🎓New Chapter 11 Bankruptcy Filing - The College of New Rochelle🎓

The College of New Rochelle

September 20, 2019

Non-profit The College of New Rochelle filed for bankruptcy, an unfortunate step for a school founded in 1898 and meant to serve underprivileged and first-generational college students. Sadly, the school’s problems stem from a rogue Controller who (i) failed to pay payroll taxes over a two year period, (ii) misappropriated government grant money, (iii) used endowment funds in an unauthorized manner, (iv) stiffed creditors with all kinds of schemes, and (v) concealed the true nature of the school’s financial condition by, among other things, misrepresenting financial health and issuing false financial statements. Ouch.

While Mr. Incompetent Controller pled guilty to fraud and failure to pay payroll taxes, that, unfortunately, does not cure the financial situation for the school, which finds itself “with over $31 million in previously undisclosed debts.” As for the Controller, he was sentenced to three years in federal prison, a $25k fine, and ordered to pay restitution of no less than $13.2mm — which there isn’t a chance in hell he’ll be able to do.

As if this isn’t horrible enough already, the school’s endowment is too small and the school’s enrollment revenue is too inadequate to address this massive liability. Consequently, the school is now forced to wind-down to pay off its debts. As a practical matter, what does this mean? Well, first, the school had to figure out a solution for its students. It did so via a “teach-out agreement” with a neighboring school, pursuant to which the students were able to continue their education and secure credit. Second, the school owns its real estate and has hired a real estate broker to pursue sales thereof. Those sales will go a long way towards paying the past due taxes owed and secured debt. The company has a commitment for a $4mm DIP credit facility to fund the cases.

What a sad social commentary: one dude’s malfeasance tore down 100+ years of history. Tragic.

• Jurisdiction: S.D. of New York (Judge Drain)

• Capital Structure: $31.9mm secured loan (Citizens Bank/DASNY), $2mm secured loan (Carney Family Charitable Foundation), ~$2.4mm secured loan (Key Bank NA), ~$14mm bond debt (Industrial Bonds, UMB Bank NA, trustee)

• Professionals:

  • Legal: Cullen and Dykman LLP (Matthew Roseman, Bonnie Pollack, Elizabeth Aboulafia, Sophia Hepheastou)

  • Financial Advisor/CRO: Getzler Henrich & Associates LLC (Herbert Weil, Mark Podgainy)

  • Real Estate Broker: A&G Realty Partners LLC/B6

  • Claims Agent: KCC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Key Bank NA

    • Legal: Nolan Heller Kauffman LLP (Francis Berman)

  • DIP Lender ($4mm): Summit Investment Management LLC

    • Legal: Kilpatrick Townsend & Stockton LLP (Todd Meyers, David Posner, Paul Rosenblatt)

🖥New Chapter 11 Bankruptcy Filing - Collective Inc. (Visto)🖥

Collective Inc. (Visto)

November 29, 2018

Adtech isn’t exactly known for its sexiness. SaaS (software-as-a-service), on the other hand, has been on fire lately. “Recurring revenue” is everyone’s jam these days (yes, even ours) and SaaS products are the key drivers of recurring revenue. This would explain some of the REDONKULOUS multiples that we’ve been seeing of late in the SaaS space. Just last week SAP purchased Qualtrics, a Utah-based provider of experience management software, for $8b, or 23x TTM revenue. That’s no typo: 23x!

Source: tomtunguz.com

Of course, none of these companies, to our knowledge, was an adtech company. So, what is the market for a SaaS adtech company? Collective Inc. a/k/a Visto is about to find out.

Collective Inc. is a SaaS company that…

“…allows brands, advertising agencies, and advertisers to purchase and place advertising and monitor and evaluate data with respect thereto. Collective also offers managed services to media and publisher clients, where Collective employees provide proposals to clients, and then implement and monitor advertising campaigns for those clients.

It was once a high-flying startup that grew to $174mm in revenues in 2013 and was on the verge of an IPO. But…

within the next twelve months and before any IPO went to market, Collective began experiencing a downturn in its traditional managed service business due to a significant decrease in buys from large advertising agency holding companies who were beginning to build their own internal advertising trading desks to buy digital ads themselves instead of using companies like Collective to buy it for them. As a result, the IPO was pulled.

Consequently, Collective pivoted to SaaS; it is now finding that transition to be costly and ineffective; its net loss in 2017 was $15.7mm; and, so, it needs a lifeline. Collective is lucky that the secured lender and agent on its $26mm credit facility ($17.285mm funded), National Electric Benefit Fund (“NEBF”) and RCP Advisors 2 LLC, respectively, are patient. They have been largely forgiving as Collective runs a sale process that has largely been a failure.

Now, though, the company has filed for chapter 11 to effectuate a 363 sale that will convey its assets to a prospective buyer “free and clear” of prior liens and encumbrances. Zeta Global Holdings Corp. emerged as a stalking horse purchaser and the proposed purchase price is an all-(Zeta)-stock transaction worth approximately $15mm. NEBF will fund the case via a $4mm DIP.

• Jurisdiction: S.D. of New York (Judge Lane)

• Capital Structure: $26mm debt (National Electric Benefit Fund)

• Company Professionals:

  • Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Nancy Manzer, Benjamin Loveland)

  • Investment Banker: Oaklins DeSilva & Phillips LLC

  • Claims Agent: Epiq Corporate Restructuring LLC (*click on company name above for free docket access)

• Other Parties in Interest:

  • Lender: National Electric Benefit Fund

    • Legal: Troutman Sanders LLP (Brett Goodman, W. Peter Beardsley)

  • Official Committee of Unsecured Creditors

    • Legal: Cullen and Dykman LLP (Michelle McMahon, Nicole Stefanelli)

Updated 1/11/19

New Chapter 11 Filing - Herb Philipson's Army and Navy Stores Inc.

Herb Philipson’s Army and Navy Stores Inc.

October 8, 2018

Herb Philipson’s Army and Navy Stores Inc., a New York-based outdoor apparel and sporting goods retailer since 1951, filed for bankruptcy in the Northern District of New York.

The company carries various brands like Carhartt, Columbia Sportswear, Levi, lee, Under Armour, Dickies, Timberland and The North Face in its stores (most of which are now the company’s largest unsecured creditors) and also serves as the exclusive retailer for the Utica Comets Hockey Team and the new Utica City Football Club. The company has 9 locations, none of which are in or on company-owned structures or real property. The company had revenues of $43.5mm and $39.8mm in 2016 and 2017, respectively. Through nine months of 2018, the company experienced a dramatic decline in business with revenues of just $15.6mm.

What caused such a stark decline in business? The company notes:

“The decline of the Debtor’s business is directly attributable to a confluence of operational and liquidity factors. Starting in 2015, the Company began to suffer from decreased sales — largely attributable to HP’s inventory mix failing to appeal to the tastes of the market and the rise of e-commerce, which allowed the Debtor’s customers to purchase from on-line retailers the same or similar good being offered by the Company.”

Moreover, the company lost access to its line of credit, necessitating sales of new inventory to finance operations and leaving the company unable to order fresh inventory in Q1 2018.

What followed is a textbook tale of a small brick-and-mortar business trying to make it in a world dominated by upstart DTC brands, Amazon, and bigbox retail. Renegotiations of leases. Headcount reductions. An intensified focus on inventory selection and management. A scramble for new credit which, here, new ownership was able to lock down.

Clearly, however, the terms of the new credit line were either too onerous or too unrealistic as, unfortunately for the company, the new credit facility merely helped expedite the company’s spiral into bankruptcy court. Indeed, roughly a month after entering into the new lending facility, the lender, Second Avenue Capital, notified the company that it was in default under the facility. The relief afforded the company by the cash infusion was, clearly, short-lived.

Consequently, the company filed for bankruptcy so that the “automatic stay” protections of the Bankruptcy Code (section 362) could be leveraged to prevent Second Avenue Capital from exercising its rights and remedies under the credit facility and provide the company with a “breathing spell” within which to attend to “properly restructure and reorganize its affairs and propose a chapter 11 plan that would provide…creditors with meaningful recoveries.”

October 12, 2018 Update:

As is often the case in bankruptcy, there are two sides to every story. In this case, the company’s secured lender, Second Avenue Capital, argues that the company “demonstrated a shocking inability to accurately project the operating performance of the business” leading to “material deviations” to the underwriting-dependent budget. Second Avenue argues, among other things, that (i) the debtor missed its own sales projections by 33.1%, (ii) comparable store sales are projected in the company’s latest budget to be negative 30% and 37% (vs. the underwritten projected positive 5% and 10%) for the months of November and December 2018; and (iii) the company has already missed its own inventory projection by approximately 17.9%. In other words, Second Avenue — while objecting to the company’s motion to use cash collateral — is asserting that they are undercollateralized and that the company is providing inadequate adequate protection.

Notably, Second Avenue doesn’t expressly say that the company was fraudulent in providing the budget upon which Second Avenue underwrote the loan; it does say, however, that “[a]s a consequence of the Debtor’s financial performance…and not any nefarious conduct by the Lender…the Debtor was in substantial and material default” under the credit agreement. Not exactly mincing words. Which only means one of three things: (1) the company was wildly inept in putting together its projections/budget; (2) the company was hopelessly optimistic and otherworldly unrealistic about its projections/budget; (3) the macro conditions for a small brick-and-mortar retailer in today’s day are coming at owners so fast and so furious that projections and budgets, more than usual, are anyone’s guess. We’ll leave it to a court to decide but it sure looks like there may be a contested fight here with the fate of the company in the balance.*

*The first day hearing was scheduled for October 15 but no orders have hit the docket.

• Jurisdiction: N.D. of New York (Judge Davis)

• Capital Structure: $2.05mm of secured debt (Second Avenue Capital), $1.5mm secured promissory notes

• Company Professionals:

  • Legal: Griffin Hamersky LLP (Scott Griffin, Michael Hamersky, Sophia Hepheastou) & Cullen and Dykman LLP (Maureen Bass)

  • Financial Advisor & Investment Banker: Scouler Kirchhein LLC

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

• Other Parties in Interest:

  • Senior Secured Lender: Second Avenue Capital LLC

    • Legal: Riemer & Braunstein LLP (Steven Fox)

New Chapter 11 Filing - Hobbico Inc.

Hobbico Inc.

1/10/18

Chicago-based designer, manufacturer and distributor of hobby products like radio-control toys filed for bankruptcy after struggling from (i) too much debt, (ii) lack of investment in product innovation and in its core ecommerce platform, (iii) a systemic shift in the drone market (wherein Asian suppliers started competing by selling direct-to-consumer), (iv) the bankruptcy of a key supplier of racing products, and (v) disruption to its Asian supply chain. The company defaulted on its secured debt and is using the chapter 11 process in order to attempt to sell its business as a going-concern. 

• Jurisdiction: D. of Delaware
• Capital Structure: $74.5mm revolver and term loan (Wells Fargo Bank NA), $41.2mm subordinated secured note (Cyprium Investors IV AIV I LP)     
• Company Professionals:
  • Legal: Neal Gerber & Eisenberg LLP (Mark Berkoff, Nicholas Miller, Thomas Wolford) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Matthew Talmo, Andrew Golden)
  • Financial Advisor: CR3 Partners LLC (Tom O'Donoghue, Douglas Flannery, Chris Creger, Layne Deutscher) & Keystone Consulting Group LLC (Louis Brownstone)
  • Investment Banker: Lincoln International LLC (Alexander Stevenson)
  • Claims Agent: JND Corporate Restructuring (*click on company name above for free docket access)
• Other Parties in Interest:
  • DIP Agent: Wells Fargo Bank NA
    • Legal: Goldberg Kohn Ltd. (Randall Klein, Zachary Garrett, Prisca Kim, Jacob Marshall) & (local) Burr & Forman LLP (J. Cory Falgowski)
  • Lender: Cyprium Investors IV AIV I LP
    • Legal: Cahill Gordon & Reindel LLP (Joel Levitin, Richard Stieglitz Jr.)
  • Official Committee of Unsecured Creditors
    • Legal: Cullen and Dykman LLP (S. Jason Teele, Nicole Stefanelli, Michelle McMahon, Bonnie Pollack) & (local) Whiteford Taylor & Preston LLC (Christopher Samis, L. Katherine Good, Stephen Gerald, Kevin Shaw)
    • Financial Advisor: Emerald Capital Advisors (John Madden)

New Chapter 11 Filing - Peekay Acquisition LLC

Peekay Acquisition LLC

• 8/10/17 Recap: The Auburn Washington-based specialty retailer of lingerie, sexual health and wellness products with 46 locations has filed for bankruptcy after failing to find an out-of-court buyer for its 5000 SKUs of lubes, $265 vibrators, sex toys and other fun stuff. This place sounds...liberated. And while the sex retail industry is allegedly gaining acceptance - at least according to the Company's own filing - it seems that Peekay was unable or incapable of capitalizing on it given its capital structure (PETITION Note: Agent Provocateur also filed for bankruptcy this year so query whether this really is a brick-and-mortar business or whether people would really rather discreetly order their sex toys on Amazon...our money is on the latter. Prior to the internet, options were a bit more limited, we gather.). Consequently, the company's Term Loan A Lenders have consented to the use of its cash collateral and are credit bidding $31mm of their debt to acquire the company after a long and failed attempt by the Company to explore other out-of-court options (which apparently included an IPO...WTF? What would the ticker be? "SEX"? "DIK"? "ASS"? We could do this all day.). 
• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $38.2mm first lien term loan ($27mm term loan A + $8.4mm interest/fees, $14.4mm term loan B + $1.98mm interest/fees), $19mm PIK seller notes    
• Company Professionals:
  • Legal: Landis Rath & Cobb LLP (Adam Landis)
  • Financial Advisor/CRO: Traverse LLC (Albert Altro)
  • Investment Banker: SSG Advisors LLC (J. Scott Victor)
  • Claims Agent: Rust Consulting/Omni Bankruptcy (*click on company name above for free docket access)
• Other Parties in Interest:
  • Term A Lenders/TLA Acquisition Corp. (Alpine Associates, Alpine Heritage LP, Alpine Heritage II LP, Alpine Heritage Offshore Fund Ltd., Chatham Capital Management IV LLC, The K2 Principal Fund LP, Tor Capital LLC, Twin Haven Special Opportunities Fund IV LP)
    • Legal: Curtis Mallet-Provost Colt & Mosle LLP (Steven Reisman, Shaya Rochester, Joshua Geller) & (local) Richards Layton & Finger PA (Mark Collins, Amanda Steele, Brendan Schlauch)
  • Official Committee of Unsecured Creditors
    • Legal: Cullen and Dykman LLP (S. Jason Teele, Nicole Stefanelli) & (local) Whiteford Taylor & Preston LLP (Christopher Samis, L. Katherine Good, Aaron Stulman, Kevin Shaw)
    • Financial Advisor: The DAK Group (Sheon Karol, Ari Fuchs, Claudia Levine)

Updated 9/5/17