May 5, 2023 – The Debtor notified the Court that its Plan of Reorganization had become effective as of May 1, 2023 [Docket No. 211]. The Court had previously confirmed the Debtor’s Plan on April 5th [Docket No. 205].
The Debtor was represented by: (i) Schwartz Law, PLLC as bankruptcy counsel and (ii) Campbell Jones Cohen CPAs as accountant.
Deadlines in respect of filing administrative claims and professional fee claims have been set for June 15, 2023 and June 30, 2023, respectively.
Case Evolution
On December 7, 2022, Tru Grit Fitness LLC (“Tru Grit” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Nevada (Judge August B. Landis). At filing, the Debtor, a provider of fitness equipment, noted estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn. At filing, the Debtor noted the impact of COVID on the sale of home gym equipment; with sales pumped up before declining "significantly as big-box retailers [ie its major customers] began procuring their own private label in-home fitness equipment and the pandemic waned, allowing public gyms to reopen." The quick swing in demand was exacerbated by the shortage of shipping containers during COVID with the end result being a $20.0mn mountain of late -arrived inventory that the Debtor could not shift (or afford to store).
On December 6, 2022 (ie immediately before the Debtor filed), prepetition secured lender EFP Funding Solutions, LLC ("EFP*," owed $52.4mn in respect of prepetition borrowings) filed a complaint and sought appointment of a receiver in a California Superior Court.
On February 16, 2023, the Court hearing the Debtor's cases issued an order approving the adequacy of the Debtor's Disclosure Statement (conditionally) and voting and solicitation procedures. Also on February 16, 2023, the Debtor filed a Plan of Reorganization. The Disclosure Statement had been filed on February 10th.
On March 8th, the Court gave the Debtor authority to access $1.0mn of debtor-in-possession (“DIP”) financing being provided by EFP (the “DIP Lender”…and also the "Plan Sponsor") and use cash collateral.
*EFP Funding Solutions is an entity controlled by Hunter Street, a Wayzata, MN-based "boutique special opportunities investment firm."
Plan Overview
The Debtor's memorandum of law in support of Plan confirmation [Docket No. 198] provides, "The Plan was proposed by the Debtor in good faith after arms-length negotiations between the Debtor and parties in interest, including the Plan Sponsor. During its plan-negotiations, the Debtor was represented by experienced counsel and was under the operational supervision of a court-approved chief restructuring officer. The Plan is presented in the best interest of the Debtor’s creditors and is the best hope for the Debtor to reorganize and achieve a fresh start and successful post-petition operations, including the preservation of jobs for the Debtor’s employees."
The Disclosure Statement [Docket No. 126] explains, “Pursuant to the Plan, the Debtor shall exchange 100% of the New Equity Interests in the Reorganized Debtor in exchange for and satisfaction [of] $20 million of the EFP Funding Allowed Claim. The remainder of the EFP Funding Allowed Claim [EFP Funding holds a Claim in the total amount of $69,722,651.91] that is not exchanged for 100% the New Equity Interests shall be bifurcated under Section 506 of the Bankruptcy Code and Bankruptcy Rule 3012 and reclassified as an Allowed Class 2 General Unsecured Claim under the Plan.
Distributions to Holders of General Unsecured Claims in Class 2 shall be funded through a contribution of $100,000 from the Plan Sponsor [ie EFP Funding] (the ‘Plan Funding Contribution’), which amount shall be distributed pro rata among all Holders of Allowed Class 2 Claims. The existing Equity Interests in Debtor shall be cancelled on the Effective Date of the Plan.”
The following is a summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):
- Class 1 (“Secured Claim of EFP Funding”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $69,722,651.91. Each Holder will receive 100% of the Equity Interests in the Reorganized Debtor in exchange for $20 million of the EFP Funding Claim. The remainder of the EFP Funding Claim that is not exchanged for equity will be bifurcated and reclassified as a Class 2 General Unsecured Claim under the Plan.
- Class 2 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $54,431,960. Each Holder will receive their Pro Rata share of $100,000.
- Class 3 (“Warehouse Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $663,990. Each Holder will receive payment in 12 equal payments, with the first payment to be made on or before the 30th Business Day after the occurrence the Effective Date, and subsequent payments to be made on the 15th day of each month thereafter. No interest or fees or expenses will be paid on Class 3 Claims. By accepting payment, Class 3 Claims Holders will give up their lien rights, if any, in the Debtor’s property.
- Class 4 (“Holders of Debtor’s Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
Voting Results
On March 23, 2023, the Debtor's claims agent notified the Court of the Plan voting results [Docket No. 196], which were as follows:
- Class 1 (“EFP Funding Allowed Claim”): 1 claim holder, representing $20,000,000.00 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 2 (“General Unsecured Claims”): 3 claim holders, representing $49,734,545.26 (91.42%) in amount and 75% in number, voted in favor of the Plan. 1 claim holder, representing $144,123.42 (0.26%) in amount and 25% in number, rejected the Plan.
- Class 3 (“Warehouse Claims”): 1 claim holder, representing $663,990.00 (100%) in amount and 100% in number, voted in favor of the Plan.
Key Documents
The Disclosure Statement [Docket No. 126] attaches the following exhibits:
- Exhibit A: Copy of Proposed Plan of Reorganization
- Exhibit B: Liquidation Analysis
- Exhibit C: Financial Projections
The Debtor filed a Plan Supplement [Docket No. 188], attaching the following:
- Exhibit 1: List of Executory Contracts and Expired Leases to be Assumed or Rejected Pursuant to the Plan
- Exhibit 2: Proposed Third Amended Operating Agreement
- Exhibit 3: Temporary Employment Agreement by and between Brandon Hearn and Tru Grit Fitness LLC
- Exhibit 4: Temporary Employment Agreement by and between Matt Piva and Tru Grit Fitness LLC
Events Leading to the Chapter 11 Filing
The Disclosure Statement provides, "The Debtor’s sales slowed significantly as big-box retailers began procuring their own private label in-home fitness equipment and the pandemic waned, allowing public gyms to reopen. In or around June 2021, several of the Debtor’s major retail consumers began slowing production requests and cancelling pending orders. Furthermore, the shortage of shipping containers at the height of the pandemic led to drastically higher shipping costs. As a result, the Debtor was left with approximately $20 million in inventory selling much more slowly than projected, leading to increased storage costs.
On December 6, 2022, EFP Funding filed a Complaint for breach of contract, breach of guaranties, breach of guaranties, appointment of a receiver, and other causes of action in the California Superior Court, San Diego County, against the Debtor and Matt Piva and Brandon Hearn."
Liquidation Analysis (see Exhibit B of Docket No. 126)
About the Debtor
According to the Debtor: “We offer a spectrum of innovative fitness equipment within several categories. Strength, Conditioning, Cardio, Racks, Conditioning Machines, Flooring and Storage Solutions. We also design and build custom gyms for hotels, schools, commercial gyms, etc. With our high quality North American supply chain we are able to bring your gym space to life quick and on budget.”
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