August 29, 2022 – Privately held Level Four Orthotics & Prosthetics, Inc. and five affiliated debtors (dba Restore POC and together “Restore POC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 22-10807 (Judge TBA). The Debtors, a North Carolina provider of custom prosthetics, orthotics, and cranial remolding products, are represented by Kevin S. Mann of Cross & Simon, LLC. Further board-authorized engagements include: (i) Ruberto, Israel & Weiner, P.C. as general bankruptcy counsel, (ii) Verdolino & Lowey, P.C. as accountant and (iii) Kroll Restructuring Administration LLC as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 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) Orthomerica Products, Inc. ($2.3mn trade claim), (ii) Cascade Orthopedic Supply, Inc. ($567k trade claim) and (iii) CPO Management Services, LLC ($217k services claim).
Filing Date Highlights
- Provider of prosthetics, orthotics, and cranial remolding products files for Chapter 11 with $20.2mn of funded debt
- Cites inability to scale operational growth after acquisitions, managment turnover, COVID-19 and "Great Resignation" as driving factors
- Enters into stalking horse arrangement with Bionic Prosthetics and Orthotics Group LLC ($3.25mn opening bid)
- Lines up $1.0mn of DIP financing from prepetition lender and controlling equity holder Penta Mezzanine SBIC Fund I, L.P.
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Irish Declaration), Rebecca R. Irish, the Debtors' Chief Executive Officer and President (and Managing Partner of the fund, Penta Mezzanine SBIC Fund I, L.P. ("Penta") holding a controlling interest in the Debtors), provides: "From early 2014 through mid-2019, Restore POC
undertook an initiative of strategic acquisitions to position the enterprise for increased efficiencies and growth. The acquisitions were financed by a series of secured loans to [lead Debtor] L4 from Penta. Following this period of rapid expansion and growth, Restore POC struggled to find the right management team and other key personnel to scale operational efficiencies and realize the Debtors’ full potential.
From early 2014 to mid-2017, the Debtors struggled internally and went through three separate management teams. In mid-2017, James C. Button ('Button') was appointed CEO of the Debtors and served until he was terminated in March of 2019. Shortly thereafter, on May 30, 2019, Button commenced an action in the General Court of Justice Superior Court Division of the State of North Carolina (Forsyth County), captioned Button v. Level Four Orthotics & Prosthetics, Inc., et al., Case No. 19 CVS 3246 (the 'Button Action'). The Button Action seeks damages arising out of Button’s termination including severance and wages (asserted as
approximately $418,000), an undetermined amount for Button’s enforcement of contracts allegedly breached by L4 and Penta in connection with certain stock warrants, options, and agreements.
Just when Restore POC was poised to reap the benefits of scaling the business and realigning the Debtors’ overhead structure following its acquisition campaign, the COVID-19 pandemic took hold. As the economy ground to a halt during the second quarter of 2020, sales slowed, the Debtors’ operating revenue suffered, and outstanding payables mounted. L4 continued to be embroiled in the Button Action, which was a further distraction to management and a further drain on L4’s financial resources.
Like many other healthcare facilities, to protect our patients (many of whom are high risk) and our highly skilled providers, Restore POC was largely forced to close its doors except under the strictest guidelines. Due to the uncertainty of any government-based programs, Restore POC was forced to terminate or lay off approximately 30% of its employees. In an industry that is almost completely dependent on the knowledge, skill, and professional certifications of its personnel, this translated to a significant reduction in revenue. Despite two loans through the Payroll Protection Program, Restore POC also suffered, and continues to suffer, from the effects of the 'Great Resignation' following in COVID’s wake. Restore POC’s workforce shrank from 81, at the beginning of 2019, to 67 just prior to the Petition Date, with significant employee turnover in the interim period."
Stalking Horse Arrangements
After a prepetition marketing effort in respect of an out of court sale (begun in 2021) failed to attract an acceptable offer, "the Debtors turned their attention to a § 363 sale….Time being of the essence, Restore POC returned to negotiations with the two interested parties to determine whether their offers could fit within the structure of a § 363 sale.
After several discussion with both parties, Bionic Prosthetics and Orthotics Group LLC (the 'Stalking Horse Purchaser') demonstrated both the willingness and capacity of stepping into the role of stalking horse on the expedited timeline required by Restore POC’s circumstances…..Restore POC and the Stalking Horse Purchaser worked quickly and at arm’s length to negotiate the terms and, ultimately, the agreement to purchase substantially all the assets of Restore POC through a § 363 sale (the 'Stalking Horse APA'). Restore POC and the Stalking Horse Purchaser executed the Stalking Horse APA effective as of August 12, 2022, and on August 16, 2022, the Stalking Horse Purchaser delivered $162,500 to Debtors’ counsel as a good faith deposit….Under the Stalking Horse APA, the Stalking Horse Purchaser has committed to acquire substantially all the Debtors’ assets for a purchase price of $3,250,000 due at closing, plus reimbursement for any deposits and pre-paid expenses related to assumed contracts, plus an adjustment for work in progress based on performance after the closing estimated in the amount
of $360,000 payable over time.
Per the terms of the Stalking Horse APA, in the event that the Stalking Horse Purchaser is not the successful bidder, the Stalking Horse Purchaser shall be entitled to a break-up fee of $162,500.00 (i.e. 5% of the cash due at closing, or approximately 2% of the value conferred to the Debtors’ estates from the Stalking Horse APA) and expense reimbursement in an amount not to exceed $75,000.00."
The Debtors have a commitment from Penta for $1.0mn of debtor-in-possession ("DIP") financing with $300k of that amount to be made available with an interim DIP order. The DIP financing comes with 12% interest payable in kind (5% following an Event of Default) and a $25k commitment fee.
As of the Petition date, the approximate principal and interest outstanding under the Debtors credit facilities was as follows:
In addition, the Debtors have unsecured debts totaling approximately $3.6mn (mostly inter-company debt owed to lead Debtor L4) and an unforgiven loan (NB: forgiveness expected by the end of August) that the Debtors obtained pursuant to the federal Paycheck Protection Program ("PPP”) in the amount of $1,777,452.
78.6% of the fully diluted stock of the lead debtor is owned by Level Four SBIC Holdings, LLC, which in turn is a wholly owned subsidiary of Penta. The Debtors' CEO Rebecca Irish also serves as Managing Partner of Penta.
Each respective shareholder and percentage of ownership is as follows:
About the Debtors
According to the Debtors: "For over 15 years, we have been working directly with patients, providers, and physicians to ensure that our patients have the best prosthetics, orthotics and cranial remolding experience."
The Irish declaration adds: "Restore POC is a provider of custom prosthetics, orthotics, and cranial remolding products with a mission to provide affordable, quality products and limb loss solutions to patients in need. Many of Restore POC’s customers are U.S. veterans, the elderly, the underserved, and infants. L4, the parent of the Debtor Subsidiaries, operates seven clinic locations in North Carolina and one location in South Carolina, with company support services in a separate facility in North Carolina and executive offices in Winter Park, Florida. L4 serves as the operational and financial hub of Restore POC. All of Restore POC’s raw materials and inventory are purchased by and through the Debtor Parent for its own behalf and on behalf of the Debtor Subsidiaries. All payments on accounts receivable are swept daily from the Debtor Subsidiaries deposit accounts into the Debtor parent’s deposit account. Payments of all Restore POC’s operational expenses are similarly funded through the Debtor Parent’s disbursement account on its own behalf and on behalf of the Debtor Subsidiaries. L4 is also responsible for the administration of Restore POC’s shared services functions including billing and collections, administering payroll, human resources support, contracting, credentialing, legal, marketing and purchasing on its own behalf and on behalf of the Debtor Subsidiaries."
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