June 6, 2023 – The Court hearing the Pill Club Pharmacy Holdings case issued an order approving the sale of certain of the Debtors’ assets (namely customer lists and IP) to stalking horse Pepper Park LLC* (the “Buyer” or “Stalking Horse Bidder,” with consideration to comprise assumption of $35.4mn of secured debt and $50k in cash) [Docket No. 303, with attached Stalking Horse Purchase Agreement at Exhibit 1 to this order]. The assumed debt is comprised of approximately $30.0mn of prepetition debt and $5.5mn of DIP financing, in each case provided to the Debtors by TriplePoint Venture Growth BDC Corp (or affiliates).
* The Buyer, apparently an unformed acquisition entity, lists a WeWork address in Manhattan in the “Notices” section of the APA, with copies of any notices to be sent to its counsel Cooley LLC. The APA is, however, conspicuously signed by Olivia Jahn, formerly of McDemott, Wiill & Emery and now Deputy GC at “Thirty Madison.” Cooley also recently represented Thirty Madison, “a leading virtual specialty health company with over 750k active patients…[and]…the premier specialty healthcare company for people living with chronic conditions,” in its recent acquisition of “Nurx” a “leading female-focused digital healthcare company providing convenient, affordable, and personalized care powered by provider specialization and proprietary technology…” In what will be a related development, Thirty Madison has announced the hire of a new Chief Business Officer (Caroline Hofmann) who will be charged with leading Thirty Madison's "continued expansion of its women's health portfolio."
On April 18, 2023, The Pill Club Pharmacy Holdings, LLC and seven affiliated debtors (together “Pill Club*” or the “Debtors”) filed for Chapter 11 protection noting estimated assets of under $50k; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors, "a wellness coalition on a mission to support women and people who menstruate’s entire wellbeing," cited "current market conditions and the Debtor’s resultant deteriorating liquidity position…[as]…compounded by a slate of ongoing investigative and litigation expenses."
* The Debtors have been through several name changes in recent years, most recently reverting to "Pill Club" from "Favor" after an adverse Texas Court ruling as to the Debtors' ability to use the "Favor" trademark. The Debtors were founded by Nicholas Chang (a doctor from Duke University) and Kevin Chung in 2014 (see further below on subsequent funding from, inter alia, ACME, Base10, GV, Shasta Ventures, VMG, Uber’s Dara Khosrowshahi and Honey’s George Ruan and iGlobe).
On May 26th, the Debtors requested Court authority to: (i) access $5.5mn in new money debtor-in-possession (“DIP”) financing to be provided by prepetition lenders TriplePoint Venture Growth BDC Corp, TriplePoint Private Venture Credit Fund Inc and TriplePoint Venture Lending Fund, LLC (collectively, the “DIP Lenders”), (ii) roll up of $16.5mn of prepetition debt and (iii) use cash collateral [Docket No. 250, with the DIP Term Sheet attached at Exhibit 1].
Bidding Procedures Motion
The Debtors’ requesting motion [Docket No. 119] states, “Prior to the Petition Date, the Debtors entered into a letter of intent (the 'Stalking Horse LOI') with a prospective buyer that the Debtors expect to designate as Stalking Horse (the 'Potential Stalking Horse Bidder') for the sale of substantially all of the Debtors assets. Although the Stalking Horse LOI is nonbinding and the transaction contemplated thereby remains subject to, among other things, due diligence and negotiation of certain material terms and conditions, the Debtors nonetheless believe that the sale terms in the Stalking Horse LOI represent a fair and compelling offer because, if consummated (1) the Buyer will assume up to $35 million of the Debtors’ secured indebtedness, (2) the Buyer intends to continue certain of the Debtors’ operations on a going concern, and (3) the Buyer intends to provide for continuity in health care services to the Debtors’ patients.
…the Debtors and their advisors have developed bidding and auction procedures for the orderly and value-maximizing marketing and sale of the Assets (the ‘Bid Procedures’). The Bid Procedures are designed to continue to promote a competitive and robust bidding process, and to generate the highest or otherwise best value for the Debtors’ estates, while allowing the Debtors to implement the proposed transaction on an expedited basis.
The Bid Procedures are also intended to provide the flexibility to solicit proposals, negotiate transactions, hold an auction, and proceed to consummate the proposed Sale Transactions for the highest or otherwise best offers for the Assets, all while protecting the due process rights of all interested parties and ensuring that there is a full and fair opportunity to review and consider proposed transactions…
The Bid Procedures are designed to encourage all prospective bidders to submit bids, including for all or part of the Assets (each, a ‘Partial Bid’), at the outset of these Chapter 11 Cases to provide the highest or otherwise best available recoveries to the Debtors’ stakeholders.”
Key Terms of Stalking Horse APA:
- Seller: Hey Favor, Inc., a Delaware corporation.
- Buyer: Pepper Park LLC.
- Purchase Price: The consideration for the Acquired Assets shall be the assumption by Buyer of the Assumed Liabilities pursuant to this Agreement and the Assignment and Assumption Agreements (the “Purchase Price”)….The Buyer will assume up to $35 million** of the Debtors’ secured indebtedness…
- Bid Protections:
- “Break-Up Fee” means an amount equal to Nine Hundred Thousand Dollars ($900,000) to compensate Buyer for serving as the “stalking horse” and subjecting this Agreement and the Ancillary Agreements to higher and better offers.
- “Expense Reimbursement” the Expense Reimbursement to Buyer and its affiliates shall not exceed Five Hundred Thousand Dollars ($500,000).
- “Reverse Break Up Fee” If this Agreement is terminated pursuant to Section 10.1(d), then no later than two (2) Business Days after such termination, Buyer shall pay to Seller an amount in cash equal to Two Million Dollars ($2,000,000).
** The APA provides as to assumption of TriplePoint liabilities: "Seller shall use reasonable best efforts to, and to cause its Representatives to, provide all cooperation reasonably requested by Buyer in connection with Buyer’s negotiation and execution of definitive documentation (the 'Definitive Financing Documentation') relating to the assumption, repayment, refinancing or retirement of the Assumed Pill Club Obligations and the Assumed Pill Club DIP Obligations in an aggregate principal amount (as determined without regard to payment in kind interest, unpaid interest, the Pill Club EoT Obligation and the Pill Club DIP EoT Obligation) up to Thirty Five Million Three Hundred and Fifty Thousand Dollars ($35,350,000) (the 'TriplePoint Liabilities'). Buyer will enter into such Definitive Financing Documentation at or prior to the Closing."=
Events Leading to the Filing of the Chapter 11 Cases
The Debtors provide: "The catalyst for these Chapter 11 Cases is the Debtors’ difficulty recapitalizing their current balance sheet given current market conditions and the Debtor’s resultant deteriorating liquidity position. This difficulty was compounded by a slate of ongoing investigative and litigation expenses, the costs of which have decreased the Debtors’ runway from two years to a number of months. After careful consideration of the status of these issues and potential options to resolve them, the Debtors determined that filing the Chapter 11 Cases in this Court was appropriate and necessary to protect the Debtors’ business.
The Debtors intend to negotiate cooperatively with their prepetition lender and investors to ultimately emerge from these Chapter 11 Cases with a leaner balance sheet that is better aligned with current operational realities or to sell the Company. To do so, the Debtors plan to efficiently sell the majority of their assets.
California False Claims Act Settlement
In mid-February, the Debtors reached an $18.3 million settlement with the State of California ($15.0mn to the state's Department of Justice and $3.3mn to insurance authorities) over claims it defrauded the state's Medicaid program by prescribing contraception without adequate consultation and for over-billing in respect of prescribed contraception, including by alleged shipping 1,000s of female condoms to individuals who did not want them. The female condoms provided much higher margins for the Debtors than their other products (eg birth control pills) and would be sent to customers as "gifts" (including promised chocolates) before allegedly finding their way onto the Debtors' (@37,000) Medi Cal invoices ("Not only do they bring a high reimbursement rate, but the company also billed Medi-Cal more than 250% of the retail price on average, investigators found"). Good background here and here.
The Debtors' CEO, Liz Meyerdirk (who came to the Debtors from Uber Eats) commented at the time that Pill Club was "glad to have the opportunity to resolve these issues and to bring our full focus back to expanding access to contraceptive care for all who need it" and also noted that it was taking steps to make sure customers receive only products they request; presumably including a reduction in sales/shipments of the high margin female contraceptives…and an accompanying reduction in revenue.
About the Debtors
According to the Debtors: “We believe everyone has the right to easy, affordable birth control and have helped over 3 million patients across the U.S. get access.“
In June 2021 Tech Crunch reported: "The Pill Club announced today that it has raised a $41.9 million Series B extension round led by Base 10. Existing investors, including ACME, Base10, GV, Shasta Ventures and VMG, participated in the round, as well as new investors, including Uber’s Dara Khosrowshahi and Honey’s George Ruan and iGlobe.
The extension round comes over two years after the company announced its initial Series B investment, a $51 million financing led by VMG Partners. After reportedly being valued at $250 million, the company declined to provide its latest valuation, other than saying that the extension was an up-round."
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