November 5, 2020 – The Debtors have filed each of a bidding procedures motion (the Debtors prefer "sales procedures" motion) and a sale motion [Docket Nos. 16 and 17, respectively]. The bidding procedures motion requests Court approval of (i) bidding procedures in respect of a sale of substantially all of their assets, including bidder protections for stalking horse American Freight FFO, LLC (an affiliate of Franchise Group, Inc.; NASDAQ: FRG, the “Stalking Horse Purchaser”), and (ii) a proposed timetable culminating in a December 15th auction (if necessary) and a December 17th sale hearing.

The sale motion requests authority to enter into an asset purchase agreement with the Stalking Horse Purchaser (the "APA," attached to the motion at Exhibit B). The APA notes a purchase price comprised of (i) $7.0mn of first lien prepetition debt held by the Stalking Horse Purchaser ($22.0mn outstanding), (ii) up to the full amount owed the Stalking Horse Purchaser under debtor-in-possession ("DIP") financing arrangements (proposed borrowings of $6.54mn) and (iii) $739k to cover wind down expenses. Please see our separate coverage of the Debtors' DIP financing motion [Docket No. 14]. 

In a November 5th press release announcing its intention to purchase the Debtors' assets, Brian Kahn, CEO of Franchise Group Inc. stated, “FFO provides us a great opportunity to expand our store footprint and growth at American Freight.”

The Debtors' CEO Hank Mullany added: “With the support of Franchise Group, we are asking the court to approve the sale agreement. The planned transaction places FFO with a partner that has strong financial resources, that is dedicated to growth and support of our people.”

Key Terms of the Stalking Horse APA:

• Sellers: Furniture Factory Ultimate Holding, LP
• Purchaser: American Freight FFO, LLC
• Purchase Price (other than Assumed Liabilities and Cure Costs): Consists of (i) credit bid a portion of the Secured Debt in an amount of $7,000,000 pursuant to section 363(k) of the Bankruptcy Code, (ii) credit bid up to the amount of all outstanding obligations under the DIP Agreement as of the Closing Date pursuant to section 363(k) of the Bankruptcy Code, and (iii) make a cash payment to Sellers (via wire transfer of immediately available funds into a bank account designed in writing by Sellers) in an amount of $739,000 to fund the wind-down of the Sellers’ estates and the closure of the Chapter 11 Cases (such amount, the “Wind Down Cash”).
• Bidder Protections: (a) a break- up fee in the amount equal to the greater of (i) $360k or (ii) three percent (3.0%) of the Purchase Price (the “Breakup Fee”); (b) an Expense Reimbursement of up to $400k (the “Expense Reimbursement”); (c) an initial overbid equal to an amount equal to or greater than the Stalking Horse Bid, plus the Break-Up Fee plus the Expense Reimbursement plus the Minimum Bid Increment of $500k (collectively, the “Initial Overbid”); and (d) Bidding increments thereafter of not less than $500k.

Proposed Key Dates

• Sale Objection Deadline: December 10, 2020
• Bid Deadline: December 14, 2020
• Auction: December 15, 2020
• Sale Hearing: December 17, 2020

Marketing Efforts

The bidding procedures notes, “In June 2020, the Debtors engaged FocalPoint Securities, LLC (‘FocalPoint’) as their proposed investment banker to locate investors and to market their assets for sale, to assist in the evaluation of strategic alternatives, including the sale of the Company or its assets. 

Beginning in July and continuing until the end of October, FocalPoint contacted approximately 121 potential strategic and financial buyers, out of which 24 executed confidentiality agreements and received the confidential information memorandum and requested diligence information and 3 parties participated in management meetings and had access to the full online data room. The Debtors received initial indications of interest from each of the 3 that participated in management presentations and commenced discussions surrounding a potential transaction. Meanwhile, the Debtors continued to suffer a drain on cash flow and lacked a source of long-term additional liquidity. Consequently, it became apparent that the Debtors liquidity position would require that the sale process continue in a chapter 11 process. The Debtors’ pre-petition lender was unwilling to provide the funding for a chapter 11 proceeding. 

In mid-October, the Debtors and its advisors commenced discussions with the American Freight FFO, LLC, who had purchased the Debtors first lien secured loan facility, to serve as a ‘stalking horse’ purchaser. The Debtors were able to conclude these negotiations and, on November 4, 2020, entered into an Asset Purchase Agreement dated November 4, 2020 the ‘Asset Purchase Agreement’)… by and among the Debtors as sellers and American Freight FFO, LLC as buyer (the ‘Stalking Horse Purchaser"). 

FocalPoint continues to market the Debtors’ assets postpetition. The Debtors believe that, based on consultations with FocalPoint, the marketing period, which will have spanned approximately eighteen weeks prepetition and the proposed approximately five weeks during these Chapter 11 Cases, is a reasonable and sufficient period to solicit bids on the Debtors’ assets given the current market. The Debtors believe that the marketing efforts will be sufficient to ensure the highest or otherwise best offer, particularly in light of the Debtors’ limited financing options and ongoing cash needs. Further, the Debtors believe that a delayed sale process likely would lead to substantial deterioration of the operating performance of their businesses and the value of their assets. 

The Debtors also believe that, based on consultations with FocalPoint, the proposed Sale Procedures will solicit the highest or otherwise best offer for the Debtors' assets under the circumstances of these Chapter 11 Cases.”

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.

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