December 29, 2022 – The U.S. Trustee assigned to the Debtors cases objected to the Debtors’ proposed bidding procedures [Docket No. 124], arguing that "[t]he Bid Protections are not actually necessary to invite a bidder to the table. The Prepetition TPC Lenders have been at the table for more than two years prior to the Petition Date, and they have taken actions – including lending $11 million since late August 2022 – designed to protect their existing position….In short, the Bid Protections are not necessary to incentivize the Prepetition TPC Lenders from essentially making a ‘take out’ bid of the first lien position." 

In addition to questioning the bid-chilling impact of a $450k break-up fee and a $500k expense reimbursement, the U.S. Trustee also objects to the auction/sale process, arguing that it is improperly short and that the Court should reject the Debtor's proposed timetable ("The bid deadline is a mere thirty-five (35) days after the Petition Date, and included in that thirty five-day period is the holiday season") in favor of  "a reasonable period of time for the Debtors to conduct a robust solicitation of interest in the Pharmaca assets."

A hearing to consider the objection is scheduled for January 3, 2023.

Case Status

On December 9, 2022, Medly Health Inc. and 31 affiliated Debtors (“Medly” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtors, operators of pharmacies and health and wellness stores, cited (i) a failed effort to create a nationwide, online pharmacy business and unsustainable IP/software costs in building out the online iteration of their traditionally bricks-and-mortar business and (ii) an investigation into legacy accounting practices and the founders of the business that implemented them.

Also on December 9th, the Debtors filed a motion seeking (i) approval of bidding procedures in relation to the sale of the substantially all of the Debtors’ Pharmaca business assets (the “Sale”) and (ii) authorization to enter into stalking horse arrangements with MedPharmaca Holdings, Inc. (the “Stalking Horse Bidder*,” $18.5mn bid).

*The Stalking Horse Bidder "is affiliated with the DIP Lender and the Prepetition TPC Lenders but does not serve as a lender to the Debtors."  The APA lists each of TerraMar Capital and TriplePoint as contacts in respect of the Buyer. In the bankruptcy context, we most recently saw TerraMar Capital (which "provides debt and equity capital to middle-market businesses facing an inflection point") acquiring assets in each of the Francesca's and Lolli & Pop Chapter 11s.

On December 13th, the Court hearing the Medly Health cases issued an order authorizing the Debtors to access: (i) $4.0mn in new money, debtor-in-possession (“DIP”) financing from prepetition lenders TriplePoint Venture Growth BDC Corp., TriplePoint Capital LLC and TriplePoint Private Venture Credit Inc. (the “DIP Lenders”) on an interim basis; with access to the $4.0mn balance of what is in total $8.0mn of requested new money DIP financing to be considered at January 9th hearing.

The U.S. Trustee Objection

The objection [Docket No. 124] states, “…the Debtors seek authority to enter into a stalking horse agreement with MedPharmaca Holdings, Inc. 'MedPharmaca') for the sale of substantially all of the assets of their Pharmaca business. The Debtors indicate that MedPharamaca 'is affiliated with the DIP Lender and the Prepetition TPC Lenders, but does not serve as a lender to the Debtors.' The Purchase Price (which is subject to adjustment per the Asset Purchase Agreement) is $18.5 million – an amount less than the $20 million principal amount which the Debtors owe on account of the first lien debt.…The Debtors also seek approval via the Motion to provide MedPharmaca with (A) a breakup fee in the amount of $450,000 (the 'Break-Up Fee') and (B) an expense reimbursement not to exceed $500,000 on account of expenses incurred by the Stalking Horse Bidder in connection with the Sale (the 'Expense Reimbursement' and, together with the Break-Up Fee, the 'Bid Protections'). 

Further, the Debtors seek approval of the following timetable for selling substantially all of the assets of their Pharmaca business: a bid deadline of January 13, 2023; an auction date of January 17, 2023; and a sale hearing of January 19, 2023. The bid deadline is a mere thirty-five (35) days after the Petition Date, and included in that thirty five-day period is the holiday season.

…[t]he Bid Protections are not actually necessary to invite a bidder to the table. The Prepetition TPC Lenders have been at the table for more than two years prior to the Petition Date, and they have taken actions – including lending $11 million since late August 2022 – designed to protect their existing position.

In short, the Bid Protections are not necessary to incentivize the Prepetition TPC Lenders from essentially making a ‘take out’ bid of the first lien position. The cost simply makes it more difficult for other bidders to propose a qualified bid in the first instance, let alone to become the winning bidder, because they must include cash sufficient to cover the Bid Protections. In sum, the Bid Protections are unnecessary and work to chill the bidding process, which makes their cost impermissible under the O’Brien standard. Additionally, the proposed bid protections are not entitled to administrative expense super priority protection. Mot. Ex. A (Proposed Bid Procedures Order).

Further, the record does not justify the Debtors’ proposed sale timetable. There is no indication that a complete, formal marketing process was conducted prepetition which was reasonably calculated to reach all potentially-interested parties. The Debtors do not identify in the Motion the ‘several parties’ contacted prepetition to gauge interest in a potential transaction or the number of parties who executed non-disclosure agreements. Additionally, the Debtors do not describe what – if any – post-petition marketing efforts have been undertaken during the holiday season, or explain why a bid deadline which is eleven (11) days after this Motion is heard by the Court provides a reasonable period of time for the Debtors to conduct a robust solicitation of interest in the Pharmaca assets.”

Sales Background

Key Terms of the APA:

• Seller: Medly Health Inc.
• Buyer: MedPharmaca Holdings, Inc.
• Assets: Substantially all of the Debtors' Pharmaca business and certain other assets (collectively, the “Acquired Assets”)
  
• Purchase Price: $18.5mn cash subject to adjustments, with the APA specifying: "The consideration for the Acquired Assets shall be (i) an amount in cash equal to the sum of (A) Eighteen Million Five Hundred Thousand Dollars ($18,500,000) (the 'Base Purchase Price'), minus (B) the Inventory Shortfall, minus (C) the Accounts Receivable Shortfall, minus (D) the Prepaids Shortfall plus (E) the Inventory Excess, plus (F) the Accounts Receivable Excess, plus (G) the Prepaids Excess (collectively, the 'Purchase Price') and (ii) the assumption by Buyer of the Assumed Liabilities pursuant to the Assignment and Assumption Agreements."
• Bid Protections: (i) a breakup fee in the amount of $450k and (ii) an expense reimbursement not to exceed $500k. There is also a $250k minimum bid increment.

Marketing Efforts

The bidding procedures/sale motion [Docket No. 15] notes, “[t]he Debtors faced severe liquidity and operational challenges in the summer and fall of 2022. During this time frame, the Debtors reached out to several parties, including certain of their competitors, to determine any interest in either a potential financial restructuring or sale of the Debtors’ business. While several parties executed nondisclosure agreements and performed certain diligence on the Debtors’ business, no offers were received.

In late November 2022, the Debtors and the Stalking Horse Bidder began negotiating the Stalking Horse Agreement. In order to pursue the potential Sale, the Debtors negotiated bridge financing from the Prepetition TPC Lenders under the TPC Loan Agreement to fund operations during the sale process in these chapter 11 cases…

On December 9, 2022, the Debtors entered into the Stalking Horse Agreement with the Stalking Horse Bidder, who is affiliated with the DIP Lender and the Prepetition TPC Lenders, but does not serve as a lender to the Debtors. The Stalking Horse Agreement seeks to sell the Acquired Assets to the Stalking Horse Bidder, subject to higher and better bids, in consideration of payment to the Debtors of $18,500,000 as the Base Purchase Price subject to adjustments as set forth in section 2.1(a) of the Stalking Horse Agreement.

The Debtors intend to broadly market their assets postpetition with the goal of fostering a robust bidding process and a competitive auction for the sale of the Acquired Assets consistent with terms of the proposed Bidding Procedures. The Debtors have and will continue to pursue interest from direct competitors, the largest pharmacies in the country, and other investor groups interested in early stage healthcare companies to solicit offers for the sale of the Acquired Assets. The Debtors will send (to the extent not already provided), notice of this Motion to all parties that they believe may be potentially interested in acquiring the Acquired Assets, including to the parties contacted prepetition. The Debtors will assist interested parties who either have, or will, execute confidentiality agreements acceptable to the Debtors to conduct diligence on the Acquired Assets, in accordance with the Bidding Procedures. The Debtors believe that the marketing of the Acquired Assets over the period contemplated by the Bidding Procedures, in addition to the marketing activities that have taken place to date, will result in the highest and best purchase price for the Acquired Assets and maximize value for all of the Debtors’ constituents.”

The motion continues, “The Debtors, with the assistance of their advisors, will continue to market the Acquired Assets to potential purchasers. As such, the Debtors believe that prospective bidders will have sufficient time and information to conduct the necessary due diligence to submit binding bids in accordance with the timeline proposed herein.

Completion of the sale process in a timely manner will also maximize the value of the Acquired Assets obtained through the proposed Sale. The proposed dates governing the Sale, marketing, and auction process are within the Milestones provided under the Interim DIP Order. Failure to adhere to the Milestones would constitute a default under the Interim DIP Order. Accordingly, it is in the Debtors’ and their stakeholders’ best interests to complete a robust sale process as swiftly as possible to consummate the Sale within the parameters set by the Milestones.”

Proposed Key Dates:

• Bidding Procedures Objection Deadline: December 22, 2022
• Bidding Procedures Hearing: December 29, 2022
• Bid Deadline: January 13, 2023
• Auction: January 17, 2023
• Sale Hearing: January 19, 2023

About the Debtors

According to the Debtors: “Medly is a full-service, digital pharmacy that offers free prescription delivery for all types of medications."

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