New Chapter 11 Filing - Product Quest Manufacturing LLC

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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 - EBH Topco LLC (a/k/a Element Behavioral Health Inc.)

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EBH Topco LLC (a/k/a Element Behavioral Health Inc.)

5/23/18 

Behavioral health services and residential drug and alcohol addition treatment provider in 13 treatment centers across 8 states filed for bankruptcy. If that sounds boring: it's because it is. Which would explain why the Wall Street Journal felt compelled to drop in that its also the facility that treated Britney Spears and Lindsay Lohan. SEO just shot through the roof. Anyway, the company stated,

While the Company has had ongoing financial difficulties, the overall census of the facilities and revenue has declined since 2017. The decline in out-of-network admissions, lower reimbursement rates by insurance providers and the decline in the average length of stay were all contributing factors to the financial losses of the Company. While the Company attempted to increase census through ongoing marketing efforts of its in-house sales team and internet advertising, the increased cost of these efforts did not result in the increase in revenue to improve the financial results of the Company and offset the Company’s cash burn. Financial performance for the fiscal year 2017 was $103.7 million in revenue, $129.6 million in expenses, and EBITDA of $(25.9) million with a total net income/(loss) of $(51.2) million.

Given that the company started in 2008 and then pursued an acquisition-based growth strategy, it seems like they didn't underwrite to current conditions. Ouch. 

Just a few weeks ago, Project Build Behavioral Health, LLC purchased the first lien paper and after an initial buyer of the assets fell through, agreed to be the company' stalking horse bidder in bankruptcy subject to an expedited sale process (the sale hearing is slated for late June); it intends to credit bid its debt. The company has a proposed $14.2 million DIP credit facility lined up to fund the cases. 

  • Jurisdiction: D. of Delaware (Judge Shannon)
  • Capital Structure: $76mm '19 first lien term loan and revolver debt (Madison Capital Funding LLC), $29mm '20 second lien term loan (Cortland Capital Market Services LLC)
  • Company Professionals:
    • Legal: Polsinelli PC (Christopher Ward, Shani Katona, Stephen Astringer, Jeremy Johnson)
    • CRO/Financial Advisor: Alvarez & Marsal LLC (Martin McGahan)
    • Investment Banker: Houlihan Lokey Capital Inc.
    • Claims Agent: Donlin Recano & Company Inc. (*click on company name above for free docket access)
  • Other Parties in Interest:
    • DIP Lender/Stalking Horse Bidder: Project Build Behavioral Health, LLC
      • Legal: McDonald Hopkins LLC (David Agay, Scott Opincar, Michael Kaczka) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)
    • Ad Hoc Group of Second Lien Lenders
      • Legal: Morrison & Foerster LLP (Jonathan Levine, Daniel Harris)
    • Equity sponsors: NEA, Frazier Healthcare Ventures, Formation Capital