August 17,2022 – The Court hearing the GenapSys case issued an order authorizing the Debtor to: (i) access $4.1mn (increased by $100k) in new money, debtor-in-possession (“DIP”) financing being provided by Oxford Finance, LLC (the “DIP Lender,” also its prepetition secured lender) on a final basis and (ii) continue using cash collateral [Docket No. 173 which attaches the DIP credit agreement (and an amendment thereto) and a revised budget].
In addition to increasing the quantum of the DIP, the amended credit agreement and order update certain Plan/sale milestones (eg, the sale closing deadline is extended by @3 weeks) as detailed below.
With a July 13th interim order, the Court had earlier authorized the Debtor to access $1.0mn of the DIP financing.
On July 11th GenapSys, Inc. ("GenapSys" or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtor, “a Redwood City, CA based genomic sequencing company,” noted that "the Debtor’s business was not able to withstand the liquidity, operational and reputational impacts of prepetition litigation" (see "Events Leading…" below for background on litigation).
On August 16th, the Court rejected a motion filed by company founder Hesaam Esfandyarpour to dismiss the case based on arguments that the Debtor did not have proper authority to file for bankruptcy and that the Debtor's then Board had not been properly constituted. In rejecting those arguments (and allowing the Debtor's bankruptcy case to proceed), Judge Brendan Shannon held that any filing defects had subsequently been cured, commenting that dismissal could increase the future prospect of "considerable mischief" and that "if the drastic remedy of dismissal is available, I have every confidence that parties will try to explore these issues in hopes of gaining leverage in the bankruptcy or, frankly, distracting the Debtor and the Court right out of the gate in a chapter 11 reorganization."
DIP Marketing Efforts
The DIP motion [Docket No. 10] states: “The Debtor faced unique circumstances prior to the Petition Date. It was ensnared in litigation. As such, for almost two years, with the assistance of skilled investment bankers, including Lazard, the Debtor sought to raise new and/or additional financing. Lazard’s prepetition efforts nearly materialized; however, the two potential investors identified by Lazard ultimately decided not to participate in a transaction with the Debtor. Having thoroughly exhausted all financing options, including proposals from Party B and Farallon, the Debtor reengaged with the Prepetition Secured Parties who ultimately agreed to provide the Cash Collateral and the DIP Facility.
With the assistance of its professionals and advisors, the Debtor carefully evaluated the proposed DIP Facility, including the chapter 11 milestones and liquidity provided thereunder. In connection with reviewing the proposed DIP Facility, the Debtor identified at least three key reasons supporting its entry into the DIP Facility. First, the Debtor, with the assistance of Lazard, evaluated an array of potential financing sources and only one materialized. As set forth more fully in the Aebersold Declaration, Lazard, on behalf of the Debtor, launched a marketing process in May 2022 to (i) raise capital out-of-court through debt or a new round of preferred equity financing, (ii) solicit bids for the Debtor or its assets or (iii) raise capital through a chapter 11 process that would include both debtor-in-possession and exit financing (collectively, the “Prepetition Marketing Process”). In connection with the Prepetition Marketing Process, Lazard contacted over 100 potential investors, including strategic investors, financial investors, venture investors, and existing stakeholders. Of those more than 100 investors, only 19 executed confidentiality agreements and only two parties provided the Debtor with a term sheet. When both of these proposals failed to materialize, the Debtor turned back to the Prepetition Secured Parties to provide the Cash Collateral and DIP Facility.
Second, substantially all of the Debtor’s assets are encumbered and, as evidenced by Lazard’s prepetition process, investors were wary of advancing funds while the prepetition litigations remained pending. After considering the foregoing factors, and in light of the immediately tangible benefits provided by the DIP Facility—in tandem with access to Cash Collateral—the Debtor concluded that alternative sources of financing with competitive or otherwise more favorable terms were not readily available. Indeed, the Debtor and Lazard did not identify any other viable options in the Prepetition Marketing Process. Further, given that substantially all of the Debtor’s assets are encumbered by the Prepetition Secured Parties’ liens, it is highly unlikely that any other third-party financing is available that would not require a priming fight.
Third, any viable proposals for third-party financing came undone before they were actionable. But the Debtor submits that, even if there were other third-party financing available (there is none), any other proposal would have involved additional execution risk, including material timing, due diligence and professional fee constraints. Simply put, the Debtor lacks both the time and funds necessary to engage in such a process. Accordingly, the Debtor believes that pursing the DIP Facility, coupled with use of Cash Collateral, is the best path forward."
Key Terms of the DIP Facility:
- Borrower: GenapSys, Inc.
- DIP Lenders: Oxford Finance LLC
- DIP Agent: Oxford Finance LLC
- DIP Facility: Secured multiple-draw term loan facility
- Borrowing Limits: $1.0mn on an interim basis; $4.0mn on a final basis.
- Interest Rate: Interest Rate: 14% per annum to be paid in kind at Closing
- Default Interest Rate: 2.0%
- Maturity Date:“Termination Date” means the earliest date to occur of:
- the date that is ninety (90) days after the Petition Date;
- the closing of the Approved 363 Sale;
- the date on which the Bankruptcy Court orders (x) the conversion of the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code; or (y) the dismissal of the Chapter 11 Case;
- the date the DIP Facility is accelerated upon the occurrence of an Event of Default or otherwise; and
- the approval by the Bankruptcy Court of any Alternative Sale Transaction, except for any Alternative Sale Transaction that (i) provides for the Payment in Full of the Obligations and the Prepetition Loan Obligations upon the closing of such Alternative Sale Transaction; and (ii) otherwise complies in full with all terms of the Bidding Procedures Order.
- Use of Proceeds: The Debtor is hereby immediately authorized on an interim basis to incur DIP Obligations, subject to the terms of the Interim DIP Order, the Budget (subject to the Permitted Variances) and the DIP Loan Documents, in the aggregate principal amount of up to $1,000,000 (the “Interim Funding Amount”) subject to any conditions and limitations on availability in the DIP Credit Agreement, plus all interest, fees and other charges payable in connection with such DIP Loans as provided in the DIP Credit Agreement and other DIP Loan Documents. The Debtor is hereby authorized to borrow money pursuant to the DIP Credit Agreement, subject to any limitations on and conditions precedent to borrowing under the DIP Loan Documents, and to use the proceeds of such borrowings to fund the Sale Process, for working capital and general corporate purposes of the Debtor, for other uses permitted under the DIP Credit Agreement, bankruptcy-related costs and expenses, and any other amounts required or allowed to be paid in accordance with the Interim DIP Order, but only as and to the extent authorized by the Budget (subject to the Permitted Variances) and the DIP Loan Documents.
- Expenses and Fees:
- Up Front Fee: 200 basis points to be paid in kind at Closing.
- Milestones:The DIP Credit Agreement contains the following milestones:
- Deadline to file a motion seeking entry of the Bidding Procedures Order and the Sale Order: No later than three Business Days following the Petition Date
- Deadline to obtain Bidding Procedures Order and Final DIP Order: August 15, 2022
- Deadline for sale hearing and sale order: September 7, 2022
- Deadline to close sale: September 9, 2022 (was August 15th)
Prior to the Petition Date, GenapSys raised approximately $230.3 million from secured debt and preferred equity to develop its DNA sequencing technology and detection system.
- Secured Claims On December 20, 2019, GenapSys entered into that certain Loan and Security Agreement with Oxford Finance LLC, in its capacity as collateral agent (the “Prepetition Credit Agreement”). Under the Prepetition Credit Agreement, the Prepetition Secured Parties extended a term loan of $30 million (the “Secured Loan”) to GenapSys. The Secured Loan is secured by substantially all of the Debtor’s assets, except as specifically excluded. As of the Petition Date, the approximate principal and capitalized interest outstanding under the Secured Loan is $30 million, which excludes final payment fees of $0.9 million and prepayment fees of 0.5%.
- Unsecured Claims The Debtor’s unsecured creditors are believed to hold claims totaling approximately $4 million in the aggregate. Those creditors include trade claimants, and other routine, ordinary course creditors.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Russell Declaration”), Britton Russell, the Debtor's chief financial officer and treasurer, detailed the events leading to GynapSys’s Chapter 11 filing. The Russell Declaration provides: “Prior to the Petition Date, from late 2021 to early 2022, GenapSys undertook several strategic initiatives aimed at raising additional capital to position the company for continued growth. Unfortunately, despite its proven technology and interest from investors, the Debtor’s business was not able to withstand the liquidity, operational and reputational impacts of prepetition litigation.
As a result of the market downturn, the litigation filed against the Company in 2020, the value-destructive actions taken recently by the Debtor’s founder and former CEO, Dr. Hesaam Esfandyarpour, in two lawsuits filed against the Debtor, the Debtor’s prepetition marketing efforts were severely hampered. GenapSys was forced to furlough nearly its entire workforce to preserve enough liquidity so that it could manage through to the Trial (as defined below) on July 6, 2022, and then ultimately laid off most of its workforce after the Trial to stretch its liquidity to reach the Petition Date."
The Russell Declaration further explains, "In late 2019, Dr. Esfandyarpour conducted a limited launch of a first-generation DNA benchtop sequencer, selling a few dozen instruments and billing customers less than $1 million. In February 2021, the Board asked Dr. Esfandyarpour to step down as CEO and appointed Dr. Jason Myers as CEO. By mid-2021, the Company halted sales and offered refunds to existing customers.
While the underlying semiconductor technology had been externally proven, there were numerous performance issues with the benchtop sequencer due to inherent design flaws. The Company quickly realized that it needed to redesign its DNA sequencing solution to better meet customer requirements, and engaged investment banking firms for assistance in addressing its liquidity needs. The Company sought to raise new equity, primarily to meet its commitments to launch its products and fund associated working capital needs. For example, in late 2021, GenapSys signed a letter of intent with a SPAC, which ultimately fell apart.
By early 2022, efforts to complete the equity raise were unsuccessful. GenapSys began considering other options to address its liquidity needs. Also, by early 2022, GenapSys faced mounting litigation costs associated with the California Action, as well as in connection with certain corporate governance disputes. For one, discovery costs in the California Action were beginning to strain GenapSys’s finances.
Revised Budget (see Docket No. 173)
About the Debtor
According to the Debtor: “Genapsys is focused on the advancement of universal access to genomic information by delivering an affordable, scalable, and accurate genomic sequencing ecosystem that empowers both academic and clinical research applications. Its system leverages a proprietary electrical microfluidic sequencing chip with a scalable number of detectors, allowing for a wide range of applications. Genapsys is headquartered in Redwood City, CA.”
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