PETITION Note: we recommend pairing this reading with a classic:
In our coverage of the chapter 11 bankruptcy cases of LL Flooring Holdings Inc. (“LL Flooring”)* …
... we — referring to the fact that LL Flooring is the artist formerly known as Lumber Liquidators — snuck in a particularly PETITION-esque ending:
“Will LL Flooring take one final “L” (for liquidation)?”
The answer? Absolutely-freaking-yes!
Going back to their roots, baby. True to their former name, the LL Flooring debtors have, per Docket 168, officially kicked off a hell of an assignment for our friends over at Hilco Merchant Resources LLC (“Hilco”). It’s LLL Flooring now, y’all. This is like Pizza the Hutt eating himself to death in Spaceballs (overrated movie, frankly, but that bit was hysterical).
So how did we get here? Well, recall that, under the DIP milestones, the LLL Flooring debtors had only until the end of August to find a stalking horse bidder. Here, in her declaration, is Houlihan Lokey’s Surbhi Gupta describing just how well the sale process went:
“[S]oon after the commencement of these Chapter 11 Cases, Houlihan contacted over fifty (50) additional parties (and re-contacted parties that were part of the prepetition process) to solicit bids for the Assets. Four (4) parties signed nondisclosure agreements and received access to the same virtual data room as the parties from the prepetition sale process.”
And guess who is counted amongst the four parties given data room access? Founder Tom Sullivan’s F9 Investments (“F9”):**
“As the Liquidation Pivot date neared, the Debtors negotiated with the DIP ABL Lenders to provide an extension of the Liquidation Pivot date in the hopes of reaching an agreement with F9. Unfortunately, these efforts have not resulted in an agreement on an acceptable purchase price and F9’s proposal was far below the valuation expected to be received under the Liquidation Pivot.”
Apparently, Mr. Sullivan thought he could take advantage of the bankruptcy process:
“Based on the work done with Hilco, the Debtors expect the recovery values in a liquidation to be almost 70% greater than the valuation provided in the F9 proposal submitted prior to the Liquidation Pivot.”
You almost have the admire the audacity. You’ll note that this is the same Mr. Sullivan that began a proxy campaign earlier in the year to “protect the value” of equity holders. Apparently that “value” has all but disappeared, and to Mr. Sullivan, the IP and even the FF&E are worth nothing — or so say the LLL Flooring debtors:
“Furthermore, the F9 proposal did not provide any incremental value for furniture, fixtures and equipment (namely the Debtors’ forklifts that they own across all store locations) (“FF&E”) or the Debtors’ intangible property (e.g., proprietary brands and customer lists).”
Hilariously, after all of Mr. Sullivan’s attempts to woo the LLL Flooring debtors both pre- and post-petition, he now may watch the company he founded get flushed.
And he’s not happy about it.
On the eve of a hearing on these matters — set for later today, September 4, 2024, at 11am ET*** — F9 lobbed a “limited objection” to the LLL Flooring debtors’ proposed assumption of their agreement with Hilco and their sale motion. F9 argues that the LLL Flooring debtors’ sale process has been “flawed,” with an “abrupt” pivot to liquidation. F9 writes:
The Debtors’ attempt to defend their flawed process by blaming the bidders should be rejected. Indeed, the Debtors filed the first shred of evidence in purported support of their rash decision to pivot to a liquidation on Labor Day on the eve of the hearing. While F9 Brands disputes the Debtors’ analysis of the F9 Brands going concern bid in those pleadings, F9 Brands has now submitted a revised bid that F9 Brands believes is consistent with what the Debtors communicated was acceptable on an inventory basis. Importantly, F9 Brands’ revised bid also preserves the business and employee jobs. (emphasis added)
What is that bid?
F9 Brands’ current proposed asset purchase includes, generally, the following terms: (a) value to the estates of over $66.5 million, comprised of approximately $44.5 million in cash at closing and at least $22 million in assumed liabilities; (b) the acquisition of (i) inventory, (ii) certain furniture, fixtures and equipment, and (iii) intellectual property; (c) the payment of cure costs; and (d) the assumption of liabilities related to 219 store leases and certain other contracts and employee obligations.
Oh sh*t, there it is: Mr. Sullivan is playing the jobs card. And, given the LLL Flooring debtors’ contention that F9’s offer paled in comparison to their liquidation analysis, the “highest or best” offer card. Is this real? Is Mr. Sullivan once again positioning himself as the White Knight? Will he be? Or is this just a consummate face-saving gesture?
We’ll find out later today but we reckon the spigot has run dry for these cases and there’s little Mr. Sullivan can do about it.****
*You can refer to our other LL Flooring coverage here, here, and here.
**Isaac Capital Group, majority owner of Live Ventures Inc., was another significant party engaged in the sale process; it previously submitted a few unsolicited pre-petition bids for LLL Flooring.
***The LLL debtors plan to proceed with a private sale of their Sandston distribution center (“Sandston DC”) to SNA NE LLC (“SNA”) for $104.75mm cash. SNA is the largest landowner of the business park on which the Sandston DC is located. The proceeds of this sale will go a long way towards paying back the pre-petition ABL and DIP ABL lenders. The sale also features a six-month-no-cost option pursuant to which the LLL Flooring debtors may enter into a lease with SNA over a period of time sufficient to allow the LLL Flooring debtors to maximize value of their assets during the liquidation process.
****You can go here for a professional roster in these cases, updated to reflect SNA’s counsel at Hogan Lovells US LLP (John Beck) and Morris Nichols Arsht & Tunnell LLP (Andrew Remming) and F9’s counsel at Dentons US LLP (Samuel Maizel, David Cook) and Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones).
💥 New Chapter 11 Bankruptcy Filing - Nuvo Group USA Inc. 💥
Man. We take off just a little bit of time and one of the sh*tcoiest sh*tcos in the history of sh*tcoey sh*tcos does a nice ol’ swirl around the bankruptcy bin.
Back on August 22, 2024, Nuvo Group USA Inc. and two affiliates (collectively, the “debtors”) filed chapter 11 bankruptcy cases in the District of Delaware (Judge Walrath). The debtors, founded in Israel in ‘06, make “innovative medical devices,” according to the first day declaration of CEO Robert Powell. So what happened, Mr Powell? “The Debtors simply ran out of money.”
We very much appreciate Mr. Powell in this instance; he doesn’t try to “impact of Covid” his way out of the current predicament. The debtors make one, and only one, device: a “remote pregnancy monitoring band.”* It’s called “the Band” or “INVU”; the FDA cleared it in ‘20 for remote monitoring of fetal and maternal heart rates. “Cleared” is not the same thing as FDA-approved. FDA clearance means only that the manufacturer of a given device can show that a product is “substantially equivalent” to another legally marketed device. The equivalent device, in case you’re wondering, is the Sense4Baby System Model B+, manufactured by Houston-based Advanced Maternity Innovations. The debtors break out the points of equivalence in their application, which is attached to the FDA’s clearance letter here. The FDA also cleared it for uterine contraction detection in ‘21.
The Band is quite the engineering marvel. Powell spends over 2000 words describing it, and yes, there are the all-important references to “AI” and “the cloud.” It’s an interesting, even compelling read; unfortunately, “…the Company is still at the early stages of the public rollout of INVU.” And sure as pitch-black midnight follows twilight, “...the Company has not generated significant revenues from its operations and has suffered recurring losses from operations and negative cash flows from operations. In 2023, our revenue totaled approximately $176,000, with a cost of revenues totaling $191,000, resulting in a loss on these revenues.” R&D chews up a lot of cash. Labor costs are probably not a burden. The workforce is nine employees in the U.S., 37 in Israel and 14 full-time contractors in Ukraine. Five of the Israeli employees are students/interns, Powell writes.**
So what’s an entrepreneur with an “innovative” and “cutting-edge” product to do? Gotta have cash to put this baby into production and move some units, but the damn banksters keep droning about “positive cash flow” and “EBITDA.” Some bright light suggested the debtors avail themselves of America’s once-“it” financial innovation: a “de-SPAC merger transaction.” The debtors thought this was a great idea. They undertook a “business combination” with a blank check entity called LAMF Global Ventures Corp. I (“LAMF”), which raised some $253mm in ‘21, back before everyone figured out that SPACs were just another scam. So who is LAMF?
LAMF is sponsored by LAMF LLC, “d/b/a Los Angeles Media Fund, a multifaceted media and entertainment company whose primary business is financing and producing feature films, television series, documentary projects and live events, the management of professional athletes, and investing in complementary technology businesses to the foregoing.” LAMF’s chairman is Jeffrey Soros, a nephew of George. He apparently aspires to moguldom; producer credits include Basmati Blues (rocking a 10% approval rating on Rotten Tomatoes, charges of “cultural insensitivity”) and Rules Don’t Apply (55% approval), written and directed by ‘60s heartthrob Warren Beatty, who cast himself as (genuine) mogul Howard Hughes. So what are these Hollywood types doing buying a medical device manufacturer? Who knows, but maybe Jeffrey and his “best in class management team” had trouble finding a suitable mark, err, target. LAMF’s original deadline for a “business combination” was November ‘23, or two years after IPO. November ‘23 came; no combination, so the board (Jeffrey is chairman, remember?) granted a one-month extension, then a second, then another and another, for a total of six extensions. At any rate, at some point it was the debtors’ misfortune to somehow or another appear on LAMF’s radar. They consummated their business combination on May 1 of, *checks notes,* THIS YEAR.
And then the gods of capital decided to teach the debtors a little lesson about the fickleness of investors:
As part of a de-SPAC transaction, the investors in a blank check public company have the right to redeem their shares at a designated price. The overwhelming majority of investors in LAMF chose to redeem their shares. Thus, despite a nearly $300 million Business Combination, the Company was left with only approximately $400,000 and was unable to even pay the professionals who handled the Business Combination despite the closing of the transaction. (emphasis added)
Here’s a shot of the investors:
The debtors’ liquidity “deteriorated substantially” in the wake of this fiasco. Plans to raise an additional $15mm “fell through.” Funding was quite simply unavailable, Powell admits. A group of lenders finally stepped forward — but insisted that the debtors would first need to file chapter 11. With a cash balance of $28,692.31 at the petition date (no typo, we triple-checked), the debtors had little choice.
And who are these bold investors, willing to provide capital to a company from which SPAC investors fled? Per Powell:
“The DIP Lender is an entity that I understand will be funded by among others, the Company’s founding investor, Laurence Klein, and other existing lenders/investors in the Company.”
Klein is also a board member. The debtors’ admit in the DIP Motion that the lenders are insiders — there’s no hiding it — but “…given the extremely limited timing within which the Debtors had to commence these Chapter 11 Cases, the Debtors did not have the ability to seek financing from anyone other than a lender who knew the business well enough to be willing to step up on such an expedited basis without the need to conduct substantial diligence and obtain credit approval.”
Well then. So Klein and pals are providing a superpriority senior/junior secured multi-draw term loan facility in an aggregate principal amount of up to $10 million.*** The DIP motion assures us that the facility is “uncontroversial.” It bears interest at 7% and contains no “...priming liens, roll-ups of prepetition debt, onerous case milestones, or other overly burdensome features.” There is, however, a 5% origination fee and a 20% prepayment fee. $2.85mm would be available on an interim basis, and the remaining $7.15mm after a second hearing.
The debtors intend to use the “tools” of chapter 11 to address their liquidity issues and recapitalize the business. Mr. Powell sounds the proper hope-and-changey notes: this is to advance the development of the Band, which “…the Debtors believe can change women’s healthcare and lives for the better and maximize the value of the Debtors’ estates.”
Judge Walrath approved the DIP along with other requested relief at the first day hearing on August 28, 2024. A final hearing is scheduled for September 23, 2024.
The debtors are represented by Hughes Hubbard & Reed LLP (Kathryn Coleman, Christopher Gartman, Jeffrey Margolin) and Morris Nichols Arsht & Tunnel LLP (Derek Abbott, Curtis Miller, Clint Carlisle, Avery Jue Meng) as legal counsel and Teneo (James Feltman, Scott Lyman) as financial advisor. Nuvo Investor DiP LLC is represented by Potter Anderson & Corroon LLP (Jeremy Ryan, Brett Haywood, Maria Kotsiras).
*In a real sign o’ the times, Powell feels obliged to add that it’s “for women.”
**Surprisingly, there’s no mention of any disruption brought on by the fact that both Israel and Ukraine are embroiled in hard-fought wars as we write this.
***Pre-petition funded debt includes roughly $12.8mm of 15% secured convertible bridge notes — hence the senior/junior bit — and $11mm of trade claims.
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.