Muscle Pharm Corporation (MSLPQ)

[PeonyVMW]

Creditors' Motion for Relief from Automatic Stay

Thermolife, a long-suffering creditor that was awarded $1.6M in litigation in an Arizona action via bench trial, filed for motion for relief from the automatic stay during Ch. 11 today. The hearing is scheduled for May 2nd, but at its core, Thermolife's counsel is asserting the awarding of damages in the Arizona court system was finalized prior to the MP bankruptcy filing, and that the remaining $600K in surety bonds that should be excluded from the assets of the bankruptcy estate. Note, Drexler via a mixture of his own payment and personal guarantee pledged the $600K in surety bonds to two entities: Atlantic Specialty Insurance Company and Suretec Insurance Company. The surety bonds, as described in a recent 10-K filing, have the purpose to:

"In the interim, the Company filed an appeal and posted bonds in the total amount of $0.6 million in order to stay execution on the judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid by Mr. Drexler on behalf of the Company"

So there likely emerges another front for court battling - should the May hearing rule in favour of Thermolife's relief motion, the bonds from the insurance companies will be paid out, and the remaining amount (~$1.2M) will remain as outstanding due to creditor.

This provokes a short analysis of Musclepharm's balance sheet, as it's long demonstrated the negative equity (>$50M deficit), of which $48M (!) was last characterized as current liabilities, and much of the amount owing is tied up in litigation, specifically - settlements that have been agreed to but not adhered to.

Below is a short synopsis of litigation, and how it could be interpreted this motion for relief affects creditors:
Thermolife Should they collect on their surety bond for $600K, then their remaining amount owed is $1.2M from the estate.
White Winston The 11th hour attempt to reach a broad settlement across all the ongoing litigation actions makes analysis hazy - clearly White Winston/Amerop believe there is still something there in the business, and are attempting to best position themselves when/if MP can emerge from Chapter 11.
Empery Claims and cross-claims aside, their security agreement makes it very clear they own the collateral, which at this point is mostly the intellectual property and branding, and whatever AR from the Costco account that hasn't already been tied up in factoring. Do you think a New York hedge fund is interested in running this business? The push for an Article 9 auction sale likely answers that question. For those interested, here is an excellent case study of a similar situation to MP, in which an overleveraged food services company relinquished its assets via Article 9 sale. Big difference here is the late Ch.11 filing.
IRS and Estalella Regarding withholding taxes remittance on restricted stock units, last I checked this action was ongoing between the company and the former officers.
Manchester City Football Group MP has owed Manchester City over $3M for years, they've only paid $0.3M so far, and I have yet to see any commitment towards paying additional amounts.
Nutrablend MP had minimum monthly purchase orders of at least $700K to help offset the awarded amount owed to Nutrablend. These payments surely aren't being fully made, as the Company isn't even selling that much in product each month.
4Excelsior Yet another stiffed vendor, along with SK Labs. Both entities were recently named to the committee of unsecured creditors.

For those who have read it this far - how do you see this playing out in the next six months?

One last item to keep in mind - assuming Empery prevails as the senior secured creditor, that Chapter 11 doesn't result in a sustainable reorganization plan, and returns to the Article 9 auction of its collateral (i.e. MSLP branding and IP assets):

Assuming the auction is completed, the buyer must be willing to proceed outside of an insolvency proceeding. In this case, an Article 9 sale could be challenged by creditors as a constructive fraudulent transfer - intent to defraud creditors isn't required to be proven. This type of litigation can be brought as long as four to six years after the sale.

Taken from above:
"To prevail, the party challenging the transaction must establish, first, that the borrower was insolvent on a balance sheet basis or similarly financially challenged on a cash flow or capitalization basis, and second, that the sale was for less than “fair consideration” or “reasonably equivalent value,” depending on whether state law or the U.S. Bankruptcy Code governs the claim. Where the borrower was in default under its credit facility (a requirement of Article 9) and creditors were left unpaid, the insolvency prong would likely not be difficult to prove. But if the sale was an arm’s-length sale to a non-insider of the borrower after a fulsome marketing effort, it may be quite difficult to prove that insufficient value was paid in the sale. The value issue, together with the expense of bringing a fraudulent transfer claim, can be a significant deterrent to an attack by unsecured creditors, but the risk needs to be evaluated on a case-by-case basis. While the risk of such a challenge can be significantly minimized if not nullified by a sale through bankruptcy or other insolvency proceeding, an insolvency proceeding, as noted above, may entail significantly more expense, delay and execution risk. Additionally, from the buyer’s perspective, there is risk that it may lose the deal to a competing bidder. Moreover, an insolvency proceeding is a public proceeding, whereas an Article 9 sale can be conducted outside the public view.

In addition to the risk of potential attack from unsecured creditors who will not be paid all, or an agreed portion, of their claims in connection with the sale, junior lienholders (if any) who are not paid from the sale proceeds can challenge the sale under provisions of Article 9 if it is not a “commercially reasonable” sale. Again, in the context of a private Article 9 sale as a going concern, a professional marketing and sale process will significantly mitigate the risk of a successful challenge on commercial reasonableness grounds. In the particular case described herein, the subordinated lenders and our senior lender client were party to a customary intercreditor agreement under which, after the borrower’s default, the sub debt holders were substantially precluded from contesting any sale or other disposition of collateral that the senior lender supported."

In short, an Auction 9 sale could proceed - but reading through financial statements of MP, would it really fetch a price high enough that unsecured creditors would not be left as bagholders? Now it makes sense why Thermolife so quickly filed their motion to stay and collect on the surety bond.