Wednesday, September 8, 2010

Update: TapouT, PEM Group, the SEC, Danny Pang and the Authentic Brands Acquisition

The big news of the day was the reported acquisition of TapouT by "Authentic Brands with backing from Leonard Green, the billionaire investor whose firm owns stakes in Sports Authority Inc. and Whole Foods Market Inc."

Lost in the news, however, is any explanation concerning why TapouT was sold, whether the acquired entity has worked out any (continued) relationship with Zuffa going forward --a critical component of any TapouT revenue stream I would imagine, and, of most interest to me, whether the acquisition has any connection to the SEC action against Danny Pang and PEMGroup, an Irvine, California based private equity firm that TapouT "secured a multimillion-dollar line of credit from."

Here is the relevant chronology from the SEC action as it relates to PEMGroup, Pang, and TapouT (all of these documents are publicly available via Pacer)

On April 24, 2009, the SEC filed a complaint in the United States District Court for the Central District of California for alleged violations of the federal securities laws against defendants Pang, Private Equity Management Group, LLC and Private Equity Management Group, Inc. 

Thereafter, on August 4, 2009, the Court entered a Preliminary Injunction and Orders: (1) Freezing Assets; (2) Appointing a Permanent Receiver; (3) Repatriating Assets; (4) Requiring Accountings; (5) Prohibiting the Destruction of Documents; and (6) Surrendering the Passport of Pang. 

In September 2009 "Danny Pang committed suicide by taking an overdose of a combination of painkillers and other drugs, the coroner's office in Orange County, Calif., concluded."

On March 3, 2010 the Court entered an Order approving the "sale of the following parcels of personal property identified in the moving papers by public auction, privately negotiated sale, or any other method that he [the receiver] determines is reasonable and appropriate, with such sales being pre-approved and automatically confirmed upon closing:
              
        *                      *                       *
(7) Revolver, and two Term Loans to, Equity Ownership in, and Warrants to purchase shares from, TapouT, LLC and/or Fight Industries, LLC. These companies manufacture and sell clothing and accessories for extreme fighting and mixed martial arts."
As set forth in Exhibit B to the Receiver's Eighth Status Report; Declaration of the Receiver, Robert P. Mosier, the Loans to Tapout included the following:  $5,000,000 "Revolver Loan"; $2,500,000 "Term A Loan", and a "Fight Industries Term Loan 'B'" in the amount of $500,000 (while the amounts in the Exhibit are set out in thousands, from the total and the detail provided in the Status Report it is clear that the numbers in the spreadsheet are in the millions). 

In addition, the filing provides that there were "[t]hree term loans to the Founders of TapouT" in the amount of $500,000. 

According to the Exhibit, the Revolver and Term A loans were paid off in April 2010 and the "B" loan was paid off in February 2010.  According to Exhibit B, the founder loans were paid off in Fall 2009.

Given the timing of the SEC action against Pang and PEMGroup, the Order of the Court in March 2010 permitting the sale and disposition of the TapouT property possessed by PEMGroup, and the fact that the bulk of the TapouT loans were paid off in April 2010, one has to wonder if the Pang SEC action has any connection to the acquisition reported today, i.e. did the debts of TapouT to PEMGroup lead to the sale.  Even if it didn't, what happened to the "equity interest" that PEMGroup reportedly held in TapouT.

To be continued...

Update

While the reported fact that "[l]ast year, TapouT raked in $200 million in annual revenue -- more than 16 times its $12 million revenue in 2006," if accurate, could easily explain how TapouT paid off the bulk of its loans from PEMGroup in April 2010, I took a look around to see if there was any news around that time that might have a bearing on TapouT's decision (and/or ability) to pay back the loan amounts then.

I came across a number of articles from July 2010 discussing an "expanded licensing agreement with sportswear marketer TapouT" and Li & Fung Ltd., which is reportedly "the biggest supplier to retailers including Wal-Mart Stores Inc. and Target Corp."

In fact, according to an August 12, 2010 Li & Fung Ltd. Press Conference presentation it appears that the TapouT "expanded" licensing deal took place in April 2010, i.e. around the time that the $7.5M revolver and Term A Loan were paid off according to the Court filings.

More to come...

Fight Lawyer