November 6, 2020 – The Court hearing the Furniture Factory Ultimate Holding cases issued an order authorizing the Debtors to (i) access $2.5mn of debtor-in-possession (“DIP”) financing on an interim basis (with the $4.04mn balance of what is in total $6.54mn of DIP financing to be made available upon the issuance of a final DIP order) and (ii) use cash collateral [Docket No. 43]. A hearing to consider a final DIP order has been scheduled for November 25th.

The DIP financing is being provided by American Freight FFO, LLC (an affiliate of Franchise Group, Inc.; NASDAQ: FRG) which had earlier purchased the Debtors' first lien secured loan facility and has agreed to serve as the stalking horse in a section 363 auction/sale process. 

As stalking horse, the DIP lender is permitted to credit bid $7.0mn of the first lien facility ($22.0mn outstanding) and can further credit bid whatever is borrowed under the DIP facility. Consideration also includes $739k of cash to cover wind-down expenses.

The Debtors' DIP motion notes, “Immediate access to incremental liquidity in the form of post-petition financing (as well as access to Cash Collateral) is vital to preserving the value of the Debtors’ estates and to maximizing the likelihood of a successful sale process. The Debtors will suffer immediate and irreparable harm absent access to additional liquidity.

As described in the First Day Declaration, the Debtors commenced these chapter 11 cases to conduct a prompt sale of all or substantially all of their assets with the goal of maximizing value for all stakeholders. Consummation of a sale transaction as soon as possible is in the best interests of the Debtors’ estates. The Debtors’ ability to use Cash Collateral and access additional liquidity through the available DIP Facility is necessary to support the sale process contemplated.

It became clear that the needed incremental financing would only be available in connection with the filing of these chapter 11 cases and the pursuit of the contemplated sale process by the Debtors. In an effort to support their ongoing business, the Debtors commenced negotiations with the DIP Lenders upon the acquisition by the DIP Lenders of the 1L Pre-Petition Loan Documents and the obligations thereunder from Stellus Capital Investment Corporation. The DIP Lender, who has agreed to the use of its Cash Collateral and is lending the Debtors additional amounts under the DIP Facility to enable the Debtors’ continued operation in the ordinary course of business post-petition and to continue and effectuate the contemplated sale process. To satisfy the requirements of the DIP Facility and maintain the support of the DIP Lenders, customers and vendors, and maintain the Debtors’ employee base, it is in the best interests of the Debtors and their estates to move expeditiously with the sale process, as discussed herein. The Debtors’ ability to use Cash Collateral and access additional liquidity through the available DIP Facility will support the sale process contemplated herein and by the Sale Procedures Motion and thereby necessitates the completion of a sale of all of the Purchased Assets as expeditiously as possible.

In addition, the Debtors, with the assistance of their advisors, solicited proposals for alternative debtor-in-possession financing from a variety of third-party potential lenders, including at least five financial institutions and one potential strategic purchaser. No actionable proposal or indication of interest in a debtor-in-possession financing facility was provided to the Debtors.

… The Debtors firmly believe that incurrence of the DIP Facility will allow the Debtors to continue normal business operations while in chapter 11, including by paying their employees, vendors, landlords, and satisfying other working capital and operational requirements and is a sound exercise of the Debtors’ sound business judgment. Satisfaction of these key obligations is necessary to preserve and maintain the value of the Debtors’ estates while the Debtors pursue a sale of substantially all of their assets. Accordingly, the Debtors have an immediate need to obtain post-petition or ‘DIP’ financing and to use its Cash Collateral and, therefore, the Debtors respectfully request that the Court approve the entry of the Interim Order and the Final Order.”

Key Terms of the DIP Facility:

• Borrowers: Furniture Factory Outlet, Inc. and Bedding, Inc.
• Guarantors: The Debtors other than Furniture Factory Outlet, Inc. and Bedding, Inc.
• DIP Lenders: American Freight FFO, LLC
• Term: Outside date of the date that is ninety (90) days after the Petition Date, subject to termination rights upon an Event of Default.
• Commitment: $6.540mn with $2.5mn on an interim basis
• Interest Rates: Per annum floating rate equal to LIBOR+7.00%, subject to a LIBOR floor of 0.00%.
• Fees: 
  • Origination fee equal to one percent (1.00%) of the maximum principal amount of the DIP Facility, which origination fee shall be fully-earned upon entry of the Interim Order and shall be payable as set forth in the Budget;
  • Costs and expenses (including, without limitation, attorneys’ fees and expenses) of the DIP Lender as set forth in the Section titled “Professional Fees and Expenses,”; and
  • A termination fee of $200,000, due and payable to the DIP Lender if the Debtors seek and obtain post-petition financing from any Person other than the DIP Lender
• Milestones: The Debtors shall be required to comply with the following (the “Milestones”):

1. the Bankruptcy Court must have entered the Sale Procedures Order by no later than November 25, 2020;
2. any competing bids must be received by Seller on or before December 14, 2020 (the “Competing Bid Deadline”);
3. if Seller receives one or more qualifying bids by the Competing Bid Deadline, Seller will conduct an auction on December 15, 2020;
4. a hearing before the Bankruptcy Court to approve the sale must be held on or before December 17, 2020;
5. the Bankruptcy Court must enter the Sale Order (defined below) on or before December 18, 2020; and
6. the Closing Date must occur on or before December 30, 2020.

Prepetition Indebtedness

As of the Petition Date, the Debtors’ capital structure consists of outstanding funded-debt obligations in the aggregate principal amount of approximately $49.4 million, $22.0 million of which is outstanding under the 1L Pre-Petition Credit Agreement, $12.7 million of which is outstanding under the 2L Pre-Petition Credit Agreement and $14.7 million of which is outstanding under certain unsecured grid notes, and unsecured trade debt of approximately $14.9 million, excluding lease termination and lease rejection claims.

About the Debtors

According to the Roach Declaration: “The Debtors are an everyday low-price provider of fashionable and affordable home furniture in South Central and Midwest United States and were founded in 1984 in Muldrow, Oklahoma around an original concept of providing quality furniture at highly competitive prices with the Company’s ‘lowest price every day’ guarantee, a differentiator from the competition. The Company offers products spanning every need for the home, including living room, dining room and bedroom furniture, mattresses, home decor and other accessories and carries prominent furniture brands, including Serta, Jackson Catnapper and United/Lane, as well as a range of products under its Natural Elements Brand.

Prior to the governmental mandated COVID-19 shutdown, the Debtors operated 68 locations and employed approximately 675 employees. As a consequence of the required shutdowns and the concomitant massive reduction in revenue and available liquidity, the Debtors permanently closed 37 locations and terminated employees at those locations. As of the Petition Date the Debtors are operating 31 retail locations across Arkansas, Missouri, Oklahoma, Kentucky and Indiana, in addition to a bedding manufacturing facility and one distribution facility (the ‘Business’) and the Debtors currently employ 270 employees.”

About Franchise Group, Inc.

Franchise Group is an operator of franchised and franchisable businesses that continually looks to grow its portfolio of brands while utilizing its operating and capital allocation philosophy to generate strong cash flow for its shareholders. Franchise Group’s business lines include Liberty Tax Service, Buddy’s Home Furnishings, American Freight and The Vitamin Shoppe. On a combined basis, Franchise Group currently operates over 4,000 locations predominantly located in the U.S. and Canada that are either Company-run or operated pursuant to franchising agreements.

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