Quotient Limited – With Support of Noteholders, Commercial-Stage Diagnostics Company Shut Out of Capital Markets Files for Chapter 11 with $310mn of Liabilities

January 10, 2023 – Quotient Limited (formerly Nasdaq:QTNT and now OTC:QTNTF; "Quotient" or the “Debtor”) filed for Chapter 11 protection (on a prepackaged basis) with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 23- 90003 (Judge David R. Jones). The Debtor, “a commercial-stage diagnostics company,” is represented by James T. Grogan III of Paul Hastings LLP. Further board-authorized engagements include: (i) Perella Weinberg Partners L.P. (“PWP”) as financial advisor and (ii) Kroll Restructuring Administration LLC as claims agent. 

The Debtor's petition notes between 50 and 100 creditors; estimated assets of $127.9mn and estimated liabilities of $310.0.0mn (both figures as at September 30, 2022, 10-Q here). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Savings Fund Society, FSB (as trustee for $105.8mn Convertible Notes claim), (ii) Carey Olsen/James Willmott (UK £194k advisory fee claim) and (iii) Clifford Chance ($125k advisory fee claim).

On December 12, 2022, the Debtor announced that it had given formal notice to the Nasdaq Stock Market LLC ("Nasdaq") of its intention to voluntarily delist its ordinary shares from the Nasdaq Global Market and on December 22nd it filed its required Form 25 with the SEC as to the delisting.

That announcement followed the Debtor's November 14th 10-Q, which included a going concern warning and noted: "adverse conditions in the U.S. and global capital markets made our pursuit of capital very difficult."

From the 10-Q: "Recent developments have called into question our ability to execute successfully on this business strategy and indeed raises substantial doubt on our ability to continue as a going concern. 

While we have made substantial progress toward the commercialization of our MosaiQ-based transfusion diagnostics products, that progress has been expensive and has required us to continuously raise capital. Since earlier this year we have pursued various potential methods of raising the funds that we require to complete the commercialization of our products. Adverse conditions in the U.S. and global capital markets made our pursuit of capital very difficult. To date, we have been unable to raise additional capital in the amounts we require. We are now close to running out of cash and close to being forced to cease operations and liquidate our MosaiQ business."

Goals of the Chapter 11 Filing

The Mendez Declaration [Docket No. 16] provides: "The Debtor enters chapter 11 in an attempt to preserve the business as a going concern thereby saving hundreds of jobs and allowing the Company to continue to serve the critical needs of hospitals, donor collection agencies, and independent testing laboratory customers throughout the United States."

Overview of the Prepackaged Plan

The Plan is being filed on a prepackaged basis and has "general unsecured creditors…paid in full;" with "100 percent of the Senior Secured Noteholders and Convertible Noteholders," is those comprising the key voting classes, having already committed to support the Plan.

The Disclosure Statement [Docket No. 15] provides, “On the Effective Date, the Debtor will effectuate the transactions contemplated by the Plan, which provides that the Debtor’s existing funded indebtedness of approximately $256 million in principal and accrued interest will be extinguished and the Reorganized Debtor will receive contributions of $41 million by the Debtor’s existing noteholders pursuant to the Private Placements in exchange for (i) 100 percent of the Newco Partnership Interests (subject to potential dilution by the Management Incentive Plan) and (ii) the Finance Co Notes in the amount of $119,523,333 (consisting of $10,000,000 in Finance Co Bridge Notes and $109,523,333 in Finance Co SSN Notes), all in accordance with the Transaction Support Agreement.

More specifically, as a result of the transactions set forth in the Plan:

• on the Effective Date, through the implementation of the transactions contemplated in the Transaction Support Agreement, each holder of an Allowed Bridge Notes Claim shall receive, in full and final satisfaction of its Allowed Bridge Notes Claim, (i) its Pro Rata share of the Finance Co Bridge Notes and (ii) an amount of Cash equal to the documented fees and expenses of the Senior Secured Notes Trustee under the Senior Secured Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses;
• on the Effective Date, through the implementation of the transactions contemplated in the Transaction Support Agreement, each Holder of an Allowed Senior Secured Notes Claim (other than the Holder of the Retained Debt, which will receive such Retained Debt pursuant to the transactions set forth in Section 3 of the Implementation Plan) shall receive, in full and final satisfaction of its Allowed Senior Secured Notes Claim, (i) its Pro Rata share (calculated excluding the Retained Debt) of the Finance Co SSN Notes; (ii) its right to purchase (pro rata based on such Senior Secured Noteholder’s percentage ownership of Senior Secured Notes (excluding the Retained Debt) or as otherwise mutually agreed among the Senior Secured Noteholders) the Newco Partnership Interests through the Senior Secured Noteholder Private Placement, together with its applicable share (based on its participation in the Senior Secured Noteholder Private Placement) of additional Newco Partnership Interests issuable in connection with the Senior Secured Noteholder Private Placement as described in the Transaction Support Agreement, which Newco Partnership Interests are subject to potential dilution by the Management Incentive Plan; and (iii) an amount of Cash equal to the documented fees and expenses of the Senior Secured Notes Trustee under the Senior Secured Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses. On the Merger Date, the holder of the Retained Debt shall receive the treatment set forth in Section 4 of the Implementation Plan;
• on the Effective Date, through the implementation of the transactions contemplated in the Transaction Support Agreement, the Convertible Notes shall be extinguished for no value and each holder of an Allowed Convertible Notes Claim shall receive, in full and final satisfaction of its Allowed Convertible Notes Claim, (i) its right to purchase (pro rata based on such Convertible Noteholder’s percentage ownership of Convertible Notes or as otherwise mutually agreed among the Convertible Noteholders) the Newco Partnership Interests through the Convertible Noteholder Private Placement; together with its applicable share (based on its participation in the Convertible Noteholder Private Placement) of additional Newco Partnership Interests issuable in connection with the Convertible Noteholder Private Placement as described in the Transaction Support Agreement, which Newco Partnership Interests are subject to potential dilution by the Management Incentive Plan; and (ii) an amount of Cash equal to the documented fees and expenses of the Convertible Notes Trustee under the Convertible Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses;
• each holder of an Allowed Other Secured Claim shall, in the sole discretion of the Reorganized Debtor, receive on the Effective Date (or as promptly thereafter as reasonably practicable) or in the ordinary course of the Reorganized Debtor’s business: (a) payment in full in Cash, including the payment of any interest Allowed and payable under section 506(b) of the Bankruptcy Code; (b) delivery of the collateral securing such Allowed Other Secured Claim; or (c) treatment of such Allowed Other Secured Claim in any other manner that renders the Claim Unimpaired, including Reinstatement;
• each holder of Allowed General Unsecured Claims shall, in the sole discretion of the Reorganized Debtor, receive on the Effective Date (or as promptly thereafter as reasonably practicable) or in the ordinary course of the Reorganized Debtor’s business: (i) Reinstatement of such Allowed General Unsecured Claim pursuant to section 1124 of the Bankruptcy Code; or (ii) payment in full in Cash on (A) the Effective Date, or (B) the date due in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such Allowed General Unsecured Claim;
• all Interests in the Debtor will be cancelled and released and the holders of such Interests shall not receive or retain any distribution, property, or other value on account of such Interests; and
• all section 510(b) claims will be extinguished and the holders of such Claims shall not receive or retain any distribution, property, or other value on account of such Claims.”

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 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3 (“Bridge Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $10.0mn (principal) and estimated recovery is 100%. Each holder shall receive, in full and final satisfaction of its Allowed Bridge Notes Claim, (A) its Pro Rata share of the Finance Co Bridge Notes and (B) an amount of Cash equal to the documented fees and expenses of the Senior Secured Notes Trustee under the Senior Secured Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses.
• Class 4 (“Senior Secured Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $136,904,167 (principal) and estimated recovery is 100%. Each Holder shall receive (A) its Pro Rata share (calculated excluding the Retained Debt) of the Finance Co SSN Notes; (B) its right to purchase (pro rata based on such Senior Secured Noteholder’s percentage ownership of Senior Secured Notes (excluding the Retained Debt) or as otherwise mutually agreed among the Senior Secured Noteholders) the Newco Partnership Interests through the Senior Secured Noteholder Private Placement, together with its applicable share (based on its participation in the Senior Secured Noteholder Private Placement) of additional Newco Partnership Interests issuable in connection with the Senior Secured Noteholder Private Placement as described in the Transaction Support Agreement, which Newco Partnership Interests are subject to potential dilution by the Management Incentive Plan; and (C) an amount of Cash equal to the documented fees and expenses of the Senior Secured Notes Trustee under the Senior Secured Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses. On the Merger Date, the holder of the Retained Debt shall receive the treatment set forth in Section 4 of the Implementation Plan.
• Class 5 (“Convertible Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $105.0mn (principal) and estimated recovery is 100%. Each holder shall receive (A) its right to purchase (pro rata based on such Convertible Noteholder’s percentage ownership of Convertible Notes or as otherwise mutually agreed among the Convertible Noteholders) the Newco Partnership Interests through the Convertible Noteholder Private Placement; together with its applicable share (based on its participation in the Convertible Noteholder Private Placement) of additional Newco Partnership Interests issuable in connection with the Convertible Noteholder Private Placement as described in the Transaction Support Agreement, which Newco Partnership Interests are subject to potential dilution by the Management Incentive Plan; and (B) an amount of Cash equal to the documented fees and expenses of the Convertible Notes Trustee under the Convertible Notes Indenture outstanding as of the Effective Date, to the extent not previously paid as Restructuring Expenses.
• Class 6 (“General Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. 
• Class 7 (“Interests in Quotient Ltd.”) is impaired, deemed to reject and not entitled to vote on the Plan. On the Merger Date, all Interests in the Debtor shall be cancelled and released and the Holders thereof shall not receive or retain any property under the Plan on account of such Interests.
• Class 8 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. On the Effective Date, all Section 510(b) Claims shall be discharged and extinguished and the holders thereof shall not receive or retain any property under the Plan on account of such Section 510(b) Claims.

Proposed Key Dates (sourced from Docket No. 16)

• Deadline to File Plan Supplement: February 3, 2023
• Plan Voting Deadline: February 7, 2023
• Deadline to Object to Confirmation of the Plan: February 10, 2023
• Deadline to File Confirmation Order: February 13, 2023
• Deadline to File Confirmation Brief: February 13, 2023
• Combined Hearing for Approval of the Disclosure Statement and Confirmation of the Plan: February 15, 2023 (subject to Court availability).

Events Leading to the Chapter 11 Filings

The Mendez Declaration provides: "…for several years we have invested heavily in an innovative blood testing technology that we call MosaiQ. Up until recently, our focus has been on developing our proprietary MosaiQ technology for use in blood grouping and donor disease screening, which is commonly referred to as transfusion diagnostics. However, in a strategic pivot, we have expanded our focus to include potential applications for MosaiQ in the autoimmune and allergy clinical diagnostics markets

Our MosaiQ business has incurred substantial losses, and we expect it will continue to incur losses unless and until it successfully commercializes one or more products. And, while Alba* is a profitable business, Alba alone does not provide sufficient revenue to sustain operations
under the Company’s current interest expense and debtload. Therefore, absent new capital, the Company would not be able to meet its debt service obligations.

[*non-debtor subsidiary Alba Bioscience Limited manufactures, distributes, and sells "conventional reagent products used primarily to identify blood group antigens and antibodies in donor and patient blood and to perform daily quality assurance testing for third-party blood grouping instrument platforms."]

The Disclosure Statement continues: "The Company has incurred net losses and negative cash flows from operations in each year since it commenced operations in 2007. As of September 30, 2022, the Company had an accumulated deficit of $809.8 million and expected operating losses to continue for at least the remainder of the fiscal year ending March 31, 2023 while continuing investment in the commercialization of its MosaiQ technology. For the six month period ended September 30, 2022, the Company’s total revenue was $17.7 million and its net loss was $84.8 million.

Adverse conditions in the U.S. and global capital markets made the Company’s pursuit of necessary, additional capital very difficult. These difficulties impaired the Company’s ability to meet its debt service obligations, as described further below. The Company’s access to liquidity has been further impacted by the suspension of redemptions by two funds managed by Credit Suisse Asset Management ('CSAM') in which the Company has previously invested an aggregate of approximately $110.35 million. CSAM has begun the process of liquidating these funds and the Company has since recovered a portion of its investments (approximately $89 million as of September 30, 2022), but further recovery remains uncertain.

As a result of the Company’s limited liquidity, the Company was unable to make certain interest payments on the Senior Secured Notes and the Convertible Notes that were due on October 15, 2022 and November 15, 2022, respectively. Prior to the expiration of the grace periods provided under the Senior Secured Notes Indenture and the Converitble Notes Indenture, as applicable, the Company reached agreements with the Senior Secured Noteholders and the Convertible Noteholders to avoid a default under the Senior Secured Notes Indenture or the Convertible Notes Indenture."

Transaction Support Agreement (attached, as amended and modified, to Plan at Docket No. 14; originally filed with December 5th 8-K)

On December 5, 2022, the Debtor entered into an a “Transaction Support Agreement,” or TSA, with (i) holders of all of its outstanding senior secured notes (the “Senior Secured Notes”) and (ii) holders of more than 99% of its convertible notes (the “Convertible Notes,” with consenting holders of the Senior Secured Notes and Convertible Notes, collectively, the “Consenting Noteholders”), whereby the Consenting Noteholders have agreed to support a restructuring of the Company’s balance sheet, which is intended to be effectuated pursuant to a set of transactions to be commenced by the Company (collectively, the “Transactions”). 

Under the TSA (8-K with supporting materials here), "the Company and the Consenting Noteholders have agreed to act in good faith to consummate the Transactions and have undertaken other customary commitments to one another. The Consenting Noteholders have also agreed to forbear from exercising, for so long as the Transaction Support Agreement is in full force and effect, any and all rights and remedies in contravention of the Transaction Support Agreement, which are or becomes available to them in respect of the Senior Secured Notes, the Convertible Notes or any other claims or interests in connection therewith.

The Transaction Support Agreement contains certain deadlines relating to the Transactions, which include deadlines (collectively, the 'Milestones') related to implementing the Transactions either through (i) the filing of a petition for relief under chapter 11 of the U.S. Bankruptcy Code in order to effect a plan of reorganization (the “Plan”) that implements a fully consensual restructuring (the 'Consensual Transaction') or (ii) parallel creditor schemes of arrangements in England and Jersey (the 'Fallback Scheme'), in each case as described in, and contemplated under, the Implementation Steps Memorandum attached to the Transaction Support Agreement as Exhibit B (the 'Implementation Steps Memo”), as well as an outside date of May 1, 2023 for the consummation of a Consensual Transaction or Fallback Scheme (such date, the 'Outside Date'). The Transaction Support Agreement provides that Requisite Consenting Noteholders (as defined below) can direct the Company to implement the Transactions via alternative implementation steps, subject to the Fiduciary Out (as defined below). Under the terms of the Transaction Support Agreement: 

• The holders of the Senior Secured Notes have agreed to fund their commitment portion of $10 million of indebtedness (the “Bridge Notes”) to the Company by no later than December 13, 2022.
• Each noteholder under the Senior Secured Notes Indenture has agreed to exchange (i) such notes held by it (other than the Bridge Notes) for newly issued senior secured debt at a discount, and (ii) its Bridge Notes for newly issued senior secured debt at face value.
• Certain holders of Senior Secured Notes have also agreed to purchase an aggregate of $13 million in new common equity at a 35% discount to a total equity value of $50 million (the 'Agreed Equity Value'). In addition, each such Senior Secured Noteholder will receive its applicable share of an aggregate of $20 million in new common equity at the Agreed Equity Value.
• The Consenting Holders who own Convertible Notes have agreed that their Convertible Notes shall be extinguished for no value, other than for the purchase right set forth immediately below.
• Such holders of Convertible Notes have agreed to purchase an aggregate of $28 million in new common equity at a 35% discount to the Agreed Equity Value. In addition, each such Convertible Noteholder will receive its applicable share of an aggregate of $30 million in new common equity at the Agreed Equity Value.
• The newly issued senior secured debt will be secured by a first lien on substantially the same collateral and assets as were subject to liens under the Senior Secured Notes Indenture. It will (i) mature 5 years (or, with the consent of holders of the Senior Secured Notes holding at least a majority of the outstanding Senior Secured Notes and each of the Specified Noteholders, 7 years) from the closing date and (ii) bear interest at a rate of 12% payable in kind for the first three years (or, with certain consent, two years) following the closing date, and thereafter payable in cash. The new senior secured debt will also provide for a mandatory repurchase with 100% of the net proceeds from certain sales, include covenants and events of default substantially similar to those existing under the Senior Secured Notes Indenture, and be redeemable at a price of 103% of the principal amount thereof, plus accrued and unpaid interest, for the first 2 years after issuance, and at par (plus accrued and unpaid interest) thereafter.
• All existing equity of the Company will be extinguished and cancelled for no consideration."

Prepetition Capital Structure

As at filing: "[t]he Debtor has approximately $252 million outstanding in principal debt obligations, exclusive of applicable interest, fees, or other charges (collectively, the “Prepetition Debt Obligations”), consisting of approximately: (a) $10,000,000 of outstanding principal under the Bridge Notes; (b) $136,904,167 of outstanding principal under the Senior Secured Notes; (c) $105,000,000 of outstanding principal under the Convertible Notes; and (d) $489,353 in General Unsecured Claims."

About the Debtor

According to the Debtor: “Building on over 30 years of experience in transfusion diagnostics, Quotient is a commercial-stage diagnostics company committed to delivering solutions that it believes reshape the way diagnostics are practiced. The MosaiQ solution, Quotient's proprietary multiplex microarray technology, offers the world's first fully automated, consolidated testing platform, allowing for multiple tests across different modalities. The MosaiQ solution is designed to be a game-changing solution, which Quotient believes will increase efficiencies, improve clinical practice, deliver significant workflow improvements, and create operational cost savings to laboratories around the world. Quotient's operations are based in Switzerland, Scotland, US and the UAE."

Corporate Structure

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