Portsmouth athletic apparel firm wins a round in bankruptcy court
Judge agrees that ‘suffocating’ contract tied company’s hands
Tempnology LLC, a small, unprofitable but promising Portsmouth-based athletic apparel firm once known as Coolcore, has managed to get out of what it called a “suffocating” contract with a distributor that would have driven it out of business, thanks to a bankruptcy judge’s judge ruling on Friday.
And now Tempnology – which filed for Chapter 11 reorganization with $6.2 million in debt at the start of September – hopes to reemerge from bankruptcy by borrowing more money from its only secured creditor – Schleicher & Stebbins Hotels LLC (S&S).
However, S&S already owns 55 percent of the company, and will buy it outright for the money in a cashless sale, unless its “stalking horse” offer attracts a substantially higher bidder.
But not everybody agrees with this idea, including the distributor – Mission Product Holdings Inc. – and the bankruptcy trustee’s office, which who used the words “conflict of interest.”
But Tempnology’s attorney, Daniel Sklar, said that the proposal would pay back creditors, keep the door open and preserve jobs (14 were on the payroll, paid a total of about $2.4 million a year, as well as a smaller number of independent contractors, paid roughly $360,000 annually).
The trustee, wanting to convert the case from Chapter 11 reorganization to Chapter 7 liquidation, noted that Tempnology, whose secured debt increased from $350,000 to $5.5 million in about 2½ years, has lost $9.3 million since 2012. A special examiner, who also noted the “many hats involved” said the company has been insolvent since the end of 2014, but he still said he wanted to keep the company going as a going concern.
At the center of all this is Mark Stebbins, a principal of S&S and the well-known CEO of Hooksett-based ProCon Construction. Until recently, he was an active manager of Tempnology and effectively controlled the company, according to an arbitrator’s and examiner’s report.
Stebbins approved most deals, including the hiring of the last two CEOs, and kept on lending the company money at bargain rates with no apparent urgency of getting it repaid until the bankruptcy filing.
Calls to Stebbins and attorneys for Tempnology were not returned by deadline.
Stebbins didn’t start Coolcore, which was founded as Cool Comfort Technologies in Maine by Dennis Ackroyd and Joseph Turner in 2008. Ackroyd, who was reportedly on the design team at Malden Mills that developed Polar fleece, came up with a triple-layer, chemical-free fabric that – according to its website – that lowers an athlete’s surface temperature by 30 percent.
A private equity partnership that including Stebbins bought the technology in 2011.
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Now headquartered in Portsmouth, Tempnology has operations in Germany and China, including Granite Textile Company Ltd., a Shanghai subsidiary that is not part of the bankruptcy proceedings.
In 2014, Tempnology had revenues of $8.3 million, though it still lost $1.9 million that year. It expects revenue to fall to $3.1 million in 2015, when it expects to lose $3.5 to $4 million.
A big part of that revenue drop was due to a fallout with the distributor Mission Product Holdings, which midway in 2014 exercised its rights to terminate the distribution agreement that granted it exclusive rights to sell a number of Coolcore accessories, according to Tempnology CEO Kevin McCarthy in a declaration filed with the court along with the bankruptcy filing.
McCarthy said that Mission was seeking a direct source to its products to improve margins. But under that clause, the company was prevented from selling any of its products in the United States until June 2016. McCarthy also added that stiff competition from Nike, Adidas and Under Armor contributed to losses for Coolcore’s “superior technology”
Tempnology claimed that Mission breached the contract by hiring its former CEO, Justin Cupps, in January 2015, a month after he left. But an arbitrator in his initial decision said that the company didn’t object at the time of Cupps’ hiring and actually negotiated with Cupps at Mission.
The arbitrator ruled the contract, with its two-year cooling-off period, was still in force.
In July 2014, a month after Mission terminated the contract, S&S took over a $350,000 bank loan and offered Tempnology $2.5 million of revolving credit, which incrementally grew to $5.5 million in 2015. In addition, another outstanding S&S $3.5 million loan was converted into equity, increasing S&S ownerships to 55 percent in March 2015
But, said McCarthy, it became clear that S&S was “unwilling to continue to fund an entity sinking deeper and deeper into debt.”
Tempnology retained Phoenix Partners LP, an investment firm that unsuccessfully tried to shop the company for sale as a going entity. When that failed, Phoenix met with S&S, which agreed to debtor-in-possession financing for $6,850,000 at an interest rate of only a half percent above prime.
“The Debtor has virtually no free or available cash to fund its ongoing operations,” said McCarthy. “Without immediate access to post-petition financing, the Debtor faces a crisis that would … likely result in the closure of the operations.”
S&S also offered to buy the company for $6,950,000 as a credit sale, unless a better offer (more than $7.3 million) came along. The deal would pay off most of the unsecured creditors, but not Mission, whose contract would be revoked.
“The Sale Motion should also be denied because the sale process is being driven by S&S who is an insider of the Debtor, the proposed buyer, the Debtor’s major (and maybe only) secured creditor, and the proposed lender,” wrote Mission’s attorneys.
Since an equity owner has a lot less protection than a secured creditor, S&S was trying to manipulate the “sale process by obtaining relief it could never obtain outside of bankruptcy,” claimed Mission’s attorneys.
But Sklar put the blame back on Mission, saying it ”consistently failed to order, market or otherwise sell the Debtor’s products during that period, essentially starving the Debtor from any income.”
He also noted that, to avoid conflict of interest, Stebbins and his partner Mark Schleicher resigned from Tempnology’s management committee, and that S&S and Tempnology hired separate attorneys who negotiated the deal at “arm’s length.”
The bankruptcy court appointed an examiner, who in an initial report filed Sept. 30, said that “much of the losses are attributable to high selling, general and administrative expenses” and was concerned that “the salaries of management are not justified by the Debtor’s performance” and was critical of Phoenix for not contacting more bidders.
He said that 80 percent of the creditors would not be paid through the proposed “cashless sale.”
But the examiner added, if the sale doesn’t go through, and S&S withdraws its offer, the company would be liquidated, so the court should not delay the sale.
On Oct. 2, the bankruptcy judge gave Tempnology its biggest wish, rejecting the contract with Mission, but has yet to rule on the DIP financing and the stalking horse sale.