🍔New Chapter 11 Filing - SD Charlotte LLC🍔

SD Charlotte LLC

February 7, 2020

SD Charlotte LLC and four affiliates (the “debtors”) filed for bankruptcy on Friday in the Western District of North Carolina. While these are smaller cases than we typically cover here in PETITION, the filing is representative of continued distress in the restaurant space. Why? SD Charlotte LLC is the owner and operator of 73 Sonic Drive-In restaurants, an affiliate is the owner and operator of 14 MOD Pizza restaurants, and another affiliate is the owner and operator of three Fuzzy’s Taco Shop restaurants. In total, the debtors employ 1,900 people and have, as the above numbers might suggest, a large presence in the south east, predominantly in North Carolina.

It’s important to note that the debtors do not indicate that their filing is the result of the various factors we’ve seen in other restaurant filings, i.e., increasing wages, poor leases, VC-backed food delivery services, etc. We can assume, though, that given significant liquidity issues arising almost immediately after the principal franchised the restaurants, that some of these factors were in play. The main issue, however, was the debtors’ debt burden: the debtors appear to have taken on too much debt and expanded too quickly in a difficult environment for restaurants; they have $22.3mm of pre-petition secured debt — a figure that the debtors acknowledge, in their filing, exceeds the value of the debtors’ assets. Ruh roh. 😬

Liquidity has been an issue for the debtors from their inception in 2017. In late 2018, the debtors had to turn to “factors” for liquidity. What the bloody hell is a “factor”? Glad you asked…

A factoring counter-party offers upfront cash payments for future receivables. Said another way, a factor will pay a discounted cash price today and take on the risk of non-payment in exchange for greater cash payments in the near future. To protect, their interest in those future receivables, the factors should obtain a security interest in those receivables and take the proper steps to record those security interests.* The debtors entered into at least at least 10 such agreements in an attempt to stave off the inevitable.

While factoring can be a viable source of emergency liquidity for struggling companies, the terms can be highly punitive. Note:

…the Debtors sold no less than $7,988,325 of future accounts receivable to the MCA Parties in exchange for cash payments in an amount not less than $5,880,000, less fees and certain expenses. These records indicate that the MCA Parties purchased the Debtors’ future accounts receivable at significant discounts, charged high fees and had the ability to debit the Debtors’ deposit accounts directly. The depletion of the Debtors’ liquidity attributable to obligations under the MCA Agreements, coupled with the seasonal downturn in the Sonic Drive-In restaurants, left the Debtors’ cash flow position untenable.

Carry the one, add the two…yeah, that’s a pretty solid discount to par value: a bit over 25%. Think about that: the debtors’ need for liquidity was so dire that they agreed to give away approximately 25 cents on every dollar that would enter their accounts because they didn’t have the luxury of time to wait for those receivables to come in. Private equity firms and others are often dubbed “vultures” but factors have a very interesting role to play here too.

And so the debtors were so low on cash that they ultimately had to get a bridge loan from their franchisor, SRI Holding Company (Sonic). The bridge loan will rollup into a DIP credit facility agreement which, with the pre-petition secured lenders’ consent, will prime the pre-petition secured debt. The DIP credit facility will finance the debtors’ cases and give the debtors some breathing room to pursue a 363 asset sale that will clear out the pre-petition debt and eliminate any and all uncertainty relating to the factoring agreements.

One final point here: it is highly unlikely that a sale will generate enough proceeds to clear both the DIP credit facility and the pre-petition secured debt. This means that general unsecured creditors will get the royal effing. Given all of the pain in restaurant and grocery chains, this begs the question: how much supply chain pain is there out there right now? Food distributors? Packagers? We reckon quite a bit.

*Here there is some question as to whether certain of the factoring agreement counterparties filed UCC-1 financing statements which may put into dispute the validity of their said security interest in those receivables. Any official committee of unsecured creditors will take great interest in whether UCC-1s have been recorded though it likely won’t matter given the value of the assets and the likely superceding security interests held by the prepetition secured lender.

• Jurisdiction: W.D. of North Carolina (Judge Beyer)

• Capital Structure: $450k Bridge Loan (SRI Holding Company), $22.3mm (Bridge Funding Group Inc.)

• Professionals:

  • Legal: Moore Van Allen PLLC (Zachary Smith, Gabriel Mathless, Hillary Crabtree, Joanne Wu, James Langdon) & JD Thompson Law (Linda Simpson)

  • Independent Director: Finley Group (Matthew Smith)

  • Financial Advisor/CRO: Meru LLC (Brian Rosenthal, Alissia Bell)

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

• Other Parties in Interest:

  • DIP Lender: SRI Holding Company, SRI Operating Company, Sonic Franchising LLC and Sonic Industries LLC

    • Legal: DLA Piper US LLP (Daniel Simon, Davi Avraham) & Robinson Bradshaw & Hinson PA (David Schilli)

New Chapter 11 Bankruptcy Filing - Achaogen Inc.

Achaogen Inc.

April 15, 2019

Biopharma is where it’s at!!

San Francisco-based Achaogen Inc. ($AKAO) is the latest in a slate of biopharma debtors who have found their way into bankruptcy court — here, the District of Delaware. Achaogen is focused on “the development and commercialization of innovative antibiotic treatments against multi-drug resistant gram-negative infections.” To date, its operations have been centered around the discovery, development and commercialization of products, making it as far as clinical trials in certain instances. As if inspired by the fact that its filing came on the heels of the much-anticipated Game of Thrones (final) Season 8 premiere, the company colorfully notes its primary purpose:

Achaogen designed its lead product, ZEMDRI® (plazomicin), to fight what the Center for Disease Control (“CDC”) calls a “nightmare bacteria” and has listed as the highest category threat of “urgent.” ZEMDRI can be used to treat patients who have limited or no alternative treatment options from infections with these nightmare bacteria. Even with its current financial situation, Achaogen continues to commercialize ZEMDRI, in part because Achaogen believes that ZEMDRI can save lives for patients who may literally have no alternative.

Nightmare bacteria!! Sheesh that’s chilling.

Even more chilling is the company’s discussion of gram-negative bacteria — found “everywhere, in virtually all environments on Earth that support life.” These bacteria are becoming increasingly resistant to common antibiotics. Achaogen calls this “a global crisis…we take for granted.” The company’s core (patented) product, ZEMDRI, is designed to “retain its effectiveness in killing these more resistant bacteria.” While ZEMDRI received FDA approval for IV-treatment of patients with complicated urinary tract infections in July 2018, the FDA rejected ZEMDRI for treatment of patients with bloodstream infections, citing a lack of substantial evidence of effectiveness.

What does the company have going for it? Again, as of July 2018, it has a commercially viable product in the United States. It also has global commercialization rights. And patent protect in the US through approximately 2031 or 2032. It sells to either specialty distributors or physician-owned infusion centers. It has agreements with Hovione Limited and Pfizer for the manufacturing of its product. Finally, it has another product in development, C-Scape, which is an oral antibiotic for treatment of patients suffering from urinary tract infections caused by a particular bacteria.

So, what’s the issue? As PETITION readers have come to learn, the development and manufacture of biopharma products is a time and capital intensive process. Indeed, the company has an accumulated deficit of $559.4mm as of December 31, 2018. This bit is especially puzzling given the company’s position that the world confronts a “global crisis”:

In the past year, there has been a dramatic downturn in the availability of financing from both the debt and equity markets for companies in the anti-infective field, based in part on the withdrawal from the space by certain large pharmaceutical companies. For example, Novartis recently announced that it is shutting down its antibacterial and antiviral research, which was followed by similar moves from Eli Lilly, Bristol-Myers Squibb and AstraZeneca.3 Allergan has also recently announced its intention to divest its anti-infective business, consisting of three commercialized products. This “big pharma flight” from antiinfective research, development and commercialization has created significant challenges for early-stage biotech companies seeking to develop and commercialize novel and much needed drugs in this sector, as opportunities for partnerships, joint R&D relationships, and merger/acquisition transactions have diminished. This sector-wide trend has negatively affected not just Achaogen but many of its competitors. Achaogen, however, has been especially impacted because it has reached the point in its life cycle where it needs substantial capital infusion to drive commercialization of its recently FDA approved drug, ZEMDRI.

Look: we don’t take everything debtors say as gospel. After all, first day pleadings are an opportunity to frame the story and set the tone of a case. But if the company is right about what it’s saying and nobody appears to give two sh*ts, well, color us a wee bit concerned. Why isn’t anybody talking about this?

Anyway, in February 2018, the company entered into a loan and security agreement with Silicon Valley Bank for $50mm. The original agreement provided SVB with a security interest in virtually all of the company’s assets — including proceeds of intellectual property — but not a security interest in the IP itself. $15mm remains outstanding under the loan. In November 2018, the company retained Evercore Group LLP to run a strategic sale process but no viable purchaser emerged. It’s not worth saving the world unless you can make some dinero, we suppose.

After engaging in various liquidity maximization efforts (including job cuts), fundraising initiatives (including an insufficient equity raise), and licensing discussions with entities abroad, the company ultimately decided that nothing would generate enough liquidity for the company to avoid chapter 11. The company notes, “although Achaogen’s out-of-court sale process did not yield any acceptable bids, many parties had expressed interest in bidding at any potential 363 auction sale, where it could pursue the Assets free and clear of existing liabilities.” The company, therefore, filed for chapter 11 to pursue a new sale process; it has no stalking horse bidder teed up. To market its assets, the company has replaced Evercore with Cassel Salpeter & Co. LLC.

In support of the bankruptcy case, SVB committed to provide the company with a $25mm DIP credit facility of which $10mm is new money and $15mm is a roll-up of the aforementioned pre-petition debt. In exchange, SVB now gets a security interest in the company’s IP.

The company’s unsecured debt is comprised of lease obligations, minimum purchase requirements under its manufacturing contract, a success fee tied to the company’s FDA approval, and $18.7mm of trade debt. New Enterprise Associates Inc., a reputed Silicon Valley venture capital firm, is the company’s largest equity holder with approximately 10.76% of the company’s shares. Prior to its 2014 IPO, the company had raised $152.1mm starting with its Series A round in August 2004: it IPO’d at a valuation of $200.4mm, having issued 6.9mm shares at $12/share to the public. It’s equity is likely worth f*ck all. Well, not exactly: we suppose this isn’t ENTIRELY “f*ck all”:

But it’s pretty darn close. Now the issue is what price the IP will fetch in a bankruptcy sale process. It will have to be tens of millions of dollars for NEA to have any sort of recovery.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $15mm secured debt (Silicon Valley Bank)

• Professionals:

  • Legal: Hogan Lovells US LLP (Erin Brady, Richard Wynne, Christopher Bryant, John Beck) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Talmo, Paige Topper)

  • Financial Advisor: Meru LLC

  • Investment Banker: Cassel Salpeter & Co., LLC

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

• Other Professionals:

  • Prepetition & DIP Lender ($25mm): Silicon Valley Bank

    • Legal: Morrison & Foerster LLP ( Alexander Rheaume, Todd Goren, Benjamin Butterfield, David Ephraim) & (local) Ashby & Geddes PA (Gregory Taylor, Stacy Newman)

  • Official Committee of Unsecured Creditors (Hovione Limited, EsteveQuimica SA, Solar Capital Ltd.,. Crystal BioScience, World Courier)
    
    

New Chapter 22 Filing - Eastern Outfitters LLC

Eastern Outfitters LLC

• 2/5/17 Recap: Seems like chapter 22 bankruptcies are the "it" thing now: everyone's doing it. Last year, Versa Capital Management bought the company in the Vestis Group bankruptcy and, now, Sports Direct looks to pick up the pieces in yet ANOTHER sale of the Bob's Stores and Eastern Mountain Sports retail properties. Top creditors include Under Armour and Google which says something about (a) why UA's growth numbers were considerably off last quarter and (b) the cost of Google SEO for companies in this internet age.
• Jurisdiction: D. of Delaware    
• Capital Structure: $41mm RCF (PNC Bank), $42mm TL (Sportsdirect) 
• Company Professionals:
  • Legal: Bracewell LLP (Robert Burns, Jennifer Feldshur, David Riley, Mark Dendinger) & (local) Cole Schotz (Norman Pernick, Marion Quirk, Katharina Earle)
  • Turnaround Advisor: AlixPartners LLC (Spencer Ware, Susan Brown, Afshin Azhari)
  • Replacement Turnaround Advisor: Meru LLC (Nicholas Campbell, Timothy Meighan)
  • Financial Advisor: Lincoln Partners Advisors LLC  (Alexander Stevenson)
  • Liquidators: Hilco Merchant Resources LLC & Gordon Brothers Retail Partners LLC
    • Legal: Curtis Mallet-Provost Colt & Mosle LLP (Steven Reisman) & (local) Womble Carlyle Sandridge & Rice LLP (Mark Desgrosseilliers)
  • Asset Disposition Advisor & Consultant: Malfitano Advisors LLC (Joseph Malfitano)
  • Claims Agent: KCC (*click on company name for docket)
• Other Parties in Interest:
  • Purchaser: SportsDirect.com Retail Ltd.
    • Legal: Greenberg Traurig LLP (Nancy Mitchell, Maria DiConza)
  • First Lien Lender: PNC Bank, NA
    • Legal: Blank Rome LLP  (Regina Kelbon, Gregory Vizza)
  • Official Committee of Unsecured Creditors
    • Legal: Cooley LLP (Jay Indyke, Cathy Hershcopf, Richelle Kalnit, Sarah Carnes) & (local) Drinker Biddle & Reath LLP (Steven Kortanek, Patrick Johnson, Robert Malone)
    • Financial Advisor: Province Inc. (Paul Huygens, Carol Cabello, Sanjuro Kietlinski, Jin Lai Dong)

Updated 5/31/17