a lot of demand and has been under-utilized due to the same supply chain issues affecting its other channels.

In other words, when we said earlier that “[c]learly the company ought to have used the initial bankruptcy for more of an operational fix,” we hit the nail on the head. The company notes:

Following the 2014 Bankruptcy, sales continued to lag almost immediately. For the years ended 2014 and 2015, net sales were pegged at approximately $420 million and $389 million respectively, while adjusted EBITDA was booked at negative $38 million and negative $24 million respectively. While a number of factors contributed to the underperformance, sourcing of products and supply chain difficulties were the major drivers.

But of course there’s an overall macro overlay here too:

The drop in net sales in 2016 and 2017 was further exacerbated by the decline in the mall model as a means for consumers to buy products of the type sold by Brookstone. During this time, foot traffic at mall locations decreased drastically, as consumers continued to seek out products online as a replacement for traditional brick and mortar shopping.

The company’s e-commerce efforts could not pick up the slack. It blames leadership changes, a new platform (and a loss of data and indexing that resulted), and the discontinuation of the hard copy catalog for this. The company notes:

Because the catalogs were directly responsible for a significant portion of the web traffic on the Debtors’ e-commerce site, the negative impact on the Debtors’ online sales was dramatic.

Anyone who thinks that e-commerce can survive independent of paper mailings ought to re-read that sentence. It also explains the fifteen Bonobos catalogs we get every week and the 829-pound Restoration Hardware calalog we receive every quarter. Remember the buzzword of the year: “multi-channel.” Case and point.

To make this already (too) long story short, Sanpower kept sinking money into this sinking ship until it finally decided that it was just throwing good money after bad. Callback to July when we said they’re disinclined to chapter 11…well, lighting millions of dollars on fire will make you a little more inclined. 💥💥

Powered by a $30mm DIP credit facility (not all new money: some will be used to refi out the ABL) from its prepetition (read: pre-bankruptcy) lenders, the company intends to use the bankruptcy filing to execute an orderly store closing process and market and sell the business. This is clearly why it went to great lengths to pretty up its e-commerce, mall and wholesale businesses in its narrative. Still, the company has been marketing the business for a month and, thus far, there are no biters. Per the agreement with its DIP lenders, the company has until September 2018 to effectuate its sale process. You read that right: a company that bled out over a period of years has two months on life support.

Major creditors include Chinese manufacturers and, as you might expect, the usual array of landlords, General Growth Properties ($GGP)Simon Property Group Inc. ($SPG), and Macerich Co. ($MAC). Given the positioning of the respective businesses, we wouldn’t expect much of a mall business to survive here regardless of whether a buyer emerges.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $70mm ABL Revolver (Wells Fargo NA) & $15mm Term Loan (Gordon Brothers Finance Company), $10mm second lien notes (Wilmington Trust), $39.4mm Sanpower Secured Notes, $46.6mm Sanpower Unsecured Notes

  • Company Professionals:

    • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Matthew Williams, Keith Martorana, Jason Zachary Goldstein) & (local) Young Conaway Stargatt & Taylor LLP (Michael Nestor, Sean Beach, Andrew Magaziner)

    • Financial Advisor: Berkeley Research Group LLC

    • Investment Banker: GLC Advisors & Co. (Soren Reynertson)

    • Liquidator Consultants: Gordon Brothers Retail Partners LLC & Hilco Merchant Resources LLC

    • Claims Agent: Omni Management Group (*click on company name above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: Wells Fargo NA (Morgan Lewis & Bockius LLP, Glenn Siegel, Christopher Carter & Burr & Forman LLP, J. Cory Falgowski)

    • DIP Term Agent: Gordon Brothers Finance Company (Choate Hall & Stewart, Kevin Simard, Jonathan Marshall & Richards Layton & Finger PA, John Knight)

    • Indenture Trustee: Wilmington Trust NA

New Chapter 11 Filing - Home Heritage Group Inc. 

Home Heritage Group Inc.

7/29/18

Recap: You can read it here.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: $83.4mm RCF (PNC Bank) & $167.4mm TL (KPS Special Situations Fund III)

  • Company Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Jamie Luton Chapman, Ashley Jacobs, Shane Reil)

    • Financial Advisor: AlixPartners LLC (Robert Albergotti)

    • Investment Banker: Houlihan Lokey

    • Claims Agent: KCC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • DIP Lender: PNC Bank NA

      • Legal: Blank Rome LLP (Regina Stango Kelbon, Stanley Tarr, Michael Graziano, Christopher Manion)

    • Sponsor: KPS Capital Partners

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Jeffrey Safterstein, Jacob Adlerstein, Sarah Harnett & Eugene Park) & (local) Cozen O’Connor LLP (Mark Felger)

New Chapter 11 Filing - The NORDAM Group, Inc.

The NORDAM Group, Inc.

7/22/18

A promising contract can sometimes prove to be an albatross. Here, The Nordam Group Inc., an Oklahoma-based aircraft component manufacturing and repair company, has filed for bankruptcy after a long-term development and manufacturing agreement ("LTPA") with Pratt & Whitney Canada Corporation ("P&WC") to develop, manufacture, and support an FAA-approved nacelle system for the Gulfstream G500 aircraft proved overly burdensome. Per the company:

"The Debtors currently estimate that their expenses incurred under the LTPA exceed $200 million. These expenses have, in turn, challenged overall financial performance, with EBITDA declining from approximately $88 million in fiscal year 2008 to approximately $50 million in fiscal year 2017. These financial challenges have further impacted the Debtors’ balance sheet and available liquidity, including with respect to the Debtors’ revolving credit facility, which matured on June 18, 2018 with approximately $266.5 million outstanding."

Harsh. After failing to successfully negotiate a resolution to these issues with both its bank group and P&WC, the company has filed for bankruptcy to leverage the Bankruptcy Code's "breathing spell" and, presumably, contract rejection provisions under section 365. The company seeks access to a $45mm DIP credit facility to fund its cases. 

  • Jurisdiction: D. of Delaware (Judge Walrath)
  • Capital Structure: $266.5mm RCF (JPMorgan Chase Bank NA), $19.2mm unsecured promissory notes   
  • Company Professionals:
    • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Ryan Preston Dahl, Jill Frizzley) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Paul Heath, Brett Haywood, Megan Kenney)
    • Financial Advisor: Huron Consulting Group Inc. (John DiDonato, Matthew Fisher)
    • Investment Banker: Guggenheim Securities LLC (Ronen Bojmel)
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
    • Independent Directors: David Eaton, Thomas Allison
  • Other Parties in Interest:
    • Prepetition Agent & DIP Agent: JPMorgan Chase Bank NA
      • Legal: Simpson Thatcher & Bartlett LLP 
    • P&WC
      • Legal: Wachtell Lipton Rosen & Katz (Philip Mindlin, Douglas Mayer) & (local) Stevens & Lee PC (Joseph Huston Jr.)

Updated: 7/23 at 2:09 CT

New Chapter 11 Filing - Sarar USA Inc.

Sarar USA Inc. 

7/20/18

Sarar USA Inc., a New Jersey-based brick-and-mortar retailer of high-end men's apparel (read: custom-tailored suits) filed for bankruptcy. The company's products are manufactured by Sarar Turkey, a Turkey-based textile company that purportedly produces clothing for the likes of Hugo Boss and Ermenegildo Zegna. Sarar USA currently operates twelve locations; it, until recently, operated eighteen locations but recently closed six locations, including a store on Madison Avenue in New York City. The stores are "primarily in 'Class A' malls (prime locations)." 

The company filed for bankruptcy because "its retail sales have not been sufficient to cover its costs, which consist primarily of rent, labor and costs of products." And why is that? Well,

While the Debtor has created a unique high-end customer experience that is valued by its customers, unpredictable industry-wide market challenges in brick-and-mortar retail locations (notably, declining traffic in traditional shopping malls and the inability/lack of willingness by landlords to adjust rents to these operating realities) have led to extremely high operating costs and depressed profits in recent years.

At least they didn't note "the Amazon Effect." Whew. 

The company's equityholders were, for some time, propping the company up with liquidity infusions but apparently concluded that they were just flushing money down the toilet. Attempts to negotiate rent concessions from landlords proved futile. The company, therefore, is in Chapter 11 to review its store footprint, close underperforming stores under cover of the Bankruptcy Code, and take a second bite of its landlords to see if they'll be able to squeeze any postpetition rent forgiveness. If the company truly is in Class A malls, well...color us skeptical. 

The company, however, seems optimistic. It boasts: 

The Debtor’s products are priced from $50-$1,500, with an average retail price (after applicable discounts) of $320. Since its founding, the Debtor has been on a purposeful mission to create high-end tailored suits for the American and Canadian market. The Debtor’s suits are known throughout the world as one of the finest brands available to discriminating consumers. The Debtor offers suits that are both in-style and customer-fitted. Store locations are stocked with an average of 4,500 unique products, across a range of colors to fit any body type. The Debtor has become a leading fashion brand in the United States.

Which would explain why none of us here at PETITION have never heard of it. We've guessing nobody in the restructuring community has either, quite frankly. At least judging by the suits we've seen y'all rocking in court, anyway. 

The company also has an e-commerce platform that "currently accounts for approximately 2% of the Debtor's revenues." Expanding that platform is just one part of many in a robust strategic plan the company hopes to initiate in bankruptcy to be viable go-forward. Godspeed. 

  • Jurisdiction: D. of New Jersey (Judge Sherwood)
  • Capital Structure: No secured debt.      
  • Company Professionals:
    • Legal: Perkins Coie LLP (Schuyler Carroll, Jeffrey Vanacore)
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)

Updated 7/20/18, 6:44 pm CT

New Chapter 11 Filing - Neighbors Legacy Holdings Inc.

Neighbors Legacy Holdings Inc.

7/12/18

Look! Some healthcare distress. 

Neighbors Legacy Holdings Inc., an operator of 22 freestanding emergency centers throughout the state of Texas filed for bankruptcy on July 12, 2018. The company blames its filing on "financial difficulties caused in large part by increased competition, less favorable insurance payor conditions, declining revenues, and disproportionate overhead costs as compared to their operational income." In other words, its owners did too much too fast, taking on too much debt to expand too rapidly in a space that requires significant upfront capital investment in exchange for a 12-18 month lag in cash flow generation. Initiate death spiral. 

The company's financial numbers look brutal. Per the First Day Declaration:

"...the Debtors’ consolidated EBITDA dropped from $49 million in 2015, to $45 million in 2016, to $10.3 million in 2017. This drop has been caused, in part, by the increased competition in the industry, which has led to lower patient volumes per Emergency Center. For the Emergency Centers opened prior to 2016, the average claims per day fell from approximately 13 in the first quarter of 2017 to approximately 10 currently. For Emergency Centers opened during 2016, there continues to be, on average, fewer than 10 claims per day. This marked reduction in patient volume led to a strain at previously profitable locations and underperformance at new locations."

The company, therefore, has been engaged in a game of whack-a-mole, trying to plug leakages in the enterprise in order to survive. The company had to close several unprofitable locations and abandon planned (but never opened) locations. It also took down SG&A, all the while alienating relationships with critical parties like landlords, vendors and doctors. You know, like, critical cogs in a medical service machine. 

On the bright side, the company does have a stalking horse bidder in tow. Altus Health Systems OPCO LLC and Altus Health System Realty LLC are the staking horse bidder for Houston assets. The company will utilize the "breathing spell" provided by the filing to conduct an auction and attempt to maximize the value of the assets in a competitive process. 

  • Jurisdiction: S.D. of Texas (Judge Isgur)
  • Capital Structure: $30mm RCF & $120mm term loan (KeyBank National Association)
  • Company Professionals:
    • Legal: Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)
    • CRO/Financial Advisor: CohnReznick LLP (Chad Sandler)
    • Investment Banker: Houlihan Lokey Inc. 
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Prepetition Lender: KeyBank National Association
      • Legal: Reed Smith LLP (Lloyd Kim, Matthew Tashman)

New Chapter 11 Filing - Tintri Inc.

Tintri Inc.

7/10/18

On June 23 in "#BustedTech (Short Busted IPOs…cough…DOMO), we wrote the following: 

Tintri Inc., a publicly-traded ($TNTR) Delaware-incorporated and Mountain View California based provider of enterprise cloud and all-flash and hybrid storage systems appears to be on the brink of bankruptcy. There's no way any strategic buyer agrees to buy this thing without a 363 comfort order. 
In an SEC filing filed on Friday, the company noted:

"The company is currently in breach of certain covenants under its credit facilities and likely does not have sufficient liquidity to continue its operations beyond June 30, 2018."

Furthermore, 

"Based on the company’s current cash projections, and regardless of whether its lenders were to choose to accelerate the repayment of the company’s indebtedness under its credit facilities, the company likely does not have sufficient liquidity to continue its operations beyond June 30, 2018. The company continues to evaluate its strategic options, including a sale of the company. Even if the company is able to secure a strategic transaction, there is a significant possibility that the company may file for bankruptcy protection, which could result in a complete loss of shareholders’ investment."

And yesterday the company's CEO resigned from the company. All of this an ignominious end for a company that IPO'd almost exactly a year ago. Check out this chart:
 Source: Yahoo! Finance

Source: Yahoo! Finance

Nothing like a $7 launch, a slight post-IPO uptick, and then a crash and burn. This should be a warning sign for anyone taking a look at Domo — another company that looks like it is exploring an IPO for liquidity to stay afloat. But we digress. 
The company's capital structure consists of a $15.4mm '19 revolving credit facility with Silicon Valley Bank, a $50mm '19 facility with TriplePoint Capital LLC, and $25mm of 8% convertible notes. Revenues increased YOY from $86mm in fiscal 2016 to $125.1mm in fiscal 2017 to $125.9mm in fiscal 2018. The net loss, however, also moved up and right: from $101mm to $105.8mm to $157.7mm. The company clearly has a liquidity ("net cash") covenant issue (remember those?). Accordingly, the company fired 20% of its global workforce (~90 people) in March (a follow-on to a 10% reduction in Q3 '17). The venture capital firms that funded the company — Lightspeed Venture Partners among them — appear to be long gone. Silver Lake Group LLC and NEA Management Company LLC, unfortunately, are not; they still own a good amount of the company.
"Isn't cloud storage supposed to be all the rage," you ask? Yeah, sure, but these guys seem to generate product revenue largely from sales of all-flash and hybrid storage systems (and stand-alone software licenses). They're mainly in the "intensely competitive IT infrastructure market," sparring with the likes of Dell EMCIBM and VMware. So, yeah, good luck with that.
*****

Alas, the company has filed for bankruptcy. This bit about the company's financial position offers up an explanation why -- in turn serving as a cautionary tale for investors in IPOs of companies that have massive burn rates:

"The company's revenue increased from $86 million in fisca1 2016 to $125.1 million in fiscal 2017, and to $125.9 million in fiscal 2018, representing year-over-year growth of 45% and 1 %, respectively. The company's net loss was $101.0 million, $105.8 million, and $157.7 million in fiscal 2016, 2017, and 2018, respectively. Total assets decreased from $158.1 million as of the end of fiscal 2016 to $104.9 million as of the end of fiscal 2017, and to $76.2 million as of the end of fiscal 2018, representing year-over-year change of 34% and 27%, respectively. The company attributed flat revenue growth in fiscal 2018 in part due to delayed and reduced purchases of products as a result of customer concerns about Tintri's financial condition, as well as a shift in its product mix toward lower-priced products, offset somewhat by increased support and maintenance revenue from its growing installed customer base. Ultimately, the company's sales levels have not experienced a level of growth sufficient to address its cash burn rate and sustain its business."

With trends like those, it's no surprise that the IPO generated less capital than the company expected. More from the company:

"Tintri's orders for new products declined, it lost a few key customers and, consequently, its declining revenues led to the company's difficulties in meeting day-to-day expenses, as well as long-term debt obligations. A few months after its IPO, in December 2017, Tintri announced that it was in the process of considering strategic options and had retained investment bank advisors to assist it in this process."

As we previously noted, "[t]here's no way any strategic buyer agrees to buy this thing without a 363 comfort order." And that is precisely the path that the company seeks to take. In its filing, the company indicated that it plans to file a motion seeking approval of the sale of its assets and bid procedures shortly. The filing is meant to provide the company with a chance to continue its efforts to sell the company as a going concern. Alternatively, it will look to sell its IP and liquidate. Triplepoint has agreed to provide a $5.4mm DIP credit facility to fund the process.  Savage.  

Meanwhile, today's chart (at time of publication):

Source: Yahoo! Finance

 

  • Jurisdiction: D. of Delaware (Judge Carey)
  • Capital Structure: $4.7mm RCF (Silicon Valley Bank), $56mm term loan (TriplePoint Capital LLC), $25mm '19 convertible notes.     
  • Company Professionals:
    • Legal: Pachulski Stang Ziehl & Jones LLP (Henry Kevane, John Fiero, John Lucas, Colin Robinson)
    • Financial Advisor: Berkeley Research Group LLC (Robert Duffy)
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • First Lien Lender: Silicon Valley Bank
      • Legal: Riemer & Brownstein LLP (Donald Rothman, Paul Samson, Alexander Rheaume, Steven Fox) & (local) Ashby & Geddes PA (Gregory Taylor)
    • Second Lien Lender: TriplePoint Capital LLC
      • Legal: McDermott Will & Emery LLP (TImothy Walsh, Riley Orloff, Gary Rosenbaum) & (local) Polsinelli PC (Christopher Ward, Jeremy Johnson, Stephen Astringer)
    • Proposed Purchaser: DataDirect Networks Inc.
      • Legal: Manatt Phelps & Phillips LLP (Blase Dillingham, Alan Noskow) & (local) Richards Layton & Finger PA (John Knight)

Updated 7/12/18 at 2:09 CT

New Chapter 22 Filing - Geokinetics Inc.

Geokinetics Inc.

6/25/18

Just when we thought companies had mysteriously figured out how to stay out of bankruptcy court, alas, a filing!

And just when we thought oil and gas-related distress had ridden off into the proverbial Texan sunset, in walks Houston-based geophysical services provider Geokinetics Inc. into the Southern District of Texas with a plan to sell substantially all of its assets to (one-time bankruptcy candidate) SAE Exploration Inc. for $20mm. Looks like the oil and gas downturn still has some appetite for prey. And it must be tasty prey: this is the second time in four years that this company is in bankruptcy. #Scarlet22. Indeed, this company is so good at bankruptcy that, the first time, it emerged from chapter 11 a full year before it even confirmed its plan!! From paragraph 24 of the First Day Declaration:

"On March 10, 2014, GOK and certain affiliated subsidiaries confirmed a prepackaged chapter 11 plan of reorganization in the District of Delaware. Pursuant to the Plan, GOK equitized over $300 million of debt and paid off its revolving credit facility. On May 10, 2013, GOK and certain affiliated subsidiaries emerged from chapter 11."

And we thought Westworld had mind-bending timelines. Whoops. 

The company blames the prolonged downturn and certain discreet "operational difficulties" that resulted in uncollectable receivables for its bankruptcy. Wanting to jump ship as the iceberg approached, Wells Fargo sought to minimize its exposure but the company and its bankers, Moelis, weren't able to find a suitable secured loan facility to refinance its revolving loan. So Moelis toggled to "strategic alternatives" mode which, seemingly, included dumping this turd on unsuspecting public equity investors as the company -- under the guidance of Fried Frank Harris Shriver & Jacobson -- filed a confidential S-1 under the JOBS Act. Sounds a lot like Domo Inc. Or Tintri Inc., for that matter. #HailMary

Obviously the company didn't IPO. Instead, it continued to bleed cash. Ascribe Capital replaced Wells Fargo and funded bridge loans for some time until they were no longer willing to perform triage. The company and its advisors stepped on the gas, lined up the stalking horse bidder, and secured interest in a $15mm DIP credit facility -- from Whitebox Advisors and Highbridge Capital, two funds that are stakeholders in the stalking horse bidder -- and filed for bankruptcy. The proceeds of the DIP will be used, in part, to pay off Ascribe's bridge loans. 

Meanwhile, remember that IPO? It seems the company thought that that was a gigantic waste of time: among the top creditors are Fried Frank Harris Shriver & Jacobson LLP and Moelis & Co. ($MO). Savage. 

  • Jurisdiction: S.D of Texas (Judge Jones)
  • Capital Structure: $15.6mm Term Loan A (Ascribe Capital, Wilmington Trust), $6.8mm RCF (Ascribe Capital, Wilmington Trust)
  • Company Professionals:
    • Legal: Porter & Hedges LLP (John Higgins, Joshua Wolfshohl, Aaron Power)
    • Financial Advisor: FTI Consulting Inc. 
    • Investment Banker: Moelis & Co. 
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Ascribe Investments LLC
      • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Bryce Friedman, Randi Lynn Veenstra, Megan Tweed, Sandeep Qusba, Yun Joo Lim) & (local) Haynes and Boone LLP (Charles Beckham Jr., Martha Wyrick)
    • SAExploration Inc.
      • Legal: Akin Gump Strauss Hauer & Feld LLP (Sarah Link Schultz, Eric Seitz)
    • DIP Lenders: Whitebox Advisors LLC, Highbridge Capital Management LLC
      • Legal: Brown Rudnick LLP (Andreas Andromalos, Steven Levine, Jeffrey Jonas, Robert Stark, Kimberly Cohen)

Updated 6/26 6:54 PT

New Chapter 11 Filing - ABT Molecular Imaging Inc.

ABT Molecular Imaging Inc. 

6/13/18

ABT is the designer, manufacturer and distributor of a Biomarker Generator. Our eyes glazed over just reading the filing papers on this one so we're going to outsource here, spare ourselves some time, and spare ourselves some serious boredom. 

The bottom line is that the company lost more money ($5.5mm) than it made in sales ($5.4mm). The company has $30mm of liabilities, all in, and assets with a net book value of merely $2.5mm. The disparity stems, in most respects, from the debt on the company's balance sheet. The purpose of the filing is to address the balance sheet and/or pursue a sale of the business. The company's secured lender, SWK Funding LLC, has agreed to fund a DIP credit facility over the course of the case and sponsor a sale through a chapter 11 plan if, during the bankruptcy process, the company is unable to find another suitable purchaser. 

  • Jurisdiction: D of Delaware (Judge Silverstein)
  • Capital Structure: $9.6mm first lien debt (SWK Funding LLC), $16.1 second lien debt (SWK Funding LLC)  
  • Company Professionals:
    • Legal: Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan, Greg Flasser)
    • Investment Banker:: SSG Capital Advisors LLC (J. Scott Victor, Neil Gupta, Michael Gunderson)
    • Claims Agent: Garden City Group (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Secured Lender: SWK Funding LLC
      • Legal: Holland & Knight LLP (Brian Smith, Brent Mcilwain) & (local) Young Conaway Stargatt & Taylor LLP 

New Chapter 22 Filing - New MACH Gen LLC

New MACH Gen LLC

6/11/18

In ⓶⓶Is A Fresh Batch of Chapter 22s Coming?⓶⓶, we asked "Did Talen Energy's Acquisition of MACH Gen Miss the Mark? (Short Synergy)". Apparently the answer is yes to both questions: MACH Gen is now in bankruptcy court for the second time in four years. 

New MACH Gen LLC and four affiliated debtors have filed a prepackaged chapter 11 bankruptcy that seeks to partially equitize its first lien debt, transfer interests in the Harquahala facility in Arizona to the First Lien Lenders, eliminate approximately $95 million of debt off of the company's balance sheet, shed approximately $20 million of annual interest expense, and reorganize around two of the debtor entities. If the plan is effectuated, the company will emerge from bankruptcy with a (slightly) trimmed down balance sheet including (i) $512 million of first lien debt split among a revolving credit facility and two term loans and provided by the prepetition First Lien Lenders and (ii) approximately $25 million in a new second lien term loan provided by Talen Energy Supply LLC. The First Lien Lenders have also agreed to provide a $20 million DIP credit facility. The proposed plan of reorganization appears to be fully consensual among the various debt and equity interest holders. Accordingly, the company hopes to confirm the plan within 45 days of filing and obtain regulatory approvals another within an additional 45 days. 

The company is the owner and manager of a portfolio of three natural gas-fired electric generating facilities: (1) a 1,080 MW facility located in Athens, New York that achieved commercial operation on May 5, 2004 (the “Athens Facility”); (2) a 1,092 MW facility located in Maricopa County, Arizona, that achieved commercial operation on September 11, 2004 (the “Harquahala Facility”); and (3) a 360 MW facility, located in Charlton, Massachusetts, that achieved commercial operation on April 12, 2001 (the “Millennium Facility,” and collectively with the Athens Facility and the Harquahala Facility, the “Facilities”). The company generates revenue by selling energy, capacity and ancillary services from the Facilities into relevant power markets. In the last fiscal year, the company generated approximately $269 million of operating revenue at a net loss of approximately $10 million. 

These numbers shouldn't really be surprising. In May we highlighted the following:

"Here is where natural gas prices were (i) in April 2014 around the time of the bankruptcy filing (5.97), (ii) in November 2015 (2.08) at the time of the Talen acquisition, (iii) in June 2016 (2.57) at the time of the announced Riverstone transaction, (iv) in December 2016 at the time the transaction closed (3.58) and (v) where they stand now (~2.69):"
Screen Shot 2018-06-11 at 9.41.11 AM.png

This change in the natural gas market (and regulatory hurdles) flipped "compelling future projections" to "a challenging operating environment" and, in 2016, the company "significantly underperformed" its way to a net loss of $589.8 million. Given the current environment for natural gas, we'll see whether this transaction does the trick. After all, as the company notes, "[a]though the Plan will result in the elimination of debt, Reorganized MACH Gen will continue to have a significant amount of indebtedness after the Effective Date." See you in four years? 

  • Jurisdiction: D. of Delaware
  • Capital Structure: $132.9mm first lien RCF (CLMG Corp., Beal Bank SSB), $465.1mm first lien TL,      
  • Company Professionals:
    • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, Edmon Morton, Kenneth Enos, Elizabeth Justison)
    • Financial Advisor: Alvarez & Marsal LLC (Ryan Omohundro)
    • Investment Banker: Evercore LLC (Bo Yi)
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
  • First Lien & DIP Agent: CLMG Corp.
  • First Lien Lenders: Beal Bank USA/SSB
    • Legal: White & Case LLP (Thomas Lauria, Scott Greissman, Elizabeth Feld)
  • Talen Energy Supply LLC 
    • Legal: Skadden Arps Slate Meagher & Flom LLP (Lisa Laukitis) 

New Chapter 11 Filing - Color Spot Holdings Inc.

Color Spot Holdings Inc.

5/29/18

Sometimes distress comes from unexpected places. On Tuesday, Color Spot Holdings Inc., a "leading" grower and distributor of quality live plants in the western and southwestern United States filed for bankruptcy. The company's products include bedding plants, e.g., (i) annuals, perennials and poinsettas and other holiday plants (70% of revenue) and (ii) flowering and ornamental shrubs (30% of revenue).

In its First Day Declaration, the company noted:

"In 2016 and 2017, the Debtors had sales of about $268 million and $248 million, respectively. The Debtors’ industry is expanding due to, among other things, an ongoing focus by consumers on caring for their yards and outdoor spaces, favorable demographic shifts, and increasing housing stock. The Debtors are poised to capture upside from this industry growth." 

Curiously that expansion and growth didn't point to expanded and grown sales. And that is despite having a heavyhitter client list, including The Home Depot ($HD), Lowe's Companies, Inc. ($LOW), Costco ($COST), Target ($T), and Walmart ($WMT). And this is despite the company's internal logistics infrastructure which includes 75% of product distribution handled by its internal fleet. This shields the company from rising trucking costs which, as PETITION has noted elsewhere, is more and more of an issue for a variety of businesses. 

To fund its highly seasonal business, the company is a party to three different credit facilities, some components of which applied (cough, usurious) interest rates at 12+%. This is a big part of the problem. In addition, we like to joke a lot about how every business under the sun blames weather for its poor earnings reports. Here, though, it truly makes sense. Indeed, the company blames the long California draught and Texan storms in 2015 and 2017 for significant operational issues. Apparently, the company also experienced declining customer service as it grew. It's hard to get good help these days, it seems. 

Consequently, the company has been in the midst of an operational restructuring; it has closed 33% of its nurseries and fixed its product mix. It has also been seeking a buyer. No stalking horse buyer is lined up, however, and the expressions of interest that the company has obtained don't appear likely to cover the Wells Fargo-funded debt. Consequently, the company intends to use bankruptcy to pursue an expedited sale process supported by the use of cash collateral with the hope of improving upon the prepetition interest and setting the business and its new owners up for success in the upcoming season. By late July, we'll know whether they were successful. 

  • Jurisdiction: D. of Delaware (Judge Silverstein)
  • Capital Structure: $117.5mm debt     
  • Company Professionals:
    • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Ryan Bartley, Sean Greecher, Jaime Luton Chapman, Betsy Feldman)
    • Investment Banker: Raymond James & Associates Inc.
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Prepetition Lender: Wells Fargo Bank NA
      • Legal: Pillsbury Winthrop Shaw & Pittman LLP (Matthew Walker, M. David Minnick) & (local) Richards Layton & Finger PA (John Knight, Brendan Schaluch)
    • Capital Farm Credit, FLCA
    • Black Diamond Commercial Finance, L.L.C.