March 21, 2023 – The Court hearing the Stimwave Technologies cases issued an order confirming the Debtors’ Second Amended Plan of Liquidation [Docket No. 791].
In a related development, on March 9th, the Debtors' former CEO Laura Perryman was arrested in Florida and charged with one count of healthcare fraud* and one count of conspiracy to commit wire fraud and healthcare fraud. In its announcement of the arrest, the DOJ also noted that the Debtors had agreed to a now unsealed non-prosecution agreement (the "NPA") in October 2022 further to which the Debtors agreed “an extensive statement of facts” about the investigation agreed to compliance measures, to cooperate in the ongoing investigation of Perryman and a $10.0mn penalty. The devicemaker also settled a civil fraud lawsuit filed under the False Claims Act ("FCA"), according to the DOJ. In that settlement, Stimwave agreed to admit to and accept responsibility for the government’s allegations of fraud and to pay a $8.6mn penalty, which will be credited to the $10.0mn fine.
*"…at the direction of its founder and CEO Laura Perryman, Stimwave created a dummy medical device component — made entirely of plastic — designed to be implanted in patients [suffering from chronic pain] for the sole purpose of causing doctors to unwittingly bill Medicare and private insurance companies more than $16,000 for each implantation of the piece of plastic."
The Debtors' filings, and the Court's confirmation order, make no mention of the Debtors' non-prosecution agreement or its agreed contents, the Debtors and the Court having agreed to seal filings related to these developments (although most of them are now available in the unsealed NPA, see DOJ link above). As to where the $10.0mn will come from, the NPA provides: "Within three days of the closing of the sale, NewCo [ie a Kennedy Lewis entity] will pay $10,000,000 to Stimwave which Stimwave will use to pay Stimwave’s monetary obligation to the Government." The Debtors' sale to Kennedy Lewis closed on October 31st.
Case Evolution
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.”
On July 14th, the Court issued an order authorizing the Debtors to access a further $28.0mn of new money, debtor-in-possession (“DIP”) financing being provided by Kennedy Lewis KLIM. Previously, the Debtors had been authorized to access a first $12.0mn tranche of what was in total a $40.0mn DIP.
On September 30th, further to an auction held on September 27th and a September 29th sale hearing, the Court issued an order approving the sale of substantially all of the Debtors’ assets to SWT SPV LLC ($124.2mn bid*), a Kennedy Lewis affiliate. The sale closed on October 31st.
*The Successful Bid is comprised of (i) $84,945,792 in the form of a credit bid of the obligations under the prepetition Loan Agreement and the DIP Facility and (ii) $39,304,208 in cash, for total consideration in the amount of $124,250,000.
On December 12th, the Debtors filed a Plan of Liquidation and a related Disclosure Statement, with further versions of the documents filed on January 31st and February 3rd. On February 8th, the Court approved the Disclosure Statement and scheduled a March 21st Plan confirmation hearing.
Overview of the Plan
The Debtors' memorandum of law in support of Plan confirmation (the "Memorandum") [Docket No. 771] notes, “Following the liquidation and sale of substantially all of the Debtors’ assets, the Debtors, the Committee, and various stakeholders engaged in extensive, good-faith, and arm’s length negotiations resulting in a chapter 11 plan that was overwhelmingly accepted by the voting Classes.
The Plan includes a 'Class 3 Unimpairment Toggle,' pursuant to which the Debtors and the Committee may jointly elect to treat Class 3 (General Unsecured Claims) as an Unimpaired Class. If the Class 3 Unimpairment Toggle is exercised, the Plan Administrator will be appointed as of the Effective Date to administer the Plan and make distributions thereunder. If the Class 3 Unimpairment is not exercised, the Debtors’ remaining assets will generally be transferred to the Liquidating Trust which will, among other things, reconcile claims, monetize assets, pursue Causes of Action and make distributions to the Holders of Allowed General Unsecured Claims and, if applicable, to Holders of Allowed Existing Series E Preferred Interests. The Plan’s proposed structure, including the deemed consolidation of the Debtors, is the most efficient and cost-effective method of winding down the Debtors’ Estates and bringing certainty and finality to the Debtors, their creditors, and the Chapter 11 Cases.
The sole objections to the Plan are from Gary Perryman and Laura Perryman, who dispute the fully consensual 'opt-in' releases in the Plan and ask to be included as Released Parties. See Docket Nos. 626, 672.3 The Debtors submit that these objections miss the mark and should be overruled. 4. As described below, the Plan satisfies all applicable elements of section 1129 of the Bankruptcy Code and otherwise complies with the applicable requirements of the Bankruptcy Code, Bankruptcy Rules, and non-bankruptcy law. The Plan should be confirmed.”
The amended Disclosure Statement [Docket No. 674] provides, “Summarily, the Plan provides for (i) either (a) “the establishment of a Liquidating Trust, to the extent that Class 3 (General Unsecured Claims) may not be paid in full, and the appointment of a Liquidating Trustee who will have all powers and authorities set forth in the Plan, or (b) the designation of a Plan Administrator who will have all powers and authorities set forth in the Plan, to the extent the Debtors and the Committee jointly elect to treat Class 3 as an Unimpaired Class and File and serve the Notice of Class 3 Unimpairment Toggle, thereby exercising the “Class 3 Unimpairment Toggle.”
The amended documents also call for, “(v) the distribution on the Effective Date (or as soon as reasonably practicable thereafter) to the Holders of Allowed General Unsecured Claims of either (a) in the event the Class 3 Unimpairment Toggle is not exercised, each Holder’s Pro Rata share of the Class A Liquidating Trust Interests, which entitle such Holder to distributions from the Liquidating Trust as set forth in the Plan and Liquidating Trust Agreement, or (b) in the event the Class 3 Unimpairment Toggle is exercised, Cash in the amount of such Allowed General Unsecured Claim (plus interest thereon accrued from the Petition Date through the date of such distribution, calculated using the Federal Judgment Rate), (vi) the distribution on the Effective Date (or as soon as reasonably practicable thereafter) to the Holders of Allowed Existing Series E Preferred Interests of either (a) in the event the Class 3 Unimpairment Toggle is not exercised, each Holder’s Pro Rata share of the Class B Liquidating Trust Interests, which entitle such Holder to distributions from the Liquidating Trust as set forth in the Plan and Liquidating Trust Agreement, or (b) in the event the Class 3 Unimpairment Toggle is exercised, the distribution to the Holders of Allowed Existing Series E Preferred Interests of their Pro Rata Share of any Net Distributable Assets and (vii) such other recoveries necessary to satisfy section 1129 of the Bankruptcy Code as set forth in the Plan.”
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, as of March 17th, a Liquidation Analysis had not been filed):
- 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 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan, with voting rights and treatment subject to the unimpairment toggle. The estimated recovery is [·]%-100%. Each Holder will receive its Pro Rata share of the Class A Liquidating Trust Interests in accordance with Article IV.C.3 of the Plan, which will entitle such Holder to distributions from the Liquidating Trust as and to the extent set forth in the Plan and Liquidating Trust Agreement. Such Class A Liquidating Trust Interests will in all events be senior in priority to the Class B Liquidating Trust Interests, and in no event will holders of Class B Liquidating Trust Interests be entitled to distributions of Liquidating Trust Assets unless and until all holders of Class A Liquidating Trust Interests have received from the Liquidating Trust Cash distributions equal to the amount of such Holder’s General Unsecured Claim (plus interest thereon accrued from the Petition Date through the date of such payment, calculated using the Federal Judgment Rate). In the event the Class 3 Unimpairment Toggle is exercised, each Holder will receive payment in full in Cash of the amount of such Holder’s General Unsecured Claim (plus interest thereon accrued from the Petition Date through the date of such payment, calculated using the Federal Judgment Rate) either: (i) on the Effective Date, or as soon as reasonably practicable thereafter or (ii) if the General Unsecured Claim is not Allowed as of the Effective Date, no later than 14 days after the date on which such General Unsecured Claim is Allowed by Final Order, or as soon as reasonably practicable thereafter.
- Class 4 (“SLLC Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5A (“Existing Series E Preferred Interests”) is impaired and entitled to vote on the Plan, with voting rights and treatment subject to the unimpairment toggle. In the event the Class 3 Unimpairment Toggle is not exercised, each Holder will receive its Pro Rata share of the Class B Liquidating Trust Interests, which will entitle such Holder to distributions from the Liquidating Trust as and to the extent set forth in the Plan and Liquidating Trust Agreement. Such Class B Liquidating Trust Interests will in all events be junior in priority to the Class A Liquidating Trust Interests, and in no event will holders of Class B Liquidating Trust Interests be entitled to distributions of Liquidating Trust Assets unless and until all holders of Class A Liquidating Trust Interests have received from the Liquidating Trust Cash distributions equal to the amount of such Holder’s General Unsecured Claim (plus interest thereon accrued from the Petition Date through the date of such payment, calculated using the Federal Judgment Rate). Toggle Treatment: In the event the Class 3 Unimpairment Toggle is exercised, on the Effective Date, or as soon as reasonably practicable thereafter, each Holder of an Allowed Existing Series E Preferred Interest in Class 5A will receive its Pro Rata share of any Net Distributable Assets.
- Class 5B (“Existing Series D Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 5C (“Existing Series B-2 Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 5D (“Existing Series B Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 5E (“Existing Series A-2 Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 5F (“Existing Series A Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 5G (“Existing Common Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 6 (“Section 510 Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 7 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
Key Definitions
- “Class 3 Unimpairment Toggle” means the scenario in which the Debtors and the Committee jointly elect to treat Class 3 as an Unimpaired Class and File and serve the Notice of Class 3 Unimpairment Toggle.
- “Class A Liquidating Trust Interests” means, in the event the Class 3 Unimpairment Toggle is not exercised, the uncertificated beneficial interests in the Liquidating Trust representing the right of Holders of Allowed General Unsecured Claims to receive Distributions from the Liquidating Trust pursuant to the Plan and the Liquidating Trust Agreement.
- “Class B Liquidating Trust Interests” means, in the event the Class 3 Unimpairment Toggle is not exercised, the uncertificated beneficial interests in the Liquidating Trust representing the right of Holders of Allowed Existing Series E Preferred Interests to receive Distributions from the Liquidating Trust pursuant to the Plan and the Liquidating Trust Agreement.
Voting Results
On March 17, 2023, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 767], which were as follows:
- Class 3 (“General Unsecured Claims”): 16 claim holders, representing $678,573.09 (99.47%) in amount and 88.89% in number, voted in favor of the Plan. 2 claims holders, representing $3,587.41 (0.53%) in amount and 11.11% in number, rejected the Plan.
- Class 5A (“Existing Series E Preferred Interests”): Redacted (see below)
Key Documents
The Disclosure Statement [Docket No. 702] attaches the following exhibits:
- Exhibit A: First Amended Plan of Liquidation
- Exhibit B: Liquidation Analysis (not in graphical format, see exhibit beginning on p.160)
The Debtors filed a Plan Supplement on March 3, 2023 [Docket No. 745], attaching the following documents:
- Exhibit A: Assumed Executory Contract and Unexpired Lease List
- Exhibit B: Administrative Claim Request Form
- Exhibit C: Disclosure Identifying Liquidating Trustee
- Exhibit D: Liquidating Trust Agreement
Petition Date Perspective
In a press release announcing the filing, the Debtors 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').
Since 2020, the Company has successfully re-structured its entire team and business operations. The new Stimwave team has worked closely with physicians, customers, professional societies, multiple governing agencies and others to build a robust, trusted foundation. During this time, the Company’s unique neuromodulation therapies and services have helped more physicians treat patients who historically had limited, if any, alternative options to opioids. The Company is now ready for its next chapter of continued growth, while establishing a new standard of care in the field of peripheral nerve stimulation (PNS) for many more patients in the future.
The Company also announced that it has received a commitment from Kennedy Lewis for up to $40 million in debtor-in-possession financing. These new funds will enable the Company to operate its business uninterrupted and to continue to grow while providing the highest level of service to physicians and the patients they serve….
To facilitate the sale of assets and the financing described above, Stimwave has filed for voluntary Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. The proposed sale will be conducted through a court-supervised process and subject to potential receipt of higher or better offers to purchase the Company. The Company expects that the sale will close within the next 90-120 days.
Under Section 363 of the U.S. Bankruptcy Code, Kennedy Lewis would serve as the stalking horse bidder in the proposed auction."
The Debtors’ CEO, Aure Bruneau, commented further: “We are excited about the continued growth we have experienced over the last two years, during a challenging time. We are grateful for our customers’ partnership and the positive impact our therapy provides for their patients. The sale process we are undertaking will have an efficient and prompt exit, while we maintain our day-to-day commitment to meet our customers’ and patients’ support needs with the high standards of quality they expect from us.”
Goals of the Chapter 11 Filings
According to the Bruneau Declaration (defined below), "[T]he Company had to commence these cases in order to access needed liquidity to maintain operations and implement a value maximizing sale transaction."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Bruneau Declaration”), Aure Bruneau, the Debtors’ chief executive officer, detailed the events leading to Stimwave’s Chapter 11 filing. The Bruneau Declaration provides: “My appointment as CEO came after Stimwave discovered 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.
Along with other newly hired executives, I was brought in to manage the Company through the risks associated with the actions of former management, implement pristine regulatory and legal compliance, retain new senior management, right-size operations, and put the Company in a position to grow and maximize value. The senior management team has accomplished these goals. Even in the face of the recent challenges described herein, the Company has leveraged its innovative technology and related intellectual property, generating revenue of approximately $50 million (representing material year over year growth) through a network of over 700 physician users.
Unfortunately, the prior mismanagement of the Company described above materially hampered Stimwave’s operations and future prospects and ultimately led to the commencement of these Chapter 11 Cases. For example, as described further below, in October 2019, just prior to the departure of Stimwave’s former CEO in November 2019, the Debtors received a civil investigative demand from the U.S. Department of Justice (the 'DOJ') pursuant to the False Claims Act and in the following months learned that DOJ had opened a parallel criminal investigation.
Since then, all members of prior senior management that the Debtors believe were involved in the conduct under investigation have resigned or have been terminated from their positions with the Company, and new management has been guiding the Company through the aftermath, fully cooperating with the DOJ in its investigation of both civil and criminal matters.
Following discovery of the financial and operational mismanagement described above, the Company undertook its own independent extensive internal investigation and disclosed the facts of that investigation to the DOJ and FDA through multiple presentations since the beginning of 2020. Further, the Company’s remediation efforts began with bringing in new management, including deeply experienced professionals in the healthcare industry who have been and remain intently focused on remediation and compliance…
In addition to the foregoing issues, the Company’s complicated capital structure and stockholder and board voting rights have inhibited the Company from obtaining additional financing. The Company’s stockholders previously approved a cap of only $30 million in total indebtedness from Kennedy Lewis Capital Partners Master Fund LP ('KLCPMF') and Kennedy Lewis Investment Management, LLC ('KLIM' and together with KLCPMF, 'Kennedy Lewis'). Any additional pre-petition debt would require various stockholder and board approvals that the Company believed would be difficult, if not impossible, to obtain.
Immediately pre-petition, the Company exhausted the remaining availability under the Term Loan Agreement with Kennedy Lewis (as described below). Consequently, the Company had to commence these cases in order to access needed liquidity to maintain operations and implement a value maximizing sale transaction.
In addition, the Company’s operations and revenues have been buffeted by headwinds brought about by the COVID-19 pandemic, substantial litigation expenses including with its former founder and other parties that were unpaid by prior management and the additional regulatory oversight and remedial action required following actions of former management in the highly regulated industry in which the Debtors operate….
In the months leading to the Petition Date, the Company retained advisors to assess the Company’s near- and long-term liquidity and operational needs. The Company began initiating discussions in earnest with Kennedy Lewis and evaluating potential strategic alternatives to maximize stakeholder value, including by entering into a series of amendments and forbearances to the Debtors’ Term Loan Agreement with Kennedy Lewis.
Stalking Horse APA and DIP Loan
The Company and its advisors have explored financial and restructuring solutions, including potential capital raises, refinancing the Debtors’ existing prepetition debt, in-court and out-of-court restructuring solutions and other capital structure, financing, and strategic alternatives. These negotiations culminated in the Debtors finalizing and entering into a stalking horse asset purchase agreement with an affiliate of Kennedy Lewis (the 'Stalking Horse APA'). The Stalking Horse APA will be subject to higher and better offers solicited during these Chapter 11 Cases, and the Debtors intend to promptly initiate a sale process and auction under section 363 of the Bankruptcy Code for the sale of all or substantially all of the Debtors’ assets.
Among other things, pursuant to the Stalking Horse APA, Kennedy Lewis will 'credit bid' the entire amount of its pre-bankruptcy loans and DIP Facility (described below) and assume certain liabilities associated with assumed contracts and trade payables… To facilitate the sale process, Kennedy Lewis has agreed to provide crucial debtor-in-possession financing (the 'DIP Facility'). The DIP Facility provides for a $40 million new money super priority senior secured term loan facility, which permits the use of the Debtors’ cash collateral pursuant to an approved budget.
While Kennedy Lewis has agreed to support the Company during this challenging time, the support is conditioned on the prompt execution of a sale process that will minimize the administrative expense of the Chapter 11 Cases while also ensuring that the Company’s business is appropriately recapitalized and able to continue as a going concern for the benefit of all stakeholders.”
The DIP Facility Sale Milestones include:
Prepetition Indebtedness
The chart below sets forth the Debtors’ funded debt obligations as of the Petition Date:
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
Read more Bankruptcy News
The post Stimwave Technologies Incorporated – Two Weeks After Arrest of Former CEO for Healthcare Fraud Involving Implant of Phony Medical Devices and Now Unsealed Settlement with DOJ, Former Medical Device Company Has Plan of Liquidation Confirmed appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.