Wed 06/15/2022 18:27 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Press Release
First Day Hearing Agenda
 
Summary
Stimwave manufactures medical devices for chronic pain
Seeks to run a sale process with existing secured lender Kennedy Lewis affiliate as stalking horse; Kennedy Lewis also to provide $40 million in DIP financing
Stalking horse credit bid is for the entire amount of prepetition and DIP loans

Stimwave Technologies Inc., a Pompano Beach, Fla.-based medical device manufacturer and provider of permanently implanted neurostimulation products for chronic pain, filed for chapter 11 protection today in the Bankruptcy Court for the District of Delaware, along with subsidiary Stimwave LLC. According to the first day declaration of CEO Aure Bruneau, Stimwave filed for chapter 11 to run a sale process with existing lender Kennedy Lewis as stalking horse, which would also provide $40 million in new-money DIP financing. The stalking horse bid is a credit bid of the entire amount of Kennedy Lewis’ approximately $39.3 million in prepetition loans and the DIP loans.

The first day hearing has been scheduled for tomorrow, Thursday, June 16, at 2 p.m. ET.

The company reports $50 million to $100 million in assets and $10 million to $50 million in liabilities. The company’s prepetition capital structure includes:
 
  • Secured debt:
     
    • Kennedy Lewis term loan:
  • Unsecured debt:
     
    • Trade debt: $2.5 million.
       
  • Equity: The company’s capitalization as of the petition date is as follows:
 
The debtors have approximately $27,000 of cash on hand (excluding cash held in nondebtor foreign bank accounts), all of which constitutes cash collateral of the Kennedy Lewis lenders.

The prepetition term loan with Kennedy Lewis Capital Partners Master Fund LP as lender and Kennedy Lewis Investment Management as collateral agent has been in default because of a U.S. Department of Justice investigation and other things, including the debtors’ failure to raise minimum cash proceeds from the sale of the company’s Series E preferred stock prior to Sept. 30, 2020, failure to comply with certain minimum liquidity requirements and failure to comply with certain minimum revenue requirements.

Kennedy Lewis agreed to various forbearances from December 2019 through the petition date, pursuant to which (a) in March 2020, the debtors secured requisite stockholder approval to create the Series E preferred stock, (b) all of the Term B and Term C loans became convertible into Stimwave’s Series E preferred stock, (c) Kennedy Lewis was designated as the “Series E Lead Investor,” entitling Kennedy Lewis to the benefit of certain protective provision and approval rights, and (d) Kennedy Lewis was issued 500,000 warrants to purchase Stimwave’s Series E preferred stock at an exercise price of $0.01 per share.

The debtors’ board has nine directors but has only six currently in office. The holders of Series A, A-2, B and B-2 preferred stock, voting together as a single class, are entitled to elect one director, and holders of Series D preferred stock are entitled to elect two directors. Kennedy Lewis Investment Management, as the Series E lead investor, is entitled to elect two directors, and holders of common stock are entitled to elect two directors, with the remaining two directors designated by the other members of the board and are elected by holders of common stock and preferred stock voting together as a single class.

The debtors are represented by Gibson Dunn & Crutcher and Young Conaway Stargatt & Taylor as counsel, Riveron as financial advisor and GLC Advisors as investment banker. Kroll Restructuring Administration is the claims agent. The case has been assigned to Judge Karen B. Owens (jointly administered case number 22-10541).

Events Leading to the Bankruptcy Filing

The company attributes the bankruptcy filing to mismanagement leading to a DOJ investigation pursuant to the False Claims Act and a parallel criminal investigation that “materially” harmed operations, as well as “headwinds” from the Covid-19 pandemic, and litigation expenses including with its former founder and other parties that were unpaid by prior management.

The debtors filed a related complaint in the Delaware Chancery Court in 2019 against former CEO Laura Perryman alleging that she breached her fiduciary duties to the debtors, including that she “directed accounting staff to make changes to the accounting system and remove invoice references on checks with Wite-Out … and photocopying so that invoices selected by the auditors for their revenue sample would appear to have been paid when, in fact, those invoices had not been paid.” The debtors further allege that Perryman used company assets to pay for her son’s apartment, to further her personal interest and pay bonuses to close friends.

Bruneau says in his declaration that since he joined the company two years ago after the discovery of financial irregularities and mismanagement and the resignation or termination of all connected management, the company has “remedied and overcome historical financial and operational prior mismanagement at tremendous expense,” but that this should serve as a foundation to continue to operate after emergence from chapter 11. Despite financial performance on an “improving trajectory” since Perryman’s resignation, the company says that its liquidity has remained strained because of the factors noted above plus difficulty in raising new capital.

The debtors also say that their “complicated capital structure and stockholder and board voting rights” have hindered the company from obtaining additional financing. The stockholders previously approved a cap of $30 million in total debt from Kennedy Lewis, with any additional preposition debt needing certain stockholder and board approvals that the company “believed would be difficult, if not impossible, to obtain.”

The debtors say that their efforts to obtain out-of-court financing prepetition were unsuccessful because the following groups of stockholders must provide written consent: (a) holders of a majority of the outstanding shares of preferred stock voting together as a single class, (b) holders of 68% of the outstanding shares of the Series D preferred stock voting as a separate class, (c) holders of a majority of the outstanding shares of the Series E preferred stock voting as a separate class and (d) Kennedy Lewis Investment Management as the Series E lead investor.

Immediately before the petition date, the company exhausted all availability under the Kennedy Lewis term loan and was therefore forced to file for bankruptcy. Stimwave entered into various forbearances with Kennedy Lewis prepetition and ultimately entered into the stalking horse agreement with its affiliate for substantially all of the debtors’ assets.

Background

Founded in 2010, Stimware manufactures and distributes two FDA-cleared devices, the Freedom SCS System and Freedom PNS System, which use electrical stimulation to block pain signals from reaching the brain and are powered wirelessly. The debtors tout their products as a non-opioid alternative to “costly major surgery,” which they say is “particularly crucial in an era during which the chronic pain patient population is expected to increase, both globally and domestically, due to aging populations and the growing incidence of musculoskeletal and other associated conditions.”

Commercialization of the products began in 2018 and now have more than 7,300 patients that use the implants. The company has regulatory clearance throughout the entire United States and 35 other countries. The company’s business activities abroad are conducted through wholly owned subsidiary Freedom Neuro BV.

The company’s headquarters in Pompano Beach are leased.

The company’s corporate organizational structure chart is below:
 

The debtors’ largest unsecured creditors are listed below:
 
10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Oscor Inc. Palm Harbor, Fla. Inventory $   616,690
Fish & Richardson PC Minneapolis Legal 313,174
Jones Day New York Legal 177,041
EM Medical LLC St. Louis Legal 155,000
Compeq Manufacturing
(Suzhou) Co. Ltd.
Suzhou Industrial
Park, China
Inventory 135,169
Resonetics LLC Nashua, N.H. Inventory 75,585
Pria Healthcare Management LLC Torrington, Conn. Sales 73,628
Richards Layton & Finger Wilmington, Del. Legal 57,428
Vistaprint Corporate Solutions Inc. Waltham, Mass. Operations 33,376
Cyber Coders Irvine, Calif. HR 31,250

The case representatives are as follows:
 
Representatives
Role Name Firm Location
Debtors' Co-Counsel Michael R. Nestor Young Conaway
Stargatt & Taylor
Wilmington, Del.
Andrew L. Magaziner
Elizabeth S. Justison
Jared W. Kochenash
Debtors' Co-Counsel Robert A. Klyman Gibson Dunn
& Crutcher
Los Angeles
Michael G. Farag
Matthew J. Williams New York
Dylan S. Cassidy
Jason S. Friedman
Debtors' Special Counsel NA Honigman NA
Debtors' Special Counsel NA Jones Day NA
Debtors' Financial Advisor NA Riveron NA
Debtors' Investment
Banker
Sean Cannon GLC Advisors New York
Debtors' Claims Agent Benjamin J. Steele Kroll New York
Co-Counsel to
Kennedy Lewis, as
Prepetition Lender,
Proposed DIP Lender
and Stalking Horse
Matthew D. Bivona Akin Gump Strauss
Hauer & Feld
Dallas
Brad M. Kahn New York
Zachary N. Wittenberg
Kevin Zuzolo
Matthew Friedrick
Co-Counsel to
Kennedy Lewis, as
Prepetition Lender,
Proposed DIP Lender
and Stalking Horse
Derek C. Abbot Morris Nichols
Arsht & Tunnell
Wilmington, Del
Tori L. Remington

DIP Financing Motion

The debtors request authority to enter into a $40 million new-money, multidraw term loan facility, with one or more affiliates of Kennedy Lewis Investment Management and Broadfin Stimwave SPV1. KL Agent would serve as the DIP agent. The debtors are seeking an initial draw of up to $12 million. The debtors also seek authority for the continued use of cash collateral of Kennedy Lewis. There is no proposed rollup.

The DIP financing bears interest at the lesser of the “maximum non-usurious interest rate” and 10%, with 2% added for the default rate, and matures on the earlier of Oct. 13 and other customary events. The DIP proceeds may be used for general corporate purposes, restructuring and sale expenses, and adequate protection payments.

The DIP financing would be secured by liens priming the prepetition term loan liens. The DIP loan would also have superpriority administrative claim status. Subject to the final order, the DIP lenders would have liens on the proceeds of any avoidance action proceeds.

The facility includes various fees, including a 3% commitment fee, 1.5% facility fee and payment of lenders’ expenses. At the election of the DIP lenders, the commitment and facility fees may be taken as original issue discount.

In support of the proposed DIP financing, the debtors filed the declaration of Sean Cannon, managing director at GLC Advisors & Co., who states that the debtors lack sufficient funds to operate their business and fund working capital. The debtors require access to the DIP facility to keep them operational while they seek to complete the proposed sale of their assets as a going concern.

The company proposes the following adequate protection to Kennedy Lewis: replacement liens, allowed superpriority administrative expense claims, financial reporting requirements and payment of advisor fees.

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 $500,000.

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

The DIP financing is conditioned on the following milestones:
 

The lien challenge deadline is 75 days from the entry of the interim DIP order. The investigation budget for an official committee of unsecured creditors is $50,000.

Other Motions

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