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July 14, 2022 – The Court hearing the Stimwave Technologies cases issued an order authorizing the Debtors to: (i) access a further $28.0mn of new money, debtor-in-possession (“DIP”) financing and (ii) continue using cash collateral [Docket No. 158]. Previously the Debtors had been authorized to access a first $12.0mn tranche of what is in total a $40.0mn DIP financing package by a June 16, 2022 interim DIP order [Docket No. 40].
The DIP financing is being provided by (a) one or more affiliates of prepetition lender Kennedy Lewis Investment Management LLC (“KLIM,” with affiliates also serving as stalking horse) and (b) Broadfin Stimwave SPV I, LLC (the “DIP Lenders” and, KLIM and the DIP Lenders holding at least 50.1% of the outstanding unused commitments in respect of the DIP Loans and the outstanding DIP Loans under the DIP Facility, collectively, the “Requisite Lenders”). See table of lenders/commitments below.
On July 11, 2022, the Debtors’ Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ proposed DIP financing motion and proposed bidding procedures [Docket No. 92] arguing that the two “work in combination” to chill bidding, provide credit bidding stalking horse Kennedy Lewis (also prepetition and DIP lender) with security interests for “the unencumbered assets [causes of action, etc] that are often the backbone of recoveries for unsecured creditors” and deprive unsecured creditors with a meaningful opportunity to challenge DIP financing arrangements.
As pertaining to the DIP motion, these objections have now been resolved; and the Debtors' motion in respect of a final DIP order was presented to the Court on an uncontested basis. Resolution of the objection (a blackline of the revised final DIP order covers the changes, see Docket No. 143) notably included a carve out for "Avoidance Proceeds…Avoidance Actions…and D&O Policy Proceeds" [ie those unencumbered assets] from liens and security interests in respect of the Debtors' assets securing the DIP financing.
On June 15, 2022, Stimwave Technologies Incorporated and one affiliated Debtor (“Stimwave” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $10.0mn and $50.0mn.
In a Petition date press release, the medical device company, advised that: “Stimwave Technologies Incorporated and its subsidiary, Stimwave LLC (collectively, 'Stimwave' or the 'Company'), a leading provider of neurostimulation devices offering chronic pain relief, announced today that it has reached an agreement to sell substantially all of its assets to [prepetition lender] Kennedy Lewis Management LP or its affiliate ('Kennedy Lewis').”
In explaining their need to seek bankruptcy protection, the Debtors further noted the prepetition discovery of “financial irregularities and regulatory misrepresentations and mismanagement by certain executives (who are no longer employed by the Company), which involved, among other things, potential violations of certain federal health care laws and regulations. Importantly, the misrepresentations were not related to the validity, safety or efficacy of Stimwave’s products and technology.”
The DIP motion [Docket No. 12], which attaches a declaration in support of the financing filed by the Debtors’ investment banker, GLC Advisors (p.174)] states: “As of the Petition Date, the Debtors had approximately $27,000 cash on hand, which aside from being Cash Collateral of the Debtors’ prepetition lenders, is insufficient for the Debtors to operate their business during the Chapter 11 Cases. Thus, the Debtors require immediate access to the proceeds of the DIP Facility and authority to use Cash Collateral to ensure they have sufficient liquidity to operate during the Chapter 11 Cases and successfully consummate the sale of their business, thereby maximizing value for all stakeholders.
The DIP Facility is the result of a fair process and the terms of the DIP Facility have been market tested by the Debtors’ advisors. Over the course of multiple weeks, the Debtors and DIP Lenders and their respective advisors negotiated the terms of the DIP Facility in detailed, arms-length and good faith negotiations involving, among other things, the amount of the financing to be made available, key economic terms, covenants, representations and warranties, and the milestones for the sale process. Moreover, in parallel with the DIP Facility, the Debtors and Kennedy Lewis (defined below) negotiated and intend to enter into that certain Equity Interest and Asset Purchase Agreement (as amended, restated, modified, or supplemented, from time to time, the ‘Stalking Horse Agreement’) to purchase all or substantially all of the DIP Collateral, subject to higher and better offers.
As further set forth in the DIP Declaration, the DIP Facility represents the best financing option available to the Debtors under the circumstances. Notably, after consultation with their advisors and in light of feedback from potential third-party lenders elicited during a prepetition marketing process, the Debtors do not believe that any third party is or would be willing to offer them financing other than on a priming basis, which would entail costly, uncertain, and value destructive litigation with the Debtors’ prepetition lenders.
In short, the DIP Facility is reasonable and necessary to ensure that the Debtors can maximize the value of their estates for the benefit of all stakeholders. It will provide the Debtors with the necessary liquidity on reasonable terms that will allow them to pay employees, vendors, and costs incurred during the Chapter 11 Cases and facilitate the successful sale of the Debtors’ business as a going concern”.
Lenders and Commitments
The motion continues: "Prior to the commencement of these cases, the Debtors, in consultation with their advisors, including their investment banker, GLC Advisors & Co. ('GLC'), carefully considered a number of other potential alternatives to address the Debtors’ capital structure and liquidity challenges, including alternate transactions with stakeholders and third parties to obtain additional financing. Yet the Debtors and their advisors were unable to identify any viable, actionable alternative that would provide the Debtors sufficient liquidity to continue operations in the ordinary course. Therefore, the Debtors focused on preparing for a potential chapter 11 filing, including by commencing a marketing process led by GLC to obtain postpetition financing.
In order to ensure that the DIP Facility reflects the best terms and conditions available under the circumstances, GLC actively solicited third-party interest in providing postpetition financing to the Debtors. GLC contacted 43 sophisticated investors who routinely provide debtor-in-possession financing in complex chapter 11 cases. The third parties contacted were unwilling to extend financing due to a number of factors, including the Debtors’ financial position, the Debtors’ levered capital structure, the Debtors’ lack of significant unencumbered collateral to secure postpetition financing on a non-priming basis, and the ongoing DOJ investigation. Third parties also cited a lack of interest in providing postpetition financing on a junior or unsecured basis and the uncertainty and legal expenses inherent in a priming fight with a pre-existing secured lender.
These efforts resulted in 41 third parties responding to GLC’s outreach and providing substantive feedback. GLC had numerous follow-up discussions with third parties about the opportunity, but ultimately no potential funding sources (other than the DIP Lenders) entered into nondisclosure agreements with the Debtors. Consequently, no third parties conducted due diligence about the Company or presented the Company with a proposed term sheet. Two of the third parties provided verbal pricing guidance despite having no interest in extending financing. Both parties indicated terms materially more expensive than the DIP Facility. As a result, engaging with the DIP Lenders ultimately represented the Debtors’ best and only option for successfully obtaining postpetition financing."
Key Terms of the DIP Facility:
- Borrower(s): Stimwave Technologies Incorporated and Stimwave LLC
- Lenders: (a) One or more affiliates of Kennedy Lewis Investment Management LLC (or entities approved by Kennedy Lewis Investment Management LLC), and (b) Broadfin Stimwave SPV I, LLC
- DIP Agents: KL Agent LLC, as collateral agent
- Commitments: A new money multi-draw term loan facility in an aggregate principal amount of up to $40.0mn, $12.0mn of which shall be available upon entry of the Interim Order.
- New Money: $40.0mn
- Roll-Up: N/A
- Interest Rate: Subject to Section 2.3(b), the aggregate principal amount outstanding under the Term Loans shall accrue interest at a fixed per annum rate equal to the lesser of (i) the maximum non-usurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness provided for in the DIP Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the DIP Loans (the “Maximum Rate”) and (ii) 10%, which interest shall be payable monthly in arrears in accordance with Section 2.2(b). Subject to Section 2.3(b), with respect to accrued interest that is due on a particular Payment Date, such accrued interest will be payable in-kind by adding an amount equal to such percentage of the outstanding principal amount to the then outstanding principal balance on a monthly basis so as to increase the outstanding principal balance of such Term Loan on each Payment Date and which amount shall be payable when the principal amount of the Term Loans are payable in accordance with Section 2.2(b) and on which principal amount interest shall be owed pursuant to this Section 2.3(a). Interest shall accrue on each Term Loan commencing on, and including, the Funding Date of such Term Loan, and shall accrue on the principal amount outstanding under such Term Loan through and including the day on which such Term Loan is paid in full.
- Default Rate: Lesser of (i) Applicable rate plus 2.0% and (ii) the Maximum Legal Rate
- Maturity Date: means the earliest to occur of:
- October 13, 2022 (the “Stated Maturity Date”),
- the date that is 30 days after the entry of the Interim Order by the Bankruptcy Court if the Final Order has not been entered by the Bankruptcy Court prior to the expiration of such 30-day period, unless otherwise extended by the Requisite Lenders in their sole discretion,
- the date of the consummation of the Sale,
- the substantial consummation (as defined in section 1101 of the Bankruptcy Code and which for purposes hereof shall be no later than the Effective Date) of a Plan of Reorganization, and
- the date the Collateral Agent, or the Collateral Agent at the direction of the Requisite Lenders, provides written notice to Borrower of the election to accelerate all of the Term Loans and terminate all of the Term Loan Commitments in accordance with the terms and conditions set forth in the DIP Loan Agreement following the occurrence of an Event of Default.
- Use of Proceeds: The Debtors have an ongoing and immediate need to continue the use of Cash Collateral, and the need to obtain credit pursuant to the DIP Facility, among other things:
- permit the orderly continuation of their business;
- maintain business relationships with their vendors, suppliers, customers, and other parties;
- make investments, capital expenditures, and pay ongoing costs of operations;
- pay fees and expenses associated with the sale of the Debtors’ assets;
- make adequate protection payments; and
- pay the costs of administration of the Chapter 11 Cases and satisfy other working capital and general corporate purposes of the Debtors. The Debtors require immediate access to sufficient working capital and liquidity through the incurrence of the new indebtedness for borrowed money to avoid irreparable harm by, among other things, preserving and maintaining the going concern value of the Debtors’ business. The Debtors will not have sufficient sources of working capital and financing to operate their business or maintain their properties in the ordinary course of business throughout the Chapter 11 Cases without the DIP Facility and authorized use of Cash Collateral
- Fees & Expenses:
- Commitment Fee: A Commitment Fee equal to 3.00% of the total aggregate commitments in respect of the DIP Facility as, and subject to the occurrence, of the Effective Date of the DIP Loan Agreement pursuant to the terms thereof (the “Commitment Fee”), which Commitment Fee can, at the sole election of the Requisite Lenders, be added to the principal amount of the Initial Term Loan and thereafter constitute principal for all purposes and accrue interest in accordance with Section 2.3 of the DIP Loan Agreement.
- Facility Fee: A Facility Fee equal to 1.50% of the total aggregate commitments in respect of the DIP Facility as, and subject to the occurrence, of the Effective Date of the DIP Loan Agreement pursuant to the terms thereof (the “Facility Fee”), which Facility Fee can, at the sole election of the Requisite Lenders, be netted out from the DIP Loans in the form of original issue discount (“OID”).
- Expenses: All Lenders’ Expenses and all reasonable and documented out of pocket expenses incurred by the Collateral Agent in connection with the documentation and negotiation of the DIP Loan Agreement and the other DIP Loan Documents and in connection with the Chapter 11 Cases through and after the Effective Date, including, without limitation, the reasonable and documented fees and expenses of Akin Gump Strauss Hauer & Feld LLP and Morris, Nichols, Arsht & Tunnell, LLP, as counsel, any third party consultants, financial and accounting advisors, and other professionals.
- Milestones:The DIP Loan Agreement contains the following milestones:
- Deadline to obtain an interim order; no later than three (3) calendar days after the Petition Date
- Deadline for the Loan Parties that shall have filed the bid procedure motions; no later than the date that is seven (7) calendar days after the Petition Date.
- Deadline to obtain a final order; no later than the date that is thirty (30) calendar days after the Petition Date.
- Deadline to obtain bid procedures order; no later than the date that is thirty (30) calendar days after the Petition Date.
- Deadline to obtain an order approving sale; no later than the date that is hundred (100) calendar days after the Petition Date.
- Deadline to have consummation of sale; no later than the date that is one hundred twenty days (120) calendar days after the Petition Date.
The Debtors' provide: "the Debtors have a highly leveraged capital structure that includes, as of the Petition Date, secured indebtedness in the aggregate amount of approximately $39.3 million under that certain Loan and Security Agreement dated May 13, 2019 (as amended, modified or supplemented, the 'Term Loan
Agreement'), with the lenders thereto, including Kennedy Lewis Capital Partners Master Fund LP ('KLCPMF' and, collectively, the 'Prepetition Term Loan Lenders'), and with Kennedy Lewis Investment Management, LLC ('KLIM' and, together with KLCPMF, 'Kennedy Lewis' and with the Prepetition Term Loan Lenders, the Prepetition Secured Parties') as collateral agent. In addition, the Debtors have substantial general unsecured obligations, including trade debt of approximately $2.5 million."
The chart below sets forth the Debtors’ funded debt obligations as of the Petition Date:
Revised DIP Budget (see final DIP order)
About the Debtors
According to the Debtors: “The Company manufactures, distributes, and provides ongoing support for implantable, minimally invasive neurostimulators, which are used as a treatment for chronic intractable pain. Stimwave’s revolutionary technology is an innovative, highly effective, non-opioid treatment currently in use throughout the world by over 7,300 patients who have received permanent implants of Stimwave devices. The Company is currently cleared by appropriate governing bodies to operate outside the United States in over 35 countries and intends to continue expanding into other markets in the future. Most of the Company’s business activities outside the United States are conducted through its wholly owned subsidiary, Freedom Neuro BV."
Corporate Structure Chart
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