Vital Pharmaceuticals, Inc. – Monster Energy Objects to Debtors’ Proposed DIP Financing, Cites Monstrous $350mn Roll-Up and Stipulations Set to Choke Off a Meaningful Challenge

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October 13, 2022 – Creditor Monster Energy Company (“Monster Energy*”) objected to the Debtors’ proposed debtor-in-possession (“DIP”) financing [Docket No. 87] arguing that the "prejudicial extraordinary provisions" of the DIP as proposed "needlessly prejudices the rights and recoveries of unsecured creditors on the first day of the case."

* At the end of September, Monster Energy, the Debtors largest unsecured creditor, was awarded $293.0mn ($272.0mn for a false advertising claim, $18.0mn for tortious interference, and $3.0mn for a trade secret claim) by a California federal jury that agreed with Monster that VPX's "super" creatine was in fract a standard water-soluble creatine and not based on a proprietary “new” compound as claimed.

Unsurprisingly, Monster Energy takes issue with a proposed $350.0mn roll-up of prepetition debt owed Truist Bank, "the ultimate priority jump for an undersecured lender that also eliminates potential challenges to the validity of that debt or its secured status." That frothy 3.5-1 ratio of roll-up to new money, Monster Energy continues, is actually worse than it appears on its face, with "over a third of the proposed interim borrowings of $34 million" to be roundtripped back to the lenders in the form of fees.

Moving past the monstrous roll-up, Monster Energy objects to "pages of stipulations related to the Prepetition Secured Parties, the Prepetition Obligations, the Prepetition Collateral, and the Prepetition Liens, while depriving a creditors’ committee of any opportunity to bring a meaningful Challenge," with the lack of a meaningful challenge opportunity made "shockingly" worse by a short, 60-day, opportunity for the debtors' creditors committee to bring that challenge. 

The Monster Energy Objection

The objection notes, “[t]he Debtors have acceded to the overreaching demands of their Prepetition Lenders, giving up control of these nascent bankruptcy cases and depriving other parties (including the to-be-formed official creditors’ committee) of any meaningful opportunity to actually protect the Debtors’ estates. Most notably, the Debtors seek authority to borrow up to $454,770,201.56, less than 22% of which is new money and of which over $350 million is a Roll Up of prepetition debt—’the ultimate priority jump’ for an undersecured lender that also ‘eliminates potential challenges to the validity of that debt or its secured status’—albeit subject to the Final Order.

More immediately, though, the Interim Order serves to firmly entrench the Prepetition Secured Parties at the helm of these bankruptcy cases, all while enriching potentially undersecured lenders to the detriment of unsecured creditors like Monster Energy and insulating the lenders’ claims from meaningful challenge. First, under the Interim Order, the Debtors are making pages of stipulations related to the Prepetition Secured Parties, the Prepetition Obligations, the Prepetition Collateral, and the Prepetition Liens, while depriving a creditors’ committee of any opportunity to bring a meaningful Challenge. Most shockingly, the Interim Order contemplates that the Creditors’ Committee must not only seek standing to bring a Challenge within just sixty days of its formation, its standing motion must be granted by the Challenge Deadline (over near- certain opposition from the Debtors and Prepetition Secured Parties) effectively shortening the Challenge period to well less than sixty days. As a further complication, to the Creditors’ Committee’s ability to assert a Challenge is that certain Debtors are limited liability companies, calling into question the conduct of a debtor in possession waiving all defenses and claims against the Prepetition Secured Parties when arguably no other party in interest can obtain standing to assert the estate’s claims.

It is also apparent from the DIP budget that over a third of the proposed interim borrowings of $34 million will be round-tripped back to the lenders in the form of upfront fees, commitment fees, adequate protection and interest payments, or escrowed to pay for the Debtors’ professional fees. Very little benefit is actually coming to the bankruptcy estates in exchange for millions of dollars in fees and the granting of senior liens to the Prepetition Secured Parties. They should not be allowed to use their leverage to tilt the playing field acutely in their favor on the first day of the case.

Further, there is no evidence that the lenders are entitled to a 506(c) surcharge waiver, and such a waiver should not be granted, if at all, unless the Debtors’ budget can be adequately vetted to be sure that it provides for the payment of all their anticipated administrative expenses, not just bank fees and professional expenses. Further, this waiver should not be granted in an interim order, and yet there is opaque wording in the proposed Interim Order appearing to suggest that the surcharge waiver, as well as marshaling rights and equities of the case, are being waived immediately, subject to a condition subsequent, the entry of a Final Order. No surcharge or other waivers should be effective, if at all, before a Final Order is entered. Further, any surcharge, equities of the case, and marshaling waivers should not be perpetual, as proposed, but limited to the time period prior to any termination of the DIP Facility so that the estate is not unfairly saddled with the costs of preserving and disposing of the lenders’ collateral.

In sum, the DIP Facility as currently proposed needlessly prejudices the rights and recoveries of unsecured creditors on the first day of the case. The Court should decline to approve the prejudicial extraordinary provisions of an Interim Order, including, without limitation, the 3.5 to 1 ratio of Roll Up to new money financing that would appear to be the product of the undue leverage exerted by the Prepetition Secured Parties over the Debtors. All of these material issues should be preserved until a committee is formed to avoid substantial prejudice to creditors including Monster Energy without providing them due process.”

Case Status

On October 10, 2022, privately held* Vital Pharmaceuticals, Inc. and six affiliate debtors (dba Bang Energy, “VPX” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Florida, lead case number 22-17842 and noted between 5,000 and 10,000 creditors; estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn.

* Jack H. Owoc is the sole shareholder and sole director of the lead Debtor.

On October 10, 2022, the Debtors requested Court authority to: (i) enter into a $454.7mn DIP financing agreement with prepetition lender Truist Bank (“Truist”) and (ii) use cash collateral [Docket No. 24 with the DIP Credit Agreement attached as Exhibit B]. The proposed DIP facility is comprised of (a) $100.0mn in new money, of which $34.0mn is to be made available upon issuance of an interim DIP order and (b) a $354.7mn roll-up of all of the principal outstanding under the Debtors’ August 2020 Revolving Credit and Term Loan Facility with Truist (the roll-up to occur with the final DIP order).

Prepetition Indebtedness

Debtor Vital Pharmaceuticals, as borrower, and certain subsidiaries and affiliates of Vital Pharmaceuticals, as guarantors, are parties to an August 2020 Revolving Credit and Term Loan Facility with Truist Bank serving as administrative agent, swingline lender and issuing bank.

The Credit Agreement provides two separate credit facilities, each maturing on August 14, 2025: (a) a revolving credit facility (the “Prepetition Revolving Credit Facility”) and (b) a term loan A (the “Prepetition Term Loan” and together with the Prepetition Revolving Credit Facility and all other obligations arising under the Prepetition Credit Agreement, the “Prepetition Loans”).

As of the Petition Date, the Prepetition Lenders are owed on account of the Prepetition Loans:

  1. $240,000,000.00 in revolving loan principal obligations, 
  2. $104,190,218.45 in term loan principal obligations, 
  3. $6,349,912.27 in respect of unpaid interest accrued through October 9, 2022, 
  4. $4,188,187.51 in respect of unpaid forbearance fees accrued through October 9, 2022, and 
  5. $41,883.33 in respect of unpaid commitment fees accrued through October 9, 2022.

The Debtors have no funded unsecured debt and incur trade debt in connection with the operation of their businesses. In the ordinary course, the Debtors also incur trade debt with certain vendors and suppliers in connection with the operation of their businesses. As of the Petition date, the Debtors have approximately $83.0mn in trade payables outstanding.

Key Terms of the DIP Facility

  • Borrower: Vital Pharmaceuticals, Inc., as debtor-in-possession in these chapter 11 cases (the “Borrower” or “Vital Pharmaceuticals”)
  • Guarantor(s): The subsidiaries and affiliates of the Borrower identified in the DIP Credit Agreement (collectively, the “Guarantors”), which are comprised of the Debtors.
  • DIP Agent: Truist Bank (“Administrative Agent” or “Prepetition Agent”)
  • DIP Lenders: The lenders from time to time party to the DIP Credit Agreement.
  • Commitment: Extensions of credit in the maximum principal amount of $454,770,201.56, which amount is composed of the sum of (a) $100,000,000 of new money that the Debtors require for the continued operation of their business during the pendency of the Chapter 11 Cases plus (b) $354,770,201.56 of additional “Roll Up” commitments.
  • New Money: $100.0mn ($34.0mn Interim)
  • Roll-Up: $354.7mn
  • Interest Rates: The DIP Loans will bear the following interest: 1-month SOFR (secured overnight financing rate) + 8.50% or Base Rate + 7.50%, at the election of the Borrower.
  • Term: The DIP Loans would be repaid in full, and the DIP Loan Commitment would terminate on, the earliest to occur of the following:
  1. unless the Final Order shall have been entered, the date that is thirty (30) calendar days after the date of entry of the Interim Order: provided. that, the date contemplated in this clause (a) may be extended with the consent of the Administrative Agent and the Required Lenders (as defined in the DIP Credit Agreement) to a date that is no later than sixty (60) calendar days after entry of the Interim Order;
  2. the date upon which any plan of reorganization or Sale Transaction (as defined in the Interim Order) becomes effective;
  3. the date that is the seven (7) month anniversary of the Petition Date; and
  4. acceleration by the DIP Agent following an Event of Default.
  • Fees: The DIP Facility includes the following fees:
  1. DIP Structuring Fee: A one-time fee of $300,000 payable to the Administrative Agent, non-refundable and payable in cash out of the proceeds of the initial funding of the DIP Facility.
  2. Upfront Fee: A one-time fee of $2,500,000, non-refundable and payable in cash out of the proceeds of the initial funding of the DIP Facility and shared ratably by the DIP Lenders.
  3. Commitment Fee: A fee equal to 0.50% per annum on the unused amount of the DIP Loan Commitment that constitutes the DIP Facility Available Amount, non-refundable and payable monthly in arrears on the last day of each month during the term of the DIP Facility and shared ratably by the DIP Lenders holding any portion of the DIP Loan Commitment.
  • Use of Proceeds: The Debtors shall use the proceeds of the DIP Facility and any Cash Collateral, in accordance with the Approved Budget, solely as follows:
    1. on the Effective Date (as defined in the DIP Credit Agreement), to pay costs and expenses associated with the closing of the transactions under the DIP Credit Agreement, including those required to be paid pursuant to the DIP Credit Agreement; and
    2. on or after the Effective Date, to fund the Cases in accordance with the Approved Budget or as otherwise set forth in this Interim Order and for the financing of Debtors’ ordinary working capital and other general corporate needs, including certain fees and expenses of professionals retained by the Debtors and for certain other prepetition and pre-filing expenses that are approved by this Court and permitted by the Approved Budget (subject to Permitted Variances) and including, after the entry of the Final Order, for the Roll Up to the extent provided for therein and the payment of the Prepetition Obligations as described therein. The Debtors shall not be permitted to use the proceeds of the DIP Facility or any Cash Collateral in contravention of the provisions of the DIP Documents, this Interim Order or the Bankruptcy Code, including any restrictions or limitations on the use of proceeds contained therein.
  • Milestones:
  1. within 105 days of the Petition Date (i.e. October 10, 2022), (x) deliver to the DIP Agent and Prepetition Agent fully-executed and bona fide commitment papers (in form and substance reasonably acceptable to the DIP Agent), from a third party investor (or group of investors) with the financial wherewithal to consummate the transaction, in respect of a credit facility, equity investment, or other investment or financing that would, upon closing (and in any event prior to the Facility Termination Date under the DIP Facility), provide for the payment in full in cash of the DIP Obligations and Prepetition Obligations (any such credit facility, equity investment, or other investment or financing, an “Acceptable Financing”); or (y) have filed a bid procedures motion in form and content reasonably acceptable to the DIP Agent and the Prepetition Agent seeking authority to (A) designate a “stalking horse” reasonably acceptable to the DIP Agent and the Prepetition Agent, (B) establish bidding procedures and (C) set a date for an auction within 75 days thereafter (such motion, the “Bid Procedures Motion”): provided that if the Debtors have obtained fully-executed commitment papers for Acceptable Financing and after the Transaction Milestone such commitment is terminated or rescinded, then the Debtors would promptly, and in any event within 14 days thereafter, file the Bid Procedures Motion;
  2. Deadline to obtain an order in form and content reasonably acceptable to the DIP Agent and the Prepetition Agent approving the Bid Procedures Motion; within 30 days after filing the Bid Procedures Motion; and
  3. in the event that a Bid Procedures Motion has been filed, have consummated a Sale Transaction consistent with the Bid Procedures Motion no later than fourteen (14) days prior to the outside date set forth in clause.

About the Debtors

According to the Debtors: “Since 1993, Florida-based Vital Pharmaceuticals, Inc., d/b/a Bang Energy and as VPX Sports, has developed delicious performance beverages, supplements, and workout products to fuel high-energy lifestyles. In addition to one of the top three energy drink brands in the U.S., Bang Energy, the company’s premium quality products include keto-friendly Meltdown®, Quash®, Vooz™ and Redline®. All of the company’s products are personally designed and approved for taste and effectiveness by founder and CEO, Jack Owoc, who started the family-owned company with one goal in mind: to produce the highest-quality sports supplements and performance beverages in the world backed by university scientific research. Since its founding 29 years ago, Jack Owoc has commissioned 30 gold standard university research studies using human test subjects to prove the efficacy and quality of the company’s products by sports nutrition PhD researchers at prestigious institutions of higher learning including but not limited to: UCLA, University of South Alabama, Florida State, Baylor University, University of Southern Maine, University of Memphis, Florida International University and College of New Jersey, among others. The company’s products and supplements are available in grocery and convenience stores around the world. Jack Owoc and his team continuously innovate new products that deliver on taste, optimal performance benefits and nutrition needs.”

The DiDonato Declaration adds: "Established in 1993 and headquartered in Weston, Florida, the Company is a frontrunner in sports nutrition and a pioneer in the performance energy drink industry.  The Company produces novel and great tasting beverages without sugar, calories, carbohydrates, or artificial flavors, and with caffeine, electrolytes, and other performance ingredients. The Company's leading product is Bang energy drink ('Bang'), which was launched by the Company in 2012 and was the fastest growing beverage in the U.S. non-alcoholic beverage sector in 2018. Bang is the third best-selling energy drink in the United States as measured by retail sales and market share data, in each case, as of April 2022.

The Company deploys a unique marketing strategy utilizing (a) digital marketing, including social media (e.g., TikTok, Facebook, Instagram, and YouTube), (b) influencers and brand ambassadors, and (c) in-store promotion. Taken together, the Company's marketing strategy has resulted in the Company becoming a dominant brand on social media, with over 4 million followers across its various social media accounts. As of September 30, 2022, the Company works with approximately 1,000 influencers. In total, the Company's marketing efforts on social media reach approximate!y 1.3 billion followers through the Company's contracted influencers and brand ambassadors."

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