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November 5, 2021 – The Court hearing the AH Liquidation cases confirmed the Plan element of the Plan Proponents’* Second Amended Combined Plan of Liquidation and Disclosure Statement on a final basis (the “Combined Document”) [Docket No. 401].
On May 31, 2021, Avadim Health, Inc. and four affiliated Debtors (“Avadim” or the “Debtors,” a healthcare and wellness company that sells topical products to improve immune health, neuromuscular health and skin barrier health) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-10883. At filing, the Debtors’ lead petition noted estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn.
On August 1, 2021, the Court hearing the Avadim Health cases approved the sale of substantially all of the Debtors’ assets to Midava Holdings 3, Inc., an entity created by prepetition lenders (ie affiliates of European alternative lending specialist Hayfin Capital Management), which credit bid $69.95mn of the $102.0mn owed to them in respect of the Debtors’ prepetition credit facility, with the balance of those credit facility borrowings comprising Class 2 – Prepetition Lender Claims.
*The Plan Proponents are AH Liquidation, Inc. (“Avadim”), RM Liquidation, Inc. (“Relion”), BP Liquidation Corp. (“Bionome”), QAA Liquidation, Inc. (“Quality Assurance”), and AH IP Liquidation, Inc. (“AHIP”), the Debtors and Debtors-in-Possession (collectively, the “Debtors”) and the Debtors’ Official Committee of Unsecured Creditors (the “Committee” and, together with the Debtors, the “Plan Proponents”).
The Combined Document [Docket No. 380] states, “The Combined Plan and Disclosure Statement is a liquidating chapter 11 plan for the Debtors. The Purchased Assets have been transferred from the Debtors to the Buyer as part of the Sale Closing. The Combined Plan and Disclosure Statement provides that, upon the Effective Date, the Liquidating Trust Assets will be transferred to the Liquidating Trust and the Dismissed Debtors will be dissolved. The Liquidating Trust Assets will be administered and distributed as soon as practicable pursuant to the terms of the Combined Plan and Disclosure Statement and Liquidating Trust Agreement.
The proposed treatment of Claims embodied in the Combined Plan and Disclosure Statement is the result of substantial arms-length negotiations between, and among, the Debtors, the Committee, the Prepetition Secured Parties, the DIP Secured Parties and the Buyer regarding an exit strategy for these Chapter 11 Cases, and implements the terms of the Global Settlement amongst the parties in the DIP Order that was approved by the Bankruptcy Court on July 26, 2021.
Specifically, the Global Settlement provides for the Committee’s support of the Sale process and consummation of the Sale to the Buyer, in exchange for, among other things:
- the agreement by the parties that the Committee file and pursue a combined disclosure statement and plan of liquidation with the support of the Prepetition Secured Parties, DIP Secured Parties and Buyer;
- the establishment of a Claims Reserve to fund Administrative Expense Claims (including Professional Fee Claims up to the Fee Limit), Priority Tax Claims, Other Priority Claims, Other Secured Claims;
- the vesting of Estate Causes of Action in the Liquidating Trust to fund distributions to the beneficiaries thereof, including the Holders of Allowed General Unsecured Claims, which recoveries, for the avoidance of doubt, are the only potential material recoveries for Holders of Allowed General Unsecured Claims;
- an increase in the Committee’s Professional’s fee budget, of which any unused portion shall vest in the Liquidating Trust;
- the funding of the GUC Cash to the Liquidating Trust, $250,000 of which shall be repaid from the net proceeds of recoveries on account of the Estate Causes of Action, if any; and
- (i) the enforcement of the subordination provisions contained in the Note Purchase Agreement, and (ii) the subordination of the Prepetition Secured Parties’ rights to Holders of General Unsecured Claims to recover on account of certain Liquidating Trust Assets in accordance with the terms of the Global Settlement and the DIP Order.
In light of the negotiations and settlement embodied in the Combined Plan and Disclosure Statement, the Plan Proponents believe that the Plan will maximize the value of the Debtors’ remaining assets and accomplish the objectives of chapter 11 of the Bankruptcy Code. Accordingly, the Plan Proponents strongly encourage creditors to vote to accept this Combined Plan and Disclosure Statement.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2 (“Prepetition Lender Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $31,702,045 (amounts owed under the Debtors’ prepetition credit facility less amounts credit bid for the Debtors assets, see further below) and expected recovery is TBD. Pursuant to the DIP Order, the Prepetition Lender Claims are Allowed (without the need to file a Proof of Claim) in the full amount due and owing under the Senior Secured Debt Documents and the DIP Order (less the Credit Bid Amount). Each Holder will receive the Lender Recovery and share the Lender Recovery with the Holders of DIP Facility Claims; provided that such Lender Recovery will first be applied to satisfy the DIP Facility Claims, and, once all DIP Facility Claims are paid in full in cash, then to satisfy any Prepetition Lender Claims.
- Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $12,345,599 and expected recovery is 0.0 – 2.0%FN. Each Holder will receive its Pro Rata share of the GUC Recovery.
FN: Recoveries for Holders of Allowed General Unsecured Claims will depend almost entirely on recoveries from the Estate Causes of Action. As of the Effective Date, there will be at least $200,000 of Liquidating Trust Funding, plus the Committee Fee Savings Amount (if any). However, as of the Filing of this Combined Plan and Disclosure Statement, it is not possible to estimate with any certainty the portion of these amounts that will be needed to pay Liquidating Trust Expenses that are required to be paid prior to making any Distributions to Holders of Allowed General Unsecured Claims.
- Class 5 (“Subordinated Notes Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $13,152,506 and expected recovery is 0%.
- Class 6 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 7 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- “Committee Fee Savings Amount” means the amount (if any) that is equal to $950,000 less the amount of the Allowed Professional Fee Claims of the Committee’s Professionals through the Effective Date.
- “Estate Causes of Action” has the same meaning as Excluded Actions in the APA, which includes the following Causes of Action: (i) Former Insider Claims; (ii) Current Insider Claims; and (iii) Non-Insider Claims.
- “GUC Cash” means Cash in the amount of $450,000 of which $250,000 was drawn on the DIP Facility on the Closing Date and will be transferred by the Debtors to the Liquidating Trust on the Effective Date and $200,000 of which will be funded by the Buyer (or its designee) to the Liquidating Trust on the Effective Date.
- “GUC Recovery” means, after payment or reserve in full for all Liquidating Trust Expenses and subject to the Lender Reimbursement Right, if applicable, the sum of (i) the GUC Cash, (ii) the Committee Fee Savings Amount, (iii) any proceeds recovered from the Former Insider Claims and the Non-Insider Claims, (iv) prior to the indefeasible payment in full in Cash of the DIP Facility Claims and the Prepetition Lender Claims, 25% of any recovery from the Current Insider Claims, and (v) after the indefeasible payment in full in Cash of the DIP Facility Claims and the Prepetition Lenders Claims, 100% of any recovery from the Current Insider Claims.
On October 25, 2021, the Debtors’ claims agent notified the Court of the voting results [Docket No. 382], which were as follows:
- Class 2 (“Prepetition Lender Claims”): 3 claim holders, representing $31,702,044.99 in amount and 100% in number, accepted the Plan.
- Class 4 (“General Unsecured Claims”): 13 claim holders, representing $2,256,461.06 (or 76.47%) in amount and 27.73% in number, accepted the Plan. 4 claim holders, representing $5,880,137.08 (or 23.53%) in amount and 72.27% in number, rejected the Plan.
The Debtors filed Plan Supplements at Docket Nos. 363 and 381 which attached the following:
Docket No. 363
- Schedule 1: Liquidation Analysis
- Schedule 2: Form of Liquidating Trust Agreement
- Schedule 3: Schedule of the Estate Causes of Action
Docket No. 381
- Schedule 1: Amended Liquidating Trust Agreement
- Schedule 2: Redline reflecting the changes between the initial Liquidating Trust Agreement and the amended Liquidating Trust Agreement
On August 1, 2021, further to its July 23rd bidding procedures order [Docket No. 115], the Court hearing the Avadim Health cases approved the sale of substantially all of the Debtors’ assets to Midava Holdings 3, Inc. (the “Buyer,” $69.95mn credit bid) [Docket No. 239]. The Buyer is an entity created by the Debtors’ prepetition and then debtor-in-possession (“DIP”) lenders (ie Hayfin Capital Management), which are owed approximately $102.0mn in respect of prepetition debt and up to $7.156mn in respect of DIP debt.
Previously on July 28th, the Debtors notified the Court that absent any further qualified bids, they had cancelled a July 28th auction and named the Stalking Horse Bidder as the successful bidder [Docket No. 218].
The APA memorializing the terms of the proposed acquisition is attached to the Debtors’ bidding procedures motion [Docket No. 16] at Exhibit B and a press release in respect of the closed sale is available here.
On July 26, 2021, the Court hearing the Avadim Health cases issued an order authorizing the Debtors to (i) access the $4.956m balance of what was in total a $7.156mn new money, debtor-in-possession (“DIP”) financing facility [Docket No. 209].
On June 2nd the Debtors had been given the go ahead as to a $2.2mn interim tranche of that funding [Docket No. 51] which was being provided by prepetition lenders (ie Hayfin, owed $102.0mn as at Petition date, see further below) who have also agreed to serve as a credit bidding stalking horse ($69.95mn credit bid) in an expedited (70 days to closing) section 363 auction/sale process.
The DIP credit agreement is filed at Docket No. 26.
Petition Date Perspective
Goals of the Chapter 11 Filings
The Daniels Declaration (defined below) provides: “After extensive operational review, board and management deliberations, and negotiations with its secured lenders, the Company filed these cases to expeditiously complete a third-party sale of substantially all of the Company's assets.”
The Debtors' senior lenders (owed more than $102.0mn in principal amounts outstanding under the Debtors' Prepetition Credit Facility and the Prepetition Senior Secured Notes) have agreed to serve as a stalking horse in a section 363 auction/sale process and have also agreed to provide an as yet undetermined amount of DIP financing to see the Debtors through that sale process.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Daniels Declaration”), Keith Daniels, the Debtors’ chief restructuring officer, detailed the events leading to Avadim’s Chapter 11 filing. The Daniels Declaration provides: “The Company suffered from a general lack of liquidity leading to the commencement of these Chapter 11 Cases. In the years and months leading up to the Petition Date, the Company engaged in numerous efforts to restructure the existing secured debt, and conducted multiple initiatives to raise capital, including a failed attempt to sell equity through an initi al public offering and the issuance of multiple convertible notes or individual private sales of equity in return for cash investment. During the period from 2019 to 2021, additional liquidity was provided to the Company on numerous occasions by the Company's prepetition secured lenders. At the same time, the Debtors invested enormous sums into marketing efforts designed to build their brand, expand market share, and increase revenue. Despite these efforts, the Company continued to experience negative cash flows and, ultimately, an unsustainable balance sheet. In the months leading up to the Petition Date, the Company faced rapidly dwindling liquidity and, in order to maintain day-to-day operations, needed to increasingly rely on discretionary disbursements under its prepetition financing agreement with its prepetition lenders.”
Daniels continues: "Despite the fact that the Company's revenues have increased steadily over the past several years, the Company' s products though have been unable to gain sufficient market foothold to fully fund its operations. Furthermore, during the same period, in an effort to expand the market for its products, the Company incurred significant selling and marketing expenses and built up excess inventory (while at the same time underutilizing its manufacturing capacity). The Company's sales related expenses resulted in limited free cash flow to fund other operating expenses, debt service, and investment in new products. In particular, the Company ramped up significant media/marketing expenditures and built up inventory in anticipation of its previously planned early 2020 IPO; however, that IPO never materialized.
Notwithstanding spending tens of millions of dollars over the past decade to build the Company's brand, the Company has been unsuccessful in reaching profitability. The Company has incurred substantial losses since its inception. As examples, the Company' s net losses were $49.5 million, $34.8 million, and $53.6 million for the years ended December 31, 20 8, 2019, and 2020, respectively. The Company is also underperforming its FY2021 financial projections, and limited financial resources continue to strain programs driving retail revenue (i.e., advertising, promotions, etc.)."
- Senior Secured Term Loan Facility. The Debtors were parties to an October 2018 credit agreement (the “Senior Secured Credit Agreement”) with Hayfin affiliates as lenders and as the administrative agent. The Debtors’ obligations under the Senior Secured Credit Agreement (maturity date of October 5, 2023) were secured by senior liens on substantially all of the Company’s assets (including patents and trademarks) (but excluding the Bionome Property, real property leasehold interests, and certain other excluded assets) and a stock pledge by Avadim of its equity interests in the four other Debtor subsidiaries, each of which provided guarantees of the Prepetition Credit Facility. Since September 16, 2019, numerous events of default occurred and the parties entered into numerous forbearance agreements, forbearance extensions and forbearance reinstatements. As of the Petition Date, the Debtors’ owed more than $79.6 million under the Prepetition Credit Facility.
- Prepetition Senior Secured Note Agreement. On April 3, 2020, the Debtors entered into a note agreement (the “Prepetition Senior Secured Note Agreement”) also with Hayfin affiliates as lenders and as collateral agent, pursuant to which a series of notes (the “Prepetition Senior Secured Notes”) were issued. The Debtors’ obligations under the Prepetition Senior Secured Note Agreement and Notes were secured by senior liens on substantially all of the Company’s assets (including patents and trademarks) (but excluding the Bionome Property, real property leasehold interests, and certain other excluded assets) and a stock pledge by Avadim of its equity interests in the four Debtor subsidiaries, each of which provided guarantees of the Prepetition Senior Secured Note Documents. As of the Petition Date, the aggregate principal amount outstanding under the Prepetition Senior Secured Notes was not less than $22.0mn.
- Unsecured Debt. In January 2020, Avadim entered into a note purchase agreement, pursuant to which Subordinated Notes in an aggregate principal amount of $6.4mn were issued to certain accredited investors.
- PPP Loan. At filing, the had a $2.01mn PPP Loan (with interest $2.02mn owed at Petition date). The PPP Loan has been forgiven in its entirety.
- Settlement Agreement. In July 2016, the Company entered into a settlement agreement to clarify its rights and obligations to the seller of a patent the Company acquired in March 2013. Under this settlement agreement, the Company agreed to make cash payments totaling up to $9.95mn to the patent seller, and issued the seller an aggregate of 237,500 shares of its common stock in two installments (of which 125,000 were issued in July 2016 and 112,500 of which were issued in January 2017). As of the Petition date, the remaining balance that the Company could be required to pay was $4.8mn.
Liquidation Analysis (for notes, see Schedule 1 attached to Docket No. 363)
About the Prepetition Debtors
According to the Debtors: “Avadim Health, Inc. is a high-growth healthcare and wellness company that sells topical products to improve immune health, neuromuscular health and skin barrier health. Using our proprietary platform, which we call our Bionome Engineered Platform, we develop products that target the institutional care and self-care markets. We believe there is significant unmet global demand for non-prescription options, such as our products, as an alternative to drugs that are more expensive or potentially addictive and can have long-term detrimental implications for our health and society. Our mission, “Discovering New Ways to Care,” represents our strong belief that, by harnessing the innate power of the skin’s ecosystem, we can improve the health of individuals with products that address current societal challenges, including access to care, affordability, drug resistance and addiction.”
The Daniels Declaration adds: “Founded in 2007 by Stephen Woody (AHI’s current CEO), the Company is a vertically integrated healthcare and wellness business that sells topical products to improve consumers’ neuromuscular health and skin barrier health, including pre-saturated towelettes, foaming, spray and other products.
Using their proprietary platform called Bionome Engineered Platform, the Debtors have developed products that target the institutional care and self-care markets, including in hospitals, long-term care facilities, closed provider pharmacies, physician offices and retail pharmacies. AHI has commercialized a number of products under two brand families: Theraworx Protect, which targets institutional care and community health, and Theraworx Relief, marketed through retail pharmacies. The Company maintains its own research and development, manufacturing and commercialization infrastructure, and is strategically positioned to take advantage of several emerging trends in healthcare: antibiotic stewardship, negativity around opioids, consumerization of healthcare and growth in self-care. The Company’s products are designed to take advantage of the increasing desire for easily accessible, self-directed care, with options that are safe and easy to use.
As of the Petition Date, the Debtors have six marketed products – three cosmetics products: Theraworx Protect for immune health,2 Theraworx Protect U-Pak for urinary health, and Combat One for soldier and first responder readiness; and three homeopathic drug products: Theraworx Relief for muscle cramps and spasms, Theraworx Relief for joint discomfort and inflammation, and PHUEL for topical muscle nutrition.”
Corporate Structure Chart
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