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August 12, 2019 − Mishti Holdings LLC and two affiliated Debtors (d/b/a Lolli & Pops and Candyopolis, the “L&P Companies ” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11813. The Debtors, owner-operators of retail candy stores, are represented by Derek C. Abbot of Morris, Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include (i) Theodora Oringher PC as co-general bankruptcy counsel, (ii) GlassRatner as financial advisor (and providing the Debtors with Chief Restructuring Officer Jeff Nerland) and (iii) Donlin Recano as claims agent.
The Debtors’ Petition (see Petition of Debtor Meetha Ventures LLC) notes between 25,000 and 50,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) First Republic Bank ($7.0mn bank loan), (ii) Katerra Renovations ($2.9mn trade debt) and (iii) First Source VA ($863k trade debt).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filings (the “Nerland Declaration”) [Docket No. 14], Jeff Nerland, the Debtors' Chief Restructuring Officer, detailed the events leading to the Debtors' Chapter 11 filing.
This bittersweet tale ultimately boils down to the interplay of the Debtors' aggressive expansion efforts (the Debtors signing a deal in Mid-2017 to expand their mall footprint by 30 stores) and the general decline of mall-based retail. The expansion entailed necessary upfront "preopening" expenses that, even when amortized over 5 years, were difficult to service. As the Nerland Declaration points out, however, even with ZERO lease-related expenses (the Debtors unilaterally deciding not to pay their landlords from April 2019), the Debtors were unable to free up sufficient cash to pay their vendors, who unsurprisingly refused to restock the Debtors' candy jars for free. This perhaps less important where landlords had otherwise padlocked the stores (or evicted the Debtors) which were home to the empty jars.
The ability of management to candycoat operational and financial shortcomings until it is too late never fails to surprise, but this management seems to have suffered from a particularly acute case of sense-altering hyperglycemia, hoping that "not making lease payments would allow the Debtors to make payments to their vendors and reduce outstanding amounts owing to the Debtors vendors, leading to more profitable operations, which, in turn, would increase revenue available to catch up on rent." What a plan. Perhaps unsurprising from a "company [that] measures success with 'happiness counts' or how many people have been delighted on a daily basis."
The Nerland Declaration states: "Beginning in or around 2018 through 2019, a number of factors negatively affected the Debtors’ financial performance.
In 2017, as part of an expansion plan to open stores throughout the United Sates, the Debtors entered into a series of package-deal lease[s] that required the Debtors to reimburse landlords for certain preopening expenses. Under these package-deal leases, in addition to rent, the Debtors make a monthly payment to the landlords reflecting the preopening expenses, plus interest, amortized over five (5) years. While the package-deal leases allowed the Debtors to open additional stores, the amount owing the landlords negatively affected the profitability of the newly opened stores. Additionally, because the Debtors’ expansion was spread throughout the United States, the Debtors faced significant distribution difficulties.
The Debtors are facing the same struggles that most brick and mortar retailers are facing – the reduction of the number of customers visiting shopping malls. The Debtors also have significant costs related to distributing product to their 69 remaining store locations and managing the inventory in each of their stores.
In or around April 2019, the Debtors were faced with a liquidity crisis and had delayed payments to vendors causing the Debtors’ accounts payable to vendors to significantly increase. The Debtors’ management team then in place determined to cease making lease payments to the landlords for their retail stores effective May 1, 2019 and communicated that to certain of the landlords, but no written agreements were reached. The last payments to the landlords for the retail locations were made in April 2019. The Debtors expected that the savings resulting from not making lease payments would allow the Debtors to make payments to their vendors and reduce outstanding amounts owing to the Debtors vendors, leading to more profitable operations, which, in turn, would increase revenue available to catch up on rent.
The amounts the Debtors saved by not making lease payments to landlords proved insufficient to pay the Debtors’ vendors, as the amounts owing vendors continued to grow and the inventory in the Debtors retail stores became depleted. The expected additional revenue never materialized and the Debtors continued to defer rent.
Beginning in July 2019, landlords began declaring defaults and taking court action to evict the Debtors from certain store locations. On about August 7, 2019, landlords for seven (7) locations in Texas locked the Debtors out of seven (7) Lolli & Pops retail stores demanding payment of unpaid back rent before allowing the Debtors to regain access to the premises. Similarly, on or about August 10, the landlord for the Debtors’ Boise, Idaho store location locked the Debtors out of that Lolli & Pops store, demanding payment of back rent as a condition to allowing the Debtors to regain access to the premises.
About the Debtors
Founded in 2011, the Debtors are owner-operators of upscale retail candy stores primarily located in shopping malls. The Debtors also operate two standalone stores outside of a mall setting: one in Los Gatos, California, and the other in Palm Springs, California.
As of the Petition Date, the Debtors own and operate 69 stores under the Lolli & Pops brand throughout the United States, including, but not limited, to California, Colorado, Delaware, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Virginia, Washington, and Wisconsin.
Prior to the Petition Date, the Debtors operated 10 stores under the Candyopolis brand in Oklahoma, Kansas and Nebraska. Just prior to the Petition Date, the Debtors ceased operating all of the Candyopolis stores.
Each Lolli & Pops store focuses on the customer experience and the breadth of the assortment of the candies offered, including international candies, a variety of gummies, nostalgic candies, cotton candy, truffles and macaroons. Lolli & Pops stores also offer private label products that are sourced directly for Lolli and Pops.
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