Z Gallerie Suffers Self-Inflicted Wounds, Files Chapter 22 Bankruptcy Case

Z Gallerie, LLC, a CA-based home furnishing and décor retailer with 76 stores nationwide, has filed for Chapter “22” protection in Delaware.

Committee Formation Meeting

The Committee formation meeting is set for Wednesday, March 20, 2019 at 10:00 a.m. at the Doubletree Hotel in Wilmington, DE. Be prepared for a high of 50, a low of 34, and scattered showers. (Not that the weather in LA will be much better…. a high of 66 and more showers).

How Did It Get Here?

Founded in 1979, Z Gallerie filed its first Chapter 11 case in 2009 in the aftermath of the Great Recession.  At that time the original founders, the Zieden siblings, reacquired the company.  In 2014, the Ziedens sold majority control of the company to its current owner, Brentwood Associates, in a $110 million leveraged buyout.  Subsequently, the company’s performance declined significantly, bringing it to where we are today.

Z Gallerie is one of several recent furniture retailers to seek bankruptcy protection, including retailer The Robert Allen Group and Heritage Home Group. But unlike other retailers, Z Gallerie did not fall victim to the “retailpocolypse” but to self-inflicted wounds. The good news? Management is confident that it has addressed its operational missteps and is well on the way to turning the company around. Among the issues?

  • A steep decline in revenues after the Brentwood acquisition.
  • Leverage and liquidity issues.
  • A failed expansion strategy.
  • Delay in launching an e-commerce platform.
  • The failed launch of a new distribution facility.
  • The loss of a major supplier.

In 2018, the company generated more than $200 million in sales.  But at the time of the filing, it had less than $2 million in cash on hand.  Running out of adequate cash to fund operations, Z Gallerie approached its prepetition lenders for additional liquidity but could not secure operating funds outside of a Chapter 11 process.


Imagining the future…. “Speed and cooperation” will determine whether Z Gallerie survives.

Where Is It Headed?

The Plan and Sale Process

Z Gallerie has secured $28 million in DIP financing commitments, conditioned on the company moving rapidly through the bankruptcy process.  To that end, Z Gallerie has already filed a “toggle plan” providing for either the marketing and sale of the company or a debt for equity swap “on terms to be determined.” The proposed timeframe is roughly as follows:

  • March 25: File disclosure statement.
  • April 12: Enter final DIP financing order, bid procedures order
  • April 19: Term sheets due from potential buyers.
  • May 7: If indications of interest are insufficient to pay off lenders, provide evidence of exit financing or execute a business plan that significantly reduces debt by aggressively shuttering stores.
  • May 7: Order approving disclosure statement.
  • May 16: Bid deadline.
  • May 20: Auction for substantially all assets.
  • May 29: Finalize asset purchase agreement.
  • June 17: Enter order confirming plan or approving sale.

The plan, however, is essentially a placeholder with significant gaps to be filled in. For example, treatment of critical trade claims and general unsecured claims is “to come.”

Store Closings

Meanwhile, the company is seeking to close up to 17 stores and requesting approval of streamlined procedures to conduct store closing sales.  It anticipates 59 go-forward locations (55 stores, two outlets, and two distribution centers).

The First Day Hearing

Z Gallerie’s financing, and other first-day relief, was approved at the first day hearing held today, Tuesday, March 12, at 3:30 p.m.

Mette K.

Avadel Pharma on the Bankruptcy Auction Block

Avadel Specialty Pharmaceuticals is one of three pharmaceutical companies to file for bankruptcy this week. The trio of healthcare companies included two pharmaceuticals companies – Novum Pharma and Avadel, both of which filed in pursuit of a sale process – and San Juan-based healthcare consulting firm, Navegar Network Alliance. Avadel’s filing comes as part of a broader restructuring of its publicly-traded, Dublin-based parent, which is currently undergoing an out-of-court restructuring to “right-size” its own headcount, reduce expenses, and improve profitability.

Avadel provides innovative medicines for chronic urological disorders. It has one commercial product, Noctiva™ , a prescription nasal spray used to prevent the kidneys from overproducing urine at night. Avadel claims this it is the first FDA-approved treatment proven to help adults with nocturia due to nocturnal polyuria. Here’s to a good night’s sleep!

A Quick Sale Process!

On Monday, Avadel filed a motion to approve procedures to sell its assets, allowing bids for any combination of assets (including just for its new drug application for Noctiva and its inventory or for only its Noctiva inventory).

Avadel hasn’t yet found a “stalking horse” buyer to make a first bid. But if it finds one, it may request approval of a breakup fee and bid protections. Bids, it proposes, will require a 10% deposit while overbids at auction must be at least $50,000. The sale process is likely to move forward at a rapid clip, with the following proposed deadlines:

  • Bid Procedures Hearing: March 13
  • Bid deadline: March 15
  • Selection of Qualified Bidders: March 18
  • Auction: March 19
  • Sale hearing: March 21

The company is working with Cassel Salpeter & Co. as investment banker.

How Did Avadel Get Here?

The company entered into an exclusive license and assignment agreement with Serenity Pharmaceuticals in September 2017. The agreement gave Avadel exclusive rights to develop, market and sell Noctiva in the U.S. and Canada. In exchange, Serenity walked away with two one-time payments totaling $70 million and royalties from product sales.

Despite significant time and investment, Avadel says that Noctiva has
underperformed since its launch due to resistance from healthcare professionals and concerns regarding potential risks for serious side effects. Due to these complications, among others, $80 million in additional investments since September 2017 have yielded less than $3 million in sales. Revised sales projections, it says, are “substantially below” the projections made in connection with its entry into the license and assignment agreement with Serenity.

Beginning in November of 2018, the company tried (and failed) to find a co-promotor for Noctiva, contacting 20 pharmaceutical companies and strategic buyers. It then tried to find a sublicensee, “discreetly” contacting potential parties. But none had completed diligence or discussed deal terms before the bankruptcy filing.

What Comes Next?

Avadel manages Noctiva’s production and distribution through third-party manufacturing, distribution, and supply agreements with such as its agreement with Renaissance Lakewood (f/k/a DPT Lakewood). Under Lakewood agreement, the company must purchase a minimum of 400,000 units of product each year regardless of need. If it falls short, Avadel has to make up the difference to Renaissance. Not expecting buyers to be interested in the contract, Avadel has filed a motion to reject it.

After the sale, Avadel intends to liquidate any remaining assets and wind down its remaining operations.

Mette K.

On the Bankruptcy Auction Block: Novum Pharma

Novum Pharma has filed for chapter 11 protection. The case is pending in the Delaware bankruptcy court under Case #19-10209.

Novum is a Chicago-based pharmaceutical company specializing in topical dermatology products. It has rights to 3 branded prescription dermatology products: Alcortin A (a fast acting fungicide), Quinja (a fungicide), and Novacort (a first-line treatment for pruritic dermatoses… caused by external hemorrhoids). If you are a regular follower, you know I like to add graphics to my posts. But I’m going pass on the illustrations and just note that I would go with the fast-acting options.

Novum reports approximately $20 million in assets, $35 million in current liabilities, and $18 million in long-term liabilities. Its goal? Preserving assets and conducting a bankruptcy sale. It intends to seek approval of bidding and sale procedures “in the early weeks” of its Chapter 11 Case.

The company attributes the bankruptcy to “(i) manufacturing hurdles leading to production delays and product ‘stock-outs’; (ii) a dispute with Cardinal and CVS regarding the price at which the Dermatology Products can be returned to the Debtor; (iii) managed care actions leading to increased prescription rejection rates for the Dermatology Products; and (iv) market dilution and decreased total prescriptions due to unauthorized generic alternatives being introduced into the market.”

For more background, you can download Novum’s bankruptcy petition, its global declaration, or the agenda for its first hearing scheduled for February 5th at 2:30 p.m. Additional information about the case is available free of charge from their claims agent, KCC, here.

Mette K.

Argos Therapeutics Files Bankruptcy to Pursue a Sale

 Argos Therapeutics filed for chapter 11 protection in Delaware on Nov. 30th with a proposed buyer in hand. The bankruptcy follows the termination of an unsuccessful phase 3 clinical trial of its most advanced cancer-treatment product. Now, Argos seeks to run a going-concern sale process with Cellscript, LLC as a “stalking horse” buyer.  Argos values Cellscript’s opening bid at $3.8 million.

Who Is Argos Therapeutics?

Argos is an immunotherapy company based in North Carolina. It is publicly traded, with shares trading on the NASDAQ until April 23. After its common stock was de-listed as of April 25, Argos transferred its common stock to the OTCQB Venture Market.

Argos focuses on developing individualized immunotherapies to treat cancer and infectious diseases. The company derives its primary revenue from third-party license agreements and government grants. But the company has been far from profitable, with a net loss of $40.6 million for 2017.

The company built its immunotherapies on its Arcelis® technology platform.

Arcelis is a precision immunotherapy technology that captures the spectrum of mutated and variant antigens that are specific to each patient’s individual disease . . . to overcome immunosuppression by enabling specifically targeted, durable memory T-cells without adjuvants that may be associated with toxicity.

Confused?  Here’s a helpful diagram.

Argos-Arcelis-Platform_AGS-003_Activate-Neo-Immunity.png

Ummm…. Still confused? If you have 15 minutes, Jeff Abbey provides a thorough explanation here.

Practically speaking, a buyer might use the Arcelis platform to treat a range of different cancers and infectious diseases. And according to Argos (notwithstanding its bankruptcy), the platform is valuable because it may circumvent manufacturing and commercialization challenges that have impeded other personalized immunotherapies.

The Proposed Sale to Cellscript

Argos has engaged in an extensive marketing effort to capitalize on its intellectual property, its manufacturing capabilities, and its position as a publicly traded entity.  Ultimately, Cellscript – one of Argos’ largest unsecured creditors – presented a purchase offer. The bid includes $1.675 million in cash, cure costs and assumed liabilities valued at no less than $1.4 million, and the “release” of Cellscript’s $2 million unsecured claim against Argus, valued at a minimum of $700,000.

Argos has proposed a $75,000 breakup fee and a $75,000 expense reimbursement. Initial overbids must total at least $4,095,330, with subsequent overbid increments of at least $100,000.  And it proposes the following sale timeline:

  • Bid deadline: Jan. 16, 2019
  • Auction: Jan. 22, 2019

The court has scheduled the bid procedures motion for hearing on Dec. 20, 2018.

Case Information

Argos is represented by Landis Rath & Cobb as bankruptcy counsel, Wilmer Cutler Pickering Hale and Dorr as special corporate counsel, and SSG Advisors as investment banker. Judge Kevin Carey is presiding over the case (#18-12714).

Mette K.

Promise Healthcare Files For Bankruptcy, Promises Improved Financial Health

Promise Healthcare Group and numerous affiliates filed for Chapter 11 protection Sunday night in Delaware.

What Ails Promise Healthcare?

Promise Healthcare is a Florida-based specialty post-acute care healthcare provider operating several hospitals and skilled nursing facilities across nine states. It operates two short-term acute care hospitals, 14 long-term acute care hospitals and two skilled nursing facilities. According to the company, Promise Healthcare is one of the largest long-term acute care hospital operators in the U.S.

“While I believe that the Debtors’ overall business is fundamentally strong, [Promise Healthcare has] been operating with an unsustainable balance sheet due to current industry dynamics and certain underperforming facilities within [its] portfolio.”  – Andrew Hinkelman, FTI Consulting, Chief Financial Officer

Like many hospital operators that have filed chapter 11 recently, such as ManorCare Health Services, Promise Healthcare has suffered from significant reductions in reimbursement rates from The Centers for Medicare & Medicaid Services. Average reimbursement rates for non-qualifying patients have dropped roughly $41,000 per stay industry wide. Coupled with Promise’s inability to adjust operating cost structures, this has directly impacted profitability.

What Are the Next Steps on the Road to Recovery?

Step 1: Sell Non-Core Assets.

Promise Healthcare has already received  purchase offers for several non-core assets.  Offers in hand, it hopes to complete sales and use the proceeds to pay down secured loans over the next three months.

  • The Silver Lake Facility:  L.A. Downtown Medical Center has offered to purchase Promise Healthcare’s Silver Lake facility section for $84.15 million. The offer will be subjected to overbids in a bankruptcy auction.  A sale closing is planned for January or February of 2019.
  • The St. Alexius Facility: Promise Healthcare has been looking for a buyer for its facility in St. Louis for the past year-and-a-half to two years. However, it has been hindered by the termination of its Medicare program in November, the need for substantial capital improvements, and heavy operating losses.  Despite these challenges, Promise Healthcare is negotiating a stock sale which it hopes to conclude by year end.
  • San Diego Property: Promise Healthcare is also in final negotiations to sell its San Diego property.  It hopes to conclude this sale as well by year end.

Step 2: Obtain Postpetition Financing.

Promise Healthcare has requested $85 million in postpetition financing, including a rollup of its $65 million prepetition asset-based revolving loan facility and a new money commitment of $20 million, with prepetition revolving lender Wells Fargo Bank as agent.

Step 3: Come Up With an Exit Strategy.

Over the next 6 months, Promise Healthcare will search for an exit. That could be a buyer for the business. Or an equity sponsor who will support a reorganization.  Houlihan has already contacted 77 financial and strategic partners and received “several” indications of interest. Ultimately, Promise Healthcare hopes to file a bid procedures motion by the end of the year, with the intention of closing a sale around April 2019.

Prime Clerk is the claims agent. Additional information about the case is available here.

Mette K.