Introduction
On July 30, 2019 (the “Petition Date”), THG Holding LLC; True Health Group LLC; True Health Diagnostics LLC; Outreach Management Solutions LLC; True Health Clinical LLC; Health Core Financial LLC; and True Health IP LLC; (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
The Debtors are represented by Morris, Nichols, Arsht & Tunnell LLP. The Debtors seek to retain Perkins Coie as special counsel. The case has been assigned to the Honorable John T. Dorsey. A hearing on the Debtors’ first day motions was held on July 31, 2019, at 2:30 p.m. (ET). A telephonic status conference is scheduled for August 19, at 1:00 p.m. (ET). A hearing on the Debtors’ second-day motions is scheduled for August 22, 2019, at 9:30 a.m. (ET). The meeting to appoint the unsecured creditors’ committee is scheduled for Thursday, August 8, 2019, at 10:00 a.m. (ET).
Background
Founded in 2014, the Debtors are one of the largest independent providers of laboratory management and diagnostic services in the United States. The Debtors operate accredited, full-service clinical laboratories that offer comprehensive testing for biomarkers that can indicate risk for cardiovascular disease, autoimmune disorders, cancer and other diseases and health testing services. The Debtors offer more than 400 tests and have handled over 1,525,000 patient samples. The currently run about 1,370 samples daily through their two facilities. The primary operations are located in Richmond, VA, which includes a 109,000 square foot facility built in 2013 consisting of 52,000 square feet for testing plus offices for billing, research and development and other administrative functions. The Debtors also maintain a second laboratory in Frisco, TX, which is a 7,000 square foot facility and includes 5,000 square feet for testing. From the two facilities, the Debtors serve approximately 1,250 physician offices located in 46 states plus the District of Columbia.
As of the Petition Date, the Debtors employed approximately 319 people in full-time and part-time positions. These employees include laboratory technicians, phlebotomists and other clinical professionals in addition to corporate support staff in finance, accounting, billing, human resources and information technology. The Debtors also contract with approximately 450 phlebotomist vendors.
Equity ownership of THG Holding, LLC, the parent, consists of Class A Shares held by Riverside Strategic Capital Fund I LP., together with its affiliated funds, Monroe Capital Management Advisors, LLC, as administrative agent, and two of the Debtors’ founding investors and Class B Shares held by approximately 40 private investors.
The Centers for Medicare and Medicaid Services have suspended all Medicare payments to the Debtors due to fraud. The federal regulators had previously suspended payments due to fraud as of June 13, 2019. In 2017, the Debtors filed for injunctive relief which was ultimately denied, and the Debtors then filed bankruptcy after the second suspension. The Debtors claim approximately $21 million in revenue have been held back since May 2017.
The Debtors owe principal amounts under a secured revolver of approximately $2.8 million and interest of $24,471.51. They have a secured term loan of approximately $117 million and $1 million in interest. They also had second lien loans in the amount of $$18.8 million and $15.5 million. An inter-creditor agreement between the first and second lien holders subordinated $34 million of first-lien debt to be pari passu with the second lien debt. Unsecured trade debt totals approximately $14 million.
Events Leading to filing the Chapter 11 Cases
On or around May 25, 2017, the Centers for Medicare and Medicaid Services instituted a 100 percent hold on all Medicare payments to True Health Diagnostics LLC without notice, limiting the Debtors’ ability to fund their retail lab business.
June 23, 2017, Centers for Medicare and Medicaid Services reduced it holdback from 100 percent to 35 percent of all Medicare payments. The Debtors estimated $21 million in receivables have been held back by Medicare since May 2017.
On or about June 13, 2019, the Centers for Medicare and Medicaid Services imposed a second 100 percent hold on all Medicare payments to True Health Diagnostics LLC. In response to the June 13, 2019 suspension, True Health Diagnostics LLC sought emergency injunctive relief against the Centers for Medicare and Medicaid Services. Although True Health Diagnostics LLC initially was successful in obtaining a temporary restraining order against Centers for Medicare and Medicaid Services to preclude Centers for Medicare and Medicaid Services from imposing the 100 percent holdback, on July 22, 2019, the District Court denied True Health Diagnostics LLC a preliminary injunction and dismissed the action for lack of subject matter jurisdiction. The continued suspension of all Medicare payments to True Health Diagnostics LLC has resulted in irreparable damage to the Debtors’ liquidity and their businesses. Consequently, the Debtors were forced to file for Chapter 11 bankruptcy protection before this Court.
Sale Motion
The Debtors seek to sell substantially all of their assets. The Debtors have filed a motion seeking entry of an order establishing bidding procedures, approving various forms of notices of respective dates, times and places, establishing assumption and rejection procedures. Additionally, although they do not yet have a stalking horse bidder, the Debtors seek authority to establish one if one should emerge. Pursuant to the motion, and as a condition of the debtor-in-possession financing, the Debtors seek a ruling that the DIP Agent (defined below) and DIP lenders are entitled to credit bid the full amount of their pre-petition claims under Section 363(k).
The Debtors propose the following timeline for conducting the Sale process:
Bidding Procedures Hearing……………………………………………… August 16, 2019
Bid Deadline ……………………………………………………………September 13, 2019
Sale Objection Deadline ………………………………………………. September 13, 2019
Assignment Objection Deadline ………………………………………..September 13, 2019
Auction ………………………………………………………………….September 17, 2019
Sale Hearing (no later than) …………………………………………….September 20, 2019
Deadline to Close Proposed Sale Transaction (no later than) …………. September 30, 2019
DIP Motion
The Debtors seek approval of debtor-in-possession financing with certain of its prepetition secured parties, including Monroe Capital LLC, as “DIP Agent”) which will provide up to $3,574,000 of new money on an interim basis and up to $7,847,000 of new money on a final basis. The financing is conditioned on certain milestones related to the sale, as set forth in the Sale Motion.
The motion also seeks approval waivers of Section 506(c) of the Bankruptcy Code for each lender, as well as a declaration that no person may assert an “equities of the case” claim under section 552(b) of the Bankruptcy Code against the prepetition secured parties with respect to proceeds, product, offspring or profits of any of the DIP collateral or the prepetition collateral
The motion also requests that. subject to the entry of the Final DIP Order, at any time following entry of the Final DIP Order, the DIP Agent and DIP lenders may propose a chapter 11 plan for one or more of the Debtors whereby, among other terms, claims arising under the prepetition first lien credit agreement will be reduced to $50 million and satisfied by (i) the creation of a new year secured term loan facility, and (ii) the issuance of new equity interests in the reorganized Debtors to the holders of such claims.
Significant First Day Motions
Critical Vendor Motion
The Debtors seek up to $250,000 on an interim basis and $500,000 on a final basis for authorization of payment of prepetition claims to critical vendors. The Debtors argue that they operate in a highly specialized, highly regulated and highly competitive industry that requires the payment of critical vendors. The Debtors argue that any disruption in the ability to receive samples and deliver test results would almost assuredly cause the collapse of the Debtors’ entire business operations and would directly affect the continuity of patient care which could result in serious harm to patients including even death.
Wages and Benefits Motion
The Debtors seek authorization, but no direction to pay certain wages and benefits to their employees. The Debtors employ approximately 319 employees. The Debtors seek authority to pay approximately $765,000 in base wages and salary, plus an average of $175,000 in commissions to sales representatives. As of the Petition Date, the Debtors estimate that uncashed employee paychecks outstanding are approximately $30,000 for wages or salary earned within 180 days of the Petition Date. The Debtors further estimate that approximately $110,000 in wages and salaries remain due and owing to employees as of the Petition Date. The Debtors further estimate that approximately $175,000 in prepetition commissions are owed to sales representatives. The Debtors believe that the portion of uncashed employee paychecks, unpaid employee wages and unpaid sales commissions allocable to each employee does not exceed $13,650 per employee.
The Debtors estimate that, as of the Petition Date, they have withheld approximately $200,000 in prepetition deductions and payroll tax obligations. The value of all accrued and unpaid prepetition accrued vacation is approximately $389,000. The Debtors believe they owe $18,000 for prepetition dental plan fees, and they do not believe they owe any amounts for the vision plan for the prepetition period. As of the Petition Date, the Debtors believe that no amounts are outstanding for life insurance premiums attributable to the prepetition period. The Debtors estimate that $145,000 is due and owing under corporate credit cards.
As of the Petition Date, approximately $215,000 in prepetition amounts for uncashed checks owed to the independent contractors remained outstanding. The Debtors believe that there is $85,000 outstanding in uncashed independent contractor paychecks together with the uncashed employee paychecks.
Refund Motion
Various state and federal laws require the Debtors to refund patients and third-party payors when overpayments are identified. As of the petition date, the Debtors estimate that approximately $16,500 in refunds are due and owing. The Debtors request authority to pay and allow offsets up to $116,500 in refund program obligations, in the ordinary course of business on an interim basis, pending entry of the final order, and to continue thereafter to issue and pay and allow offsets for the refund program obligations to patients and third-party payors, including refunds for overpayments.
Insurance Motion
The Debtors seek authority to maintain existing insurance policies and pay all obligations and to renew, revise, extend, supplement, change, or enter into new insurance policies as needed. They owe prepetition brokerage fees in the amount of $45,000. They also request relief to continue to pay into their insurance premium financing program. Insurance financing payments are approximately $48,000 and continue to February 7, 2020.
Taxes and Fees Motion
Although the Debtors estimate that approximately there is $690,000 in unpaid property taxes, as of the Petition Date, but do not seek authorization to pay the outstanding property taxes. The Debtors are only seeking authorization to pay up to $20,000 of unpaid sales and use taxes on an interim basis and $50,000 on a final basis.