Tue 06/01/2021 14:19 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda


 

















Summary
Avadim Health is a privately held healthcare and wellness company
Seeks to sell assets as a going concern to Midava Holdings 3, an affiliate of Avadim’s prepetition lenders, as stalking horse bidder for purchase consideration consisting of an approximately $70 million credit bid plus the assumption of certain liabilities
Requests approximately $7.2 million of DIP financing from its prepetition lenders

Avadim Health Inc., an Asheville, N.C.-based, privately held healthcare and wellness company offering topical products that improve neuromuscular health and skin barrier health and serve as a key component of hospital infection prevention bundles, filed for chapter 11 protection on Monday, May 31, in the Bankruptcy Court for the District of Delaware. Affiliates Avadim Health IP, Bionome Properties, Quality Assurance Associates and Relion Manufacturing also filed. For access to the  First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities request a trial here. Continue reading for more on Avadim Health Inc. case summary. 

“Faced with diminishing liquidity, increasing debts, and limited available funding for an operational turnaround,” the company filed chapter 11 to sell its assets as a going concern to Midava Holdings 3 Inc., an affiliate of its prepetition lenders, as stalking horse bidder. The stalking horse asset purchase agreement attached to the bid procedures motion includes a purchase price of approximately $70 million in the form of a credit bid (credited first against the DIP obligations and then the prepetition loan and notes), plus the assumption of certain liabilities. Milestones include a bid deadline of July 26 and a sale closing deadline of Aug. 9. The cases would be funded by $7.2 million of delayed-draw DIP financing from the company’s prepetition lenders.

The first day hearing has been scheduled for Wednesday, June 2, at 11 a.m. ET.

The company’s prepetition capital structure includes:

  • Secured debt:

    • Term loan facility: “more than” $79.6 million (including accrued interest at 13% PIK and a $618,633 fully earned prepayment/repayment premium)

    • Senior secured notes: “not less than” $22 million



  • Unsecured debt:

    • Convertible notes: $6.4 million in original principal

    • PPP loan: $2 million

    • Patent settlement agreement: $4.8 million




The company has defaulted under the term loan several times since September 2019, resulting in various forbearance agreements.

The company says it has failed to achieve profitability despite steadily increasing revenue and significant investments. After unsuccessful IPO efforts in March 2020, Avadim and its advisors explored strategic alternatives but ultimately found no viable options; this resulted in the formation of a restructuring committee in mid-January 2021. The company retained SSG in May 2021 to market the company for a going concern sale.

The debtors are represented by Pachulski Stang Ziehl & Jones and Chapman and Cutler as co-counsel, Carl Marks Advisors as restructuring advisor, with Carl Marks’ Keith Daniels serving as the debtors’ chief restructuring officer effective May 5, and SSG Advisors as investment banker. Omni is the claims agent. The jointly administered case number is 21-10883. The case has been assigned to Judge Craig T. Goldblatt.

Background

Avadim is a vertically integrated healthcare and wellness company focused on topical products that aim to improve neuromuscular and skin barrier health, including pre-saturated towelettes, foam, spray and other products. Through their proprietary platform known as Bionome Engineered Platform, the debtors develop products that target institutional care and self-care markets, including hospitals, long-term care facilities, closed provider pharmacies, physician offices and retail pharmacies. Avadim has commercialized various products under two brand families: Theraworx Protect, which targets institutional care and community health, and Theraworx Relief, which is marketed through retail pharmacies. The debtors have approximately 100 employees.

The company currently has six marketed products: three in the cosmetics field - Theraworx Protect for immune health, 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.

By mid-2016, the debtors’ products were used in approximately 60 acute care hospitals, 100 nursing homes and other long-term facilities. By the first quarter of 2020, Avadim’s products were used in approximately 250 acute care hospitals, more than 750 nursing homes and other long-term care facilities and were available in more than 47,000 pharmacies. From 2017 to 2019, the company’s annual net revenue increased from $10.8 million to $45.8 million.

Avadim says that despite spending tens of millions of dollars over the past decade to build its brand, it has yet to be profitable and has incurred “substantial losses” since inception. The company is also underperforming fiscal year 2021 projections.

The chart below depicts the debtors’ corporate organizational structure:

The debtors' largest unsecured creditors are listed below:












































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
HE Evans, Ga. Note $    5,290,476
Cooley LLP San Francisco Professional
Services
1,293,176
The Swanson Group Buffalo Grove, Ill. Trade 1,280,837
Donnelley Financial, LLC Boston Trade 534,919
QSD Inc. Laval, Canada Trade 450,848
GRS, LLC El Segundo, Calif. Trade 200,000
Daansen USA, Inc. Nashua, N.H. Trade 190,526
WPT Nonwovens Corp. Beaver Dam, K.Y. Trade 154,500
Berlin Packaging, LLC Chicago Trade 139,851
Hyman, Phelps & McNamara Washington Professional
Services
124,885


The case representatives are as follows:


























































































Representatives
Role Name Firm Location
Debtors' Co-Counsel Larry G. Halperin Chapman
and Cutler
New York
Joon P. Hong
Debtors' Co-Counsel Laura Davis Jones Pachulski
Stang Ziehl
& Jones
Wilmington, Del.
David M. Bertenthal
Timothy P. Cairns
Debtors' Restructuring
Advisor
Keith Daniels Carl Marks
Advisory
New York
Debtors' Investment
Banker
J. Scott Victor SSG Advisors W. Conshohocken, Pa.
Co-Counsel to the
Prepetition Agent
and DIP Agent
David N. Griffiths Weil, Gotshal
& Manges
New York
Bryan R. Podzius
Rachel L. Foust
Gavin Westerman
Peter Feist
Co-Counsel to the
Prepetition Agent
and DIP Agent
Zachary I. Shapiro Richards,
Layton &
Finger
Wilmington, Del.
Paul N. Heath
David T. Queroli
United States Trustee Richard L. Schepacarter Office of the
U.S. Trustee
Wilmington, Del.
Debtors' Claims
Agent
Paul H. Deutch Omni Agent
Solutions
New York




DIP Financing Motion

The debtors seek approval of $7.156 million in DIP financing in the form of delayed-draw term loans with $2.25 million available on an interim basis. The debtors’ prepetition secured lenders would stand in as the DIP lenders, and Hayfin Services, LLP would be the administrative and collateral agent. The DIP lenders are Hayfin SOF II Luxco 2 Sarl, Hayfin Opal III LP and Hayfin Topaz Luxco 2 SPA.

The DIP financing bears interest at L+12% (subject to 1% floor), with L+14% for the default rate, and matures on the earlier of Aug. 30, consummation of a sale of substantially all the debtors’ assets or consummation of a plan of reorganization. The DIP proceeds may be used for working capital and other general corporate purposes, professional fees and case administration expenses, and payments due under the DIP facility, including adequate protection payments. Funding of nondebtor expenses is expressly prohibited.

The prepetition secured lenders (who are also the DIP lenders) have agreed to the use of cash collateral and the priming of the senior secured liens. To secure the DIP financing, the debtors propose to grant first priority liens on all unencumbered tangible and intangible prepetition and postpetition property of the debtors not otherwise subject to liens, including cash, accounts receivable, causes of action, commercial tort claims, and proceeds of avoidance actions. The motion states that unencumbered property consists primarily of a parcel of real property in Black Mountain, N.C., owned by debtor Bionome Properties Corp. Avoidance actions are expressly carved out of the DIP collateral package. The DIP collateral package also includes consensual priming liens on all prepetition and postpetition collateral of the prepetition secured parties (which are also the DIP secured parties) and junior liens on collateral otherwise subject to liens senior to the debtors’ senior secured debt.

In support of the proposed DIP financing, Keith Daniels, the debtors’ chief restructuring officer, states in the first day declaration that the DIP financing is necessary to implement a sale process and that without immediate access to the DIP financing and use of cash collateral, the debtors would be forced to convert to chapter 7 and liquidate their assets.

The debtors propose the following adequate protection package for the prepetition secured lenders: (a) replacement liens (including avoidance action proceeds subject to the final order), (b) allowed superpriority administrative expense claims and (c) payment of prepetition secured parties’ and DIP lenders professionals’ fees and expenses (both prepetition and postpetition).

In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral, pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The carve-out for professional fees is $25,000.

The proposed budget for the use of the DIP facility is HERE.

The DIP financing is subject to the following milestones:

  • Petition date: Filing of bid procedures motion and entry into stalking horse APA;

  • June 2: Entry of interim DIP order;

  • June 21: Entry of bidding procedures order;

  • June 30: Entry of final DIP order;

  • July 26: Bid deadline occurs;

  • July 28: Commencement of auction;

  • July 30: Hearing held to approve stalking horse APA or alternative transaction;

  • July 30: Entry of sale order; and

  • Aug. 9: Sale closing.


The lien challenge deadline is the earlier of (a) 75 days from entry of the interim order for all parties in interest (including an official committee of unsecured creditors), (b) subject to entry of the final DIP order, entry of the sale order, and (c) such later date agreed to in writing. The UCC lien investigation budget is $25,000.

Bid Procedures Motion

The debtors seek approval of bid procedures for the sale of substantially all of their assets. Midava Holdings 3 Inc., an affiliate of the prepetition lenders and proposed DIP lenders, would serve as the stalking horse bidder, with a purchase price of approximately $70 million in the form of a credit bid, plus the assumption of certain liabilities.

The procedures contemplate the ability of a secured creditor to credit-bid, with the right of the stalking horse bidder to increase its credit bid up to the full amount. At a minimum, each bid must have a cash bid purchase price that is equal to or greater than the stalking horse purchase price plus $250,000 in cash. Subsequent overbids are $250,000. Each bid must “disclaim any right to receive a fee analogous to a break-up fee, expense reimbursement, termination fee, or any other similar form of compensation.”

The proposed sale order provides for the release of the debtors from amounts due and owing, first, under the DIP documents and, second, under the loan and notes documents up to an amount equal to the credit-bid amount.

Under the stalking horse asset purchase agreement, the purchased assets would contain all causes of action, including claims against current or former officers or directors, as well as avoidance actions.

The bid procedures are subject to the same DIP milestones and the following sale timeline:

 

The debtors’ sale efforts began in March 2020 with the retention of Torreya Capital, who pursued potential transactions including a sale or a “large financing,” but “known strategic partners” declined to proceed with a transaction, and Torreya ceased working for the company in October 2020. Thereafter, the debtors engaged SSG Advisors in May 2021 as investment banker to market and sell substantially all of the debtors’ assets, which resulted in the stalking horse APA.

Other Motions

The debtors also filed various standard first day motions, including the following:

  • Motion for joint administration

    • The cases will be jointly administered under case No. 21-10883.



  • Motion to establish trading procedures

    • Avadim seeks to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. As of the fiscal tax year ended Dec. 31, 2019, the debtors had about $93.8 million in federal NOLs and $60.8 million in state NOLs. The debtors estimate an additional $18.9 million in federal NOLs for 2020.



  • Motion to pay critical vendors

    • The debtors seek approval to pay up to $330,000 in critical vendor claims on an interim basis, with up to $500,000 in total payment sought on a final basis.



  • Motion to pay shipping and warehousing claims

    • The company requests authorization to pay up to $150,000 on account of shipping/warehousing claims on an interim basis, with up to $250,000 in total payment sought on a final basis. Payment of any claims in excess of $50,000 would require two business days’ notice to the DIP agent and its professionals.



  • Motion to pay employee wages and benefits

    • Avadim seeks to pay employee obligations as follows:





 


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