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Item 1.03
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Bankruptcy or Receivership.
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Ch. 11 Filing
On February 9, 2020 (the “Petition Date”), Valeritas Holdings, Inc. (the “Company”) and the Company’s wholly-owned subsidiaries (each a “Debtor” and together with the Company, the “Debtors”) filed voluntary petitions (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Court”), for which joint administration has been sought (the “Chapter 11 Cases”), under the caption In re Valeritas Holdings, Inc., et al., Case No. 20-10290. Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. The Debtors expect to continue their operations in the ordinary course of business without interruption during the pendency of the Chapter 11 Cases, pending the sale of their assets in a going concern sale pursuant to a competitive bidding and auction process. To maintain and continue uninterrupted ordinary course operations during the Chapter 11 Cases, the Debtors have filed a variety of “first day” motions seeking approval from the Court for various forms of customary relief, including authority to: (a) continue using their existing cash management system, (b) pay prepetition wages, compensation and employee benefits, (c) maintain existing insurance policies and pay related obligations, (d) pay certain prepetition taxes, (e) provide adequate assurance of payment to their utility providers, (f) pay prepetition claims of certain critical vendors, and (g) use cash collateral and enter into a debtor-in-possession financing facility.
Assuming the Company is able to successfully complete the Auction process, the Company anticipates that it will delist from Nasdaq and deregister its common stock under the Securities Exchange Act of 1934, as amended.
The Company cautions that trading in its securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for the Company’s securities may bear little or no relationship to the actual recovery, if any, by holders of the Company’s securities in the Chapter 11 Cases. Based upon the current proceeds available from the Asset Sale (as defined below) pursuant to the Purchase Agreement (as defined below), after payment to the Lenders (as defined below), the other secured lenders and the payment of other liabilities, there will not be any proceeds available for distribution to the holders of the Company’s common stock.
DIP Facility
To ensure access to sufficient liquidity throughout their Chapter 11 Cases, the Debtors filed a motion seeking authority to execute, enter into and perform under a debtor-in-possession financing facility on the terms set forth in that certain Senior Secured Superpriority Priming Debtor-in-Possession Credit Facility Term Sheet (the “DIP Term Sheet”), by and among the Company, as borrower (the “Borrower”), the Lenders (as defined therein) party thereto, and HB Fund LLC, as the “DIP Lender,” a form of which was filed with the Court on the Petition Date. The DIP Term Sheet provides for a senior secured super-priority priming debtor-in-possession term loan financing facility (the “DIP Facility”) in an aggregate amount of up to $12.0 million, which will be funded in two tranches, as follows: (i) $5.5 million will be funded on a weekly basis equally over four weeks from the date of Court approval of the DIP Facility on an interim basis (“Tranche A”) and (ii) $6.5 million (“Tranche B”) will be funded upon the satisfaction of certain pre-specified conditions in the DIP Term Sheet. The DIP Facility and the loans thereunder will be subject to a borrowing base and become available upon the satisfaction of customary conditions precedent thereto, including the entry of an order of the Court approving the DIP Facility on an interim basis.
The proceeds of the DIP Facility will be used by the Company in accordance with a Court-approved budget for working capital and general corporate purposes of the Debtors and to pay fees, costs and expenses related to the DIP Facility.
The maturity date of the loans to be made under the DIP Facility is the earliest to occur of: (i) April 3, 2020, (ii) the date which is thirty (30) days following the entry of the Interim Order if the Bankruptcy Court has not entered the Final Order on or prior to such date; (iii) the date the DIP Facility is accelerated as a result of an Event of Default (as defined in the DIP Term Sheet), (iv) the date of consummation of a confirmed plan of reorganization in the Chapter 11 Cases or (v) the filing of a motion by the Debtors seeking dismissal of any or all of the Chapter 11 Cases, the dismissal of any or all of the Chapter 11 Cases, the filing of a motion by the Debtors seeking to convert any or all of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy
Code, the conversion of any or all of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code or the appointment or election of a trustee under chapter 11 of the Bankruptcy Code, a responsible officer or examiner with enlarged powers relating to the operation of the Debtors’ business (powers beyond those set forth in section 1106(a)(3) and (4) of the Bankruptcy Code) under section 1106 of the Bankruptcy Code. The outstanding principal on both the Tranche A and Tranche B loans under the DIP Facility will bear interest per annum at a rate of 18%, which interest shall be paid in kind by capitalizing the amount thereof and adding it to outstanding principal. The DIP Facility will be subject to a $200,000 origination fee and be subject to commitment fees in an amount equal to 12.5% for the commitment related to the Tranche A Loans and 12.0% for the commitment related to the Tranche B Loans.
Pursuant to the terms of the DIP Term Sheet, the other Debtors, as subsidiary guarantors (each, a “Guarantor” and collectively with the Borrower, the “DIP Loan Parties”) will guarantee the obligations of the Borrower under the DIP Facility. Subject to certain exceptions, the DIP Facility will be secured by a first priority perfected security interest in all of the assets of the Borrower. The security interests and liens are subject only to certain carve-outs and certain permitted liens.
The DIP Facility is subject to certain customary affirmative and negative covenants and events of default as set forth in the DIP Term Sheet.
The foregoing description of the DIP Term Sheet does not purport to be complete and is qualified in its entirety by reference to the DIP Term Sheet itself.
Stalking Horse Asset Purchase Agreement
On February 9, 2020, Zealand Pharma A/S, (the “Purchaser”), and the Company and certain of its subsidiaries (together, the “Sellers”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which, subject to the conditions described below, the Purchaser agreed to purchase substantially all of the assets of the Company (such assets, the “Assets,” and such transaction, the “Asset Sale”). The consideration for the Asset Sale provided for in the Purchase Agreement is comprised of (i) $23 million in cash and (ii) the assumption of certain liabilities of the Debtors, all as set forth in the Purchase Agreement.
The Sellers have sought the Court’s approval to enter into the Purchase Agreement and of the Purchaser as the “stalking horse” bidder in an auction of the Assets under Section 363 of the Bankruptcy Code (the “Auction”). If approved by the Court as the stalking horse bidder, the Purchaser’s offer to purchase the Assets, as set forth in the Purchase Agreement, would be the standard against which any other bids to purchase any or all of the Assets would be evaluated.
The consummation of the Asset Sale is subject to the Purchaser being selected as the winning bidder at the Auction, the performance in all material respects of each party’s obligations under the Purchase Agreement, the Court’s authorization and approval of the Asset Sale and certain customary conditions precedent as specified in the Purchase Agreement. The Purchase Agreement also provides for expense reimbursement (up to a specified cap) payable to the Purchaser in the circumstances specified in the Purchase Agreement. The Purchase Agreement also contains a $690,000 break-up fee.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, a copy of which will be filed as an exhibit to the Company’s next periodic report or as part of an amendment to this Current Report on Form 8-K.
The Debtors’ filings with the Bankruptcy Court are available to the public at the offices of the Clerk of the Bankruptcy Court or the Bankruptcy Court’s web site (http://www.deb.uscourts.gov) or may be obtained through private document retrieval services. The Company undertakes no obligation to make any further public announcement or issue any update with respect to the documents filed with the Bankruptcy Court or any matters referred to therein.
Additional information about this process, as well as court filings and other documents related to the reorganization proceedings, is available through the Company’s claims agent, Kurtzman Carson Consultants, at http://www.kccllc.net/valeritas. Information contained on, or that can be accessed through, such web site or the Bankruptcy Court’s web site is not part of this Current Report on Form 8-K.
On February 9, 2020, the Company issued a press release announcing the filing of the Bankruptcy Petitions and Purchase Agreement, as well as related corporate actions taken in connection therewith. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
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Item 2.04
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Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
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Acceleration of Term Loan and Senior Subordinated Note
The filing of the Bankruptcy Petitions constitutes an event of default that accelerated the obligations of the Company and certain of its subsidiaries under the documents governing each of:
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the Company’s Term Loan with CRG (as defined below); and
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the Company’s $5.0 million senior subordinated promissory note with WCAS Capital Partners IV, L.P. (the “Senior Note” and together with the Term Loan, the “Debt Instruments”).
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The Debt Instruments provide that as a result of the filing of the Bankruptcy Petitions, the principal and accrued interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Debt Instruments are automatically stayed as a result of the filing of the Bankruptcy Petitions, and the creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.
Settlement Agreement
As previously disclosed, on September 30, 2019, the Company entered into a second amendment (the “Second Amendment”) to its $50.0 million term loan (the “Term Loan”) with Capital Royalty Group and certain of its affiliates (collectively, “CRG”). In connection with the Second Amendment, approximately $22.7 million of the outstanding balance under the Term Loan was exchanged for approximately 15.5 million shares of the Company’s newly created Series B Preferred Stock (the “Exchange”).
On February 7, 2020, CRG issued a notice of default with respect to the Term Loan. CRG alleged that (i) certain Events of Default (as defined in the Term Loan) had occurred and were continuing (collectively, the “Designated Defaults”) and (ii) they possessed certain claims and causes of action against the Company related to the Exchange. While the Company disputes both the occurrence and continuation of the Designated Defaults and CRG’s claims related to the Exchange, in order to advance the Company’s interests under the Chapter 11 Cases, the Company and CRG determined in good faith and on an arm’s-length basis to enter into that certain settlement agreement, dated February 9, 2019 (the “Settlement Agreement”), to settle these disputes.
Under the Settlement Agreement, in exchange for the release of all claims related to the Designated Defaults and the Exchange and other consideration, CRG will receive, among other things, (A) an allowed secured claim against each of the Debtors in an aggregate principal amount equal to $20.0 million (representing the outstanding principal amount of the Term Loan as of December 31, 2019, exclusive of the back-end facility fee, plus a portion on account of the settlement of any claims and causes of action related to the Exchange); and (B) an allowed general unsecured claim against each of the Debtors in an amount equal to $18.825 million (representing the settlement of any claims and causes of action related to the Exchange), which claim shall be classified with all other general unsecured claims in any chapter 11 plan of reorganization or liquidation proposed or supported by the Company.
Pursuant to the Settlement Agreement, the Company will file with the Court a motion seeking approval of the Settlement Agreement within two days of the Petition Date.
The foregoing description of the Settlement Agreement does not purport to be complete and is qualified in its entirety by reference to the Settlement Agreement, a copy of which will be filed with the Court on or before February 11, 2020.