CASE SUMMARY: Nuvectra to Run Sale Process, Has Ceased Sales of Core Commercial Product Algovita (2024)

Relevant Documents:
Voluntary Petition
20 Largest Unsecured Creditors
First Day Declaration
Cash Collateral Motion
First Day Hearing Notice
Press Release

Nuvectra Corporation, a Plano, Texas-based neurostimulation medical device company, filed for chapter 11 protection on Tuesday in the Bankruptcy Court for the Eastern District of Texas, reporting more than $10 million in both assets and liabilities. The debtor seeks to run a sale process for substantially all of its assets, supported by its prepetition secured lenders - Oxford Finance LLC and Silicon Valley Bank - which have agreed to the use of cash collateral.

The first day hearing is set for Monday, Nov. 18, at 12 p.m. ET.

The debtor’s core product is Algovita, a spinal cord stimulation system used to treat certain forms of chronic pain. “Despite the Debtor’s sale efforts,” John Stuart of Alvarez & Marsal says in the first day declaration, revenue for the third quarter of 2019 fell 28% compared with the same quarter in 2018, which the company blames on product performance issues with certain components of Algovita, concern among physicians about Nuvectra’s financial condition, loss of sales personnel, competitive pressures and “a general slowdown in the [spinal cord stimulation] market.” As of the petition date, Nuvectra has ceased product sales of Algovita. The drop in sales has inhibited the debtor’s ability to meet quarterly minimum revenue financial covenants under its prepetition credit facility, resulting in an event of default.

The company engaged Piper Jaffray in July with respect to a refinancing of its secured credit facility, but these efforts were unsuccessful. Piper Jaffray then began a marketing process in August, contacting 50 potential parties with respect to a sale or merger of the company as a whole, or Algovita or Virtis (its neurostimulation technology platform currently in an FDA approval process), on a standalone basis. However, these efforts have not yielded any transactions, the debtor says, citing “significant losses, negative cash flow, declining sales and cash, and the on-going FDA approval process of Virtis, combined with [Nuvectra’s] public company structure” as “factors in the failure of the strategic alternative process.”

The company’s prepetition capital structure includes:

• Secured Debt:
  • Oxford Finance LLC and Silicon Valley Bank:
    • Term loans in an aggregate maximum principal amount of $45 million, fully funded and comprised of a $27.5 million term loan A commitment, $12.5 million term loan B commitment and $5 million term loan C commitment. The loans were amended a few times, including that in February 2018, term loan A and term loan B were funded for aggregate gross proceeds of $40 million, of which $27.5 million was applied to repay the outstanding balance of previously-outstanding term loans. “As part of this transaction,” the debtor says that it “determined that it met the criteria for the transaction to be accounted for as a modification in which any unamortized debt discount is amortized over the remaining term of the exchanged or modified debt.”

• Equity: Prior to the petition date, Nuvectra’s stock was traded on the NASDAQ Global Market under the ticker symbol NVTR. According to the debtor’s 10-Q for the quarter ended June 30, 2019, as of July 23, 17,885,297 shares of the debtor’s common stock were issued and outstanding as of July 23, 2019, and no shareholder owned more than 5% of the shares.

The term loans are secured by a first lien on substantially all of the debtor’s assets, including its real property in Blaine, Minn., but excluding intellectual property (other than accounts receivable or proceeds of intellectual property). The debtor’s intellectual property is subject to a negative pledge. In addition, the debtor must maintain its primary operating and investment accounts with Silicon Valley Bank.

Just prior to the commencement of the case, on Nov. 12, the debtor and the secured lenders entered into an agreement through which the debtor prepaid $35 million of the principal outstanding under the term loans.

The debtor’s audited financial statements show cash flow from operating activities as a negative $44.6 million for fiscal 2017 and negative $48.1 million for fiscal 2018. To fund ongoing operating losses and declining cash balances, during February 2018 and September 2018, Nuvectra completed follow-on common stock offerings, generating net proceeds of approximately $88.4 million. In December 2018, the debtor generated $5 million in cash proceeds from the divestiture of former subsidiary NeuroNexus. “Despite these cash infusions,” the debtor’s cash and cash equivalents declined from $99.2 million as of Dec. 31, 2018 to $56.7 million as of Sept. 30, 2019.

The debtor used to be a subsidiary of Integer Holdings, formerly known as GreatBatch, the exclusive manufacturer of Algovita and certain of its components, until Integer spun off Nuvectra in March 2016. The debtor has incurred significant operating losses and negative cash flows since the spin-off and says it expects to continue to incur operating losses for the foreseeable future. GreatBatch is the debtor’s second largest unsecured creditor with a $2.2 million claim.

In addition to its Algovita sales troubles, the company says its profitability and liquidity have been hampered by the pricing terms and volume commitments of its exclusive supply agreement with Integer. These losses have resulted in significant declines in its cash balances, despite having raised additional funds through the issuance of common stock and the sale of NeuroNexus.

The debtor says its operations have also been adversely impacted by extensions of the FDA’s approval process of Virtis, which the debtor submitted for approval in January 2017 and now expects FDA approval “sometime in the first half of 2020.” The typical 180-day review process was reset after the debtor received requests from the FDA and the European regulator, CE Mark, for additional information. “Given the low volume of expected sales in the European Union in the near term,” the debtor says, it is evaluating the cost-effectiveness of responding to the European authorities.

The debtor is represented by Norton Rose Fulbright US, as bankruptcy counsel, Dorsey & Whitney as general counsel and Alvarez & Marsal North America as restructuring advisor. KCC is the claims agent. The case has been assigned to Judge Brenda T. Rhoades (case number 19-43090).

Background

Nuvectra is a neurostimulation medical device company with respect to chronic conditions. Its Algovita Spinal Cord Stimulation system is the company's first offering, approved for the treatment of chronic intractable pain of the trunk and/or limbs. The company’s technology platform also has capabilities under development to support other indications, the debtor says, such as sacral neuromodulation for the treatment of overactive bladder and deep brain stimulation for the treatment of Parkinson’s disease. Revenues for the third quarter ending Sept. 30 were approximately $9.3 million as compared to $12.9 million for the comparable quarter in 2018, or a 28% decline.

Prior to the tax-free spinoff of Nuvectra in March 2016, Integer contributed $75 million of cash to the debtor to fund its startup operations and commercialize Algovita. In connection with the spin-off, the debtor also entered into a loan and security agreement with its existing lenders to provide for additional funding. On Dec. 31, 2018, Nuvectra completed the divestiture of its wholly-owned subsidiary, NeuroNexus Technologies, which it sold to NEL Group, Inc. for gross cash proceeds of $5 million, subject to adjustments for various assets and liabilities. The debtor recognized a loss of approximately $300,000 on the sale. Then on July 2, 2019, the debtor merged with its remaining subsidiaries, Algostim and PelviStim. The debtor says these mergers “had no effect” on its operations or financial results.

In August 2019, Nuvectra launched a restructuring plan intended to cut costs by $1.2 million in 2019 and $5.8 million on an annualized basis in 2020 and beyond. To that end, administrative expenses have been reduced through consolidation of corporate and support functions, “as well as streamlined research and development and sales and marketing expenses to focus resources on key strategic growth areas,” the debtor says. “The Debtor has been primarily focusing on profitability instead of rapid revenue growth, increased market share and other metrics each of which relate to, but do not necessarily drive profit.”

According to a press release, the company says it is committed to supporting existing patients using Algovita, but that it is suspending support of future implants “until the Company’s path forward is determined,” and “recommends physicians cease any new implantations, as well as trial procedures and clinical studies in progress, until that time.”

The debtor's largest unsecured creditors are listed below: