January 31, 2021 – Knotel, Inc. and more than 200 affiliated Debtors (“Knotel” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-10146. The Debtors, a New York City-based flexible workspace provider in 20 global markets, are represented by Robert J. Dehney of Morris, Nichols, Arsht & Tunnel LLP. Further board-authorized engagements include (i) Milbank LLP as general bankruptcy counsel, (ii) Moelis & Company as investment banker, (iii) Ernst & Young LLP as tax advisor, (iv) Fenwick & West LLP as special corporate counsel and (v) Omni Agent Solutions as claims agent. 

At filing, the Debtors note between 200 and 1,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) One Workpl L Ferrari LLC ($5.0mn trade claim), (ii) Hudson 901 Market LLC ($4.0mn rent claim) and (iii) Eden Technologies Inc ($3.4mn trade claim). More than 20 of the Debtors top 30 unsecured creditors (all with claims in excess of $750k) have rent-related claims.

In a press release announcing the filing, the Debtors advised that: “As part of its strategic path forward, Knotel has reached an agreement to sell the business to an affiliate of Newmark Group, Inc. (Nasdaq: NMRK) ("Newmark"), a leading full-service commercial real estate firm. The Company has also made the decision to exit multiple locations in the U.S. as part of the process. 

The Company has also made the decision to exit multiple locations in the U.S. as part of the process. The filing does not include Knotel's international operations".

Amol Sarva, the Debtors’ CEO commented further: "After a thorough review of strategic alternatives, we have determined that a process to sell our business and reshape our U.S. footprint is the best path forward to maximize value for our stakeholders. The pandemic created a uniquely challenging operating environment, with significant impacts on leasing velocity and the rate of renewals in key markets, particularly New York and San Francisco. We must address this now to position our business for sustainable growth and a successful future.

Our restructuring will enable us to strengthen our balance sheet, focus on a rightsized portfolio of locations, and maintain relationships with our customer base while continuing to build on Knotel's differentiated service offering. We continue to believe in Knotel's potential in the growing flex market."

Goals of the Chapter 11 Filings

The Jureller Declaration (defined below) provides: "The Debtors commenced their chapter 11 cases to facilitate the sale of their business in an expedited manner, in order to better position that business in the post-pandemic market for flexible workspace. The Debtors believe that conducting an open and competitive marketing process in the context of these chapter 11 cases represents the best strategy to maximize the value of the Debtors’ business for stakeholders and to capitalize on anticipated post-pandemic opportunities including if companies bring their employees back to the office and seek more flexible and efficient office arrangements with a greater focus on safety and sanitation."

Sale to Newmark

Beginning at the end of December 2020, Digiatech, LLC (“Digiatech”), an existing preferred stockholder and a subsidiary of Newmark, purchased the Debtors' first lien and second lien secured debt, negotiated a financing package to both provide immediate emergency interim financing and debtor-in-possession financing, and further committed to be the stalking horse bidder to enable a timely section 363 sale and acquisition of the Company as a going concern.

In addition to an agreed purchase price that includes a $70.0mn credit bid and the assumption of certain liabilities, terms of Newmark's stalking horse bid include a 3% break-up fee and a $500k expense reimbursement.

The Debtors expect an expedited sale (bids by February 28th and a proposed closing date of March 8th) that will be followed by liquidation of the estates, through conversions to chapter 7 or structured dismissal.

DIP Financing

The Debtors have obtained a commitment for $20.4mn of new money, debtor-in-possession ("DIP") financing from an affiliate of Newmark which the Debtors believe will provide sufficient liquidity to support their day-to-day operations during the Chapter 11 process. The requested financing also includes a dollar-for-dollar (ie $20.4mn) roll-up of prepetition debt with $15.0mn of the new money (and corresponding roll-up) to occur upon the issuance of an interim DIP order and the balance to be available upon issuance of a final DIP order

The DIP financing comes with an interest rate of 12% and a 3.0% upfront fee in respect of the new money.

Prepetition Indebtedness

As at the Petition date, the debtors had the following indebtedness:

• Senior Credit Facility: The Debtors are party to a February 2019 Amended and Restated Loan and Security Agreement with Bridge Bank (a division of Western Alliance Bank) which memorializes the terms of a revolving credit facility with a revolving line of up to $30.0mn and a per annum interest rate equal to 6.0% plus the greater of either 5.25% or the prime rate. As of January 31, 2021, the outstanding balance on the Bridge Bank Loan was approximately $18.55mn of debt, plus $2.4mn of cash-collateralized letters of credit. Western Alliance Bank declared the Debtors to be in default under the Bridge Bank Loan as of November 17, 2020. Pursuant to a forbearance agreement dated as of December 4, 2020, Western Alliance Bank agreed to forbear from the exercise of certain rights and remedies as a result of such defaults from the period of December 4, 2020 through December 31, 2020. On December 30, 2020, Western Alliance Bank sold and assigned all of its right, title, and interest in and to the Bridge Bank Loan to Digiatech. 
• Junior Credit Facility: The Debtors are party to a February 2019 Plain English Growth Capital Loan and Security Agreement (the “TPC Loan”), with original lender and collateral agent TriplePoint Venture Growth BDC Corp. and lender TriplePoint Capital LLC. The TPC Loan is a revolving credit facility with a revolving line of up to $50.0mn. The per annum interest rate is equal to 6.0% plus the greater of either 5.25% or the prime rate. As of the Petition Date, the outstanding principal balance on the TPC Loan was $50.0mn. The TPC Loan is junior to Bridge Bank Loan. On about January 10, 2021, the Debtors received notice that Newmark, through its subsidiary Digiatech, purchased the TPC Loan as well. 
• Unsecured 2019 and 2020 Convertible Notes: In November 2019, Debtor Knotel, Inc. issued $9,559,424 of unsecured notes (the “2019 Convertible Notes”) with a per annum interest rate equal to 4%. All such outstanding principal and accrued interest remains outstanding and shall be subject to conversion on demand made to Debtor Knotel, Inc. on or after June 30, 2021. All such outstanding notes are subordinate to the Bridge Bank Loan and the TPC Loan. In July 2020, Debtor Knotel, Inc. issued $20,461,714 of unsecured notes (the “2020 Convertible Notes”) with a per annum interest rate equal to 4%. All principal and accrued interest remains outstanding and shall be due and payable on demand made to Debtor Knotel, Inc. by the lender at any time, as the maturity date applicable thereto was December 31, 2020. All such outstanding notes are subordinate to the Bridge Bank Loan and the TPC Loan. 
• PPP Loan: Debtor Knotel, Inc. has a $7.2mn “unsecured, forgivable” PPP loan through JPMorgan Chase Bank, N.A.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Jureller Declaration”), John M. Jureller, the Debtors’ Chief Financial Officer, detailed the events leading to the Debtors' Chapter 11 filing. The Jureller Declaration describes the exacerbated impact of COVID-19 on a commercial real estate business that was otherwise in the middle of a period of heightened capital expenditure: “Due in large part to the Debtors’ expansion and high volume of capital expenditures required to prepare new leased properties for customer use, the Debtors invested a significant amount of their funding during 2019 into properties with future revenue-generating potential. The damper placed on the revenue-generating potential of these properties by the COVID-19 pandemic has severely disrupted the Debtors’ business plans and operations, imposing a significant liquidity crisis.

Widespread adoption of work-from-home policies (either voluntary or government-mandated) caused demand for workspace to decline significantly. The Debtors have experienced lower occupancy rates than were anticipated, and, in response to reduced demand, the Debtors had to cut pricing for new sales and renewals, which, in turn, had a negative impact on EBITDA and cash flow. As the overall economy contracted, the willingness and ability of existing customers to timely pay fees was reduced, and this also had a significant negative impact on the Debtors’ financial position."

The Jureller Declaration continues: "…with the onset of the COVID-19 pandemic, beginning in early 2020 Knotel’s historical growth rate was halted. The COVID-19 pandemic has severely disrupted the Debtors’ business plans and operations, as certain customers’ business plans were materially adversely impacted, resulting in terminations of existing contracts, requests for reduced monthly service rates, a reduction in historical renewal rates, and termination of executed contracts with pending delivery dates. Further, since the onset of the pandemic, the widespread adoption of work-from-home policies caused demand for workspace to decline significantly. Finally, certain existing customers have had difficulty making timely payments due to the overall decline in their business. In total, the disruption in customer business to generate anticipated revenue has resulted in a materially adverse impact on the company’s cash flow to support ongoing obligations, particularly those obligations pursuant to existing real estate leases that was to serve as supply for both existing customers and to meet the anticipated demand by new customers. Over the past year, Knotel engaged in multiple efforts to raise capital and improve liquidity, reduce unprofitable locations, cut costs through reductions in its workforce, and weather the unprecedented shift in demand for workspace solutions in the marketplace. 

Although Knotel had been hopeful to achieve an out-of-court solution to its deteriorating liquidity position, unfortunately, the unexpected length of the pandemic severely impacted the availability of alternative financing that could have allowed Knotel to weather the decline in revenues due to COVID-19 disruptions to its business model.”

Key Prepetition Shareholders

Essential Media Group, LLC, Peak State Limited (f/k/a Arvensis Ventures Ltd) and Sarva TXT, LLC each own, either directly or indirectly, 10% or more of the equity interests in Knotel, Inc.

About the Debtors

According to the Debtors: “Knotel operates a leading flexible workspace platform that matches, tailors, and manages space for customers. Founded in 2016 to give businesses the flexibility and speed to scale on their own terms, Knotel caters to established and growing companies, giving them the freedom to focus on their business, culture, and people. All Knotel spaces are tailored to the needs of each individual company by an in-house team of architects, interior designers, and workplace strategists."

The Jureller Declaration adds: "Founded in 2015, Knotel is a market leader in the dedicated flexible workspace industry and focuses on enterprise customers. At the beginning of 2020, Knotel had over 4.0 million square feet of leased workspace under management, over 300 customers contracted for workspace, and expanded operations in various major business centers in the U.S., U.K., E.U., Asia, and South America, including New York City, San Francisco, Paris, London, Berlin, Amsterdam, and Dublin. 

About Newmark

According to Newmark: "Newmark Group, Inc. (Nasdaq: NMRK), together with its subsidiaries (“Newmark”), is a world leader in commercial real estate services, with a comprehensive suite of investor/owner and occupier services and products. Our integrated platform seamlessly powers every phase of owning or occupying a property. Our services are tailored to every type of client, from owners to occupiers, investors to founders, growing startups to leading companies. Harnessing the power of data, technology, and industry expertise, we bring ingenuity to every exchange, and imagination to every space. Together with London-based partner Knight Frank and independently owned offices, our 18,800 professionals operate from approximately 500 offices around the world, delivering a global perspective and a nimble approach. In 2019, Newmark generated revenues in excess of $2.2 billion.

Global Corporate Structure Chart (see Jureller Declaration for full, multi-paged structure chart)

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