February 19, 2020 − Hygea Holdings Corp. and 32 affiliated Debtors (“Hygea” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20- 20-10361. The Debtors, a diversified healthcare holding company, are represented by J. Kate Stickles of Cole Schotz P.C. Further board-authorized engagements include (i) Alvarez & Marsal North America, LLC (“A&M”) as financial advisors and (ii) Epiq Corporate Restructuring as claims agent.
In their Chapter 11 Petitions, the Debtors note between 10,000 and 25,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn. The Debtors' declaration in support of first day pleadings (the "Declaration") adds on assets and liabilities "As of the date hereof, the Debtors have assets on a consolidated basis of approximately $77.3 million and liabilities of approximately $212.2 million, consisting of approximately $76.3 million in current liabilities and approximately $135.9 million in long-term liabilities." The Debtors have yet to file their list of top unsecured creditors.
Restructuring Support Agreement
The Debtors have entered into a Restructuring Support Agreement (the "RSA"), dated as of February 7, 2020, with prepetition lenders Bridging Income Fund LP and Bridging Finance Inc. (together, “Bridging”) pursuant to which the Debtors agreed to commence the Chapter 11 cases and pursue a consensual restructuring, if possible, or a sale under section 363 of the Bankruptcy Code. Additionally, the Debtors have agreed that within 20 days of the Petition date, they will file a Plan that will provide for, inter alia, the (i) transfer of the Debtors’ equity to to Bridging Income Fund LP on account of its pre-petition secured claim, (ii) creation of a liquidating trust for the benefit of the Debtors’ unsecured creditors and (iii) payment of priority tax claims pursuant to section 1129(a)(9)(C) of the Bankruptcy Code including the outstanding payroll tax liability. Pursuant to the RSA, Bridging has agreed to provide the Debtors with debtor-in-possession ("DIP") financing to support the administrative and operational expenses of the Chapter 11 cases.
The Debtors provide the following background on the RSA which is supposed to have been filed at Docket No. 12 but was not (although there is a summary of key terms): "The Debtors are currently operating at a substantial loss – approximately $327,000 of negative cash flow per week. As a result, the Debtors have been unable to service their debt obligations to Bridging, which total in excess of approximately $160 million Canadian (approximately $121 million in U.S. Dollars), and certain events of default have occurred under the related credit agreement. More significantly, the Debtors have consistently required emergency funding from Bridging to satisfy critical expenses such as payroll.
Given the Debtors’ dire financial situation and the lack of any other viable alternatives, in or about October 2019, the Debtors and Bridging began discussing the framework of a potential chapter 11 plan of reorganization (the “Plan”). Since October 2019, the parties entered into five separate forbearance agreements and Bridging provided millions of dollars in emergency funding to the Debtors. The Debtors would not have been able to continue to make payroll or fund operations without the additional funding from Bridging."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Declaration”), Keith Collins, M.D., the Debtors' Chief Executive Officer, detailed the events leading to Hygea's Chapter 11 filing. The Declaration details numerous management and strategic mis-steps that cannot but leave a reader hoping that Hygea was stronger from a healthcare/medical standpoint than from a corporate/financial one. Amongst the issues faced by the never profitable Debtors: (i) an overly aggressive growth strategy, (ii) poor identification of acquisition targets and the purchase of loss-making businesses, (iii) an inability to integrate acquisitions, (iv) the purchase and then failure ("large acquisitions becoming worthless") of under-scaled MSOs (ie Management Services Organizations), (v) the failed 2008 Palm Network acquisition, (vi) incompetent financial reporting and forecasting apparently leading to profligate spending, (vii) litigation that they cannot afford to defend or settle and (viii) the inevitable failure to service debt obligations.
The Declaration states: "Since 2017, the Debtors have confronted liquidity challenges and operational issues that threaten their ability to continue as a going concern. The Debtors’ financial situation has been deteriorating over time due to a variety of reasons.
Over the last several years, the Debtors pursued an aggressive growth strategy, expanding their acquisition of Physician Practices and other healthcare businesses. In some cases, the Debtors purchased certain Physician Practices with minimal net profit. At the time of acquisition, the Debtors projected increased profitability for those practices as a result of performance improvements. The Debtors, however, failed to properly integrate the underperforming acquisitions.
The Debtors’ failed acquisition of certain MSOs similarly contributed to the current liquidity constraints. The Debtors purchased certain MSOs that, at the time of acquisition, had sufficient infrastructure to generate profit. The Debtors, however, were unable to maintain the investment required to support those MSOs and the MSOs performance dropped significantly and below acceptable levels for the HMOs. As a result, the HMOs terminated their contracts with those MSOs. Those terminations resulted in several large acquisitions becoming worthless while the Debtors remained obligated for the costs associated with such acquisitions.
The Debtors’ acquisition of the Palm Network similarly proved to be unsuccessful in terms of generating direct profits. Nonetheless, the Palm Network still provides certain value to the Debtors in terms of helping the Debtors maintain and develop new business relationships with physicians and HMOs.
In addition to failed acquisitions, the Debtors’ historical financial reporting was inadequate, causing deficiencies in their financial forecasting as well as cash management. Those inadequacies caused the Debtors to overspend in the face of an already unsustainable debt load.
Given these operational challenges, the Debtors were never profitable on a cash basis and, therefore, were dependent on constant debt and equity fundraising activities to cover losses. The Debtors have been unable to raise additional capital to fund those losses due to, in part, pending litigation stemming from shareholder and contractual disputes. The Debtors do not have the liquidity to defend or settle these lawsuits.
As a result of the foregoing issues, the Debtors have been unable to service their debt obligations to the Lender and certain events of default occurred under the Credit Agreement."
Founded in 2007, Hygea is a consolidated enterprise of several companies aggregated through a series of acquisitions that focus on the delivery of primary-care-based health care to commercial, Medicare and Medicaid patients. The Debtors currently provide health care related services to approximately 190,000 patients in the southeast United States through two platforms: (i) individual physician practices and physician group practices (collectively, the “Physician Practices”) with a primary care physician (“PCP”) focus and (ii) management services organizations (“MSOs”).
The Debtors are headquartered in Miami, Florida and currently employ more than 150 individuals.
According to the Debtors: "Hygea is a diversified healthcare holding company led by a team of nationally recognized industry innovators and leaders who represent many aspects of healthcare, from insurance and finance, to medicine and technology. We own physician practices, ancillary services companies (pharmacies, therapies and diagnostic facilities), independent physician associations (IPAs), and other medical service entities that provide seamless care to commercial, Medicare and Medicaid patients."
Corporate Structure (see also Docket No. 13.1)
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