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September 4, 2019 − uBiome, Inc. (“uBiome” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, case number 19- 11938. The Debtor, a "leading" microbial genomics company, is represented by Michael R. Nestor of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Goldin Associates, LLC as restructuring advisors ("Goldin"), (ii) GLC Advisors & Co., LLC and GLCA Securities, LLC (together, "GLC") as investment banker and (iii) Donlin Recano & Company, Inc. as claims agent.
The Debtors’ petition notes between 200 and 1,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Cigna ($2.1mn refund claim), (ii) United Health Care ($2.1mn refund claim) and (iii) Horizon Blue Cross Blue Shield of NJ ($1.4mn refund claim). Law firms caught up in the Debtor's list of top 30 unsecured creditors include (i) Covington & Burling ($313k), (ii) Arnold & Porter ($311k), (iii) Kilpatrick Townsend ($296k), (iv) Ramsey & Ehrlich ($274k), (v) Orrick ($233k) and Mintz Levin ($67k).
Objectives of the Chapter 11 filing
In a press release announcing the filing, the Debtor stated it had filed its Chapter 11 "to facilitate an orderly and efficient sale of its ongoing business, products in development, technology, and lab capabilities. The Company continues to operate while it conducts active discussions with several interested parties, and is working to finalize terms and announce asset purchase agreement(s) in the coming months. uBiome plans to complete the intended sale process under Section 363 of the U.S. Bankruptcy Code within roughly 75 days. Subject to the Court's approval, potential buyers will have the opportunity to submit offers to acquire assets associated with the Company's product lines, testing labs, intellectual property, and data resources individually or in combination with one another.
In a declaration in support of the Chapter 11 filing (the “Solsvig Declaration”) [Docket No. 2], Curtis G. Solsvig III, the Debtor’s Acting Chief Executive Officer, stated: “The Debtor filed this Chapter 11 Case to provide an innovative business with a fresh start under new management, and to preserve approximately 100 jobs through a court-supervised sale process that is intended to maximize the value of the Debtor’s assets for the benefit of all stakeholders."
The overarching sales message is that the Debtor's intellectual property and the scientific basis for its products and services is sound and that its problems stem almost entirely from poor, and probably criminal, management. For the moment, the Debtor's sales/marketing efforts are focused on a going concern sale with the Solsvig Declaration adding: "The new Board and management team has been working diligently to explore financial and operational alternatives and to prepare uBiome for a restructuring. GLC…has been diligently marketing uBiome’s assets to potential interested parties in an effort to secure an investor to finance the Restructuring…to provide a debtor-in-possession financing facility and/or to act as a stalking horse bidder in a court-supervised sale process." Mr. Solsvig, a Managing Director at Goldin, has been with the Debtor since late May of 2019.
The Debtor has entered into a debtor-in-possession (“DIP”) financing agreement with pre-petition lender Silicon Valley Bank (“SVB”) further to which the Debtor will have access to up to $8.0mn in new money borrowings that the Debtor believes will sustain its operations through the completion of a section 363 sales process.
Pre-petition Capital Structure
- Loan and Security Agreement. The Debtor, as borrower, and SVB, as lender, are parties to a Loan and Security Agreement, dated as of February 24, 2017, with obligations under the facility secured by first priority liens on certain of the Debtor’s assets, including, but not limited to, all goods, accounts, equipment, inventory, proceeds of intellectual property, contract rights, leases, general intangibles, commercial tort claims, cash, deposit accounts and letters of credit. As of the Petition Date, approximately $5.83mn remains outstanding under the facility.
- Unsecured Debt. The Debtor estimates that, as at the Petition date, its unsecured trade and other operational debt is approximately $3.5mn, mainly comprised of legal fees and claims held by vendors that were used for the clinical business.
- Contingent Liabilities. These include (i) inadvertent billings to Tricare, Medicare and Medicaid for certain tests, which may total approximately $4.0mn, (ii) potential obligations to private pay insurers for which the Debtor has received over $10.0mn of refund requests related to the Debtor’s prior clinical practice and (iii) $[indeterminate] potential fines for civil and criminal penalties resulting from the ongoing Investigation (as defined below) into the Debtor’s “highly problematic” business practices.
The Debtor has been through three rounds of venture capital financing further to which 8VC and its affiliates collectively own approximately 21.7% of uBiome’s shares across two classes, Series B preferred and Series C Preferred. In addition, Andreessen Horowitz Fund and its affiliates own approximately 11.06% of total shares across Series A Preferred and Series B Preferred.
2 Subject to that certain Stipulation and Agreement, executed on June 19, 2019, pursuant to which this shareholder, among other things, granted a proxy to Eight Partners VC Fund I, L.P.
The Debtor also issued common shares and common class F shares. On June 19, 2019, uBiome and the Founders entered into a stipulation and agreement, among other things, waiving their rights as shareholders, and, among other things, granting a proxy of their voting rights to Eight Partners VC Fund I, L.P. The Founders each owned approximately 10.67% of total shares.
Events Leading to the Chapter 11 Filing
The Solsvig Declaration provides the following background: "The Founders [Drs. Jessica Richman and Zachary Apte] implemented certain business strategies with respect to the SmartX products that were highly problematic, contained significant operational (but not scientific) flaws and, in some instances, were of questionable legality. These issues included improper insurance provider billing practices, improper use of a telemedicine physician network (known as the External Clinical Care Network), overly aggressive and potentially misleading marketing tactics, manipulation of customer upgrade testing, and improper use of customer inducements.
Moreover, certain information presented to potential investors during the three rounds of capital raise my have been incorrect and/or misleading. Although uBiome believes the science and technology behind uBiome’s business model in this developing area is sound, these issues – among others – have resulted in significant legal exposure for the Debtor.
As a result of the foregoing and other problematic business practices, the Federal Bureau of Investigation (the ‘FBI’) opened an investigation on April 26, 2019. The FBI and other federal and state agencies executed a search warrant on the Debtor’s San Francisco headquarters and obtained various files, business records and hardware. That same day, the United States Attorney for the Northern District of California issued a subpoena to the Debtor for certain records and documents. Since these events, the Debtor, the Board, and the Debtor’s management and advisors have been fully cooperating with the investigating authorities, including the U.S. Department of Justice and the Securities and Exchange Commission, regarding their ongoing investigations. The Debtor intends to continue its cooperation with these authorities despite the filing of this Chapter 11 Case."
Board and Management Changes
At the time the FBI search warrant was executed, the Debtor’s board of directors (the “Board”) was composed of the Founders, Kimmy Scotti, a partner of the venture capital investor 8VC Entrepreneurs Fund I, L.P. and 8VC Fund I, L.P. (together “8VC”), which was an early and significant investor in uBiome, Witt Wisebram, an independent director and one of uBiome’s initial creators, and Dr. Joe DeRisi, M.D., a prominent researcher in the microbiome space. Of this Board, only Ms. Scotti now remains.
Within forty-eight hours of the execution of the FBI search warrant, the three independent Board members – Ms. Scotti, Dr. DeRisi and Mr. Wisebram – created a special committee (the “Special Committee”) to investigate the allegations described above, and thereafter retained Milbank LLP to assist and advise the Special Committee in carrying out an investigation into these matters (the “Investigation”). On April 28, 2019, the Special Committee removed the Founders from their management roles and placed them on paid suspension pending further action by the Special Committee, and also suspended all SmartX business operations. In their place, on April 28, 2019, the Special Committee appointed John Rakow, the Debtor’s then-current General Counsel, as Interim Chief Executive Officer. On or about April 28, 2019, Dr. DeRisi resigned from the Board and the Special Committee, and on or about May 9, 2019 and Mr. Wisebram also resigned from the Board and the Special Committee.
On June 19, 2019, the Founders tendered their resignations from the Board and executed a Stipulation and Agreement pursuant to which the Founders waived certain rights as majority shareholders of the Debtor and granted an 8VC affiliated entity proxy rights with respect to the Founder’s shareholders rights. Mr. Rakow continued as Interim CEO until his resignation on June 28, 2019.
Effective July 2, 2019, the Special Committee removed each Founder as an officer, employee and/or from any other position with the Debtor and stopped compensating them.
The Debtor has also recently installed two new independent directors – D.J. (Jan) Baker and Spencer Wells. In addition to the installation of Messrs. Baker and Wells to the Debtor’s 3-person Board of Directors, the Debtor replaced former management with the Acting CEO Solsvig and two further secondees from Goldin; Robin Chiu who serves as as Acting Chief Financial Officer and Karthik Bhavaraju who serves as Acting Chief Operations Officer.
Debtor's Intellectual Property
The Debtors believe that they have valuable intellectual property assets which will drive interest in a sale of their business. To date, marketing efforts do seem to be in respect of a single going concern sale and not a piecemeal sale of IP rights. The Debtor states: “In assessing the Debtor’s strategic business options, several things have become clear. The Debtor has substantial and valuable Intellectual Property (‘IP’) and other commercial assets.”
These assets include:
- The Debtor’s San Francisco lab, “which is certified by both the State of California and the Center for Medicare and Medicaid Services under the Clinical Laboratory Improvement Amendments (‘CLIA’) regulations and accredited by the College of American Pathologists (‘CAP’). Only 3% of labs in the U.S. have the CLIA and CAP designations, giving uBiome a significant competitive advantage, a path to monetize its lab capabilities, and a barrier to entry which is expensive to duplicate.”
- The Debtor’s Santiago, Chile R&D facility and team which “has deep experience and proprietary know-how with technologies related to gene sequencing of microbial samples, bioinformatics analysis to analyze and identify associations between microbes and health conditions, developing machine-learning based analytics for medical conditions, and automatic lab processes for high volume sample testing.”
- A strong medical affairs team with research expertise in various aspects of the human microbiome.
- The Debtor’s engineering team in Argentina “with deep expertise in creating production software for biotechnology applications, and laboratory information management software integrating wet and dry lab processes.”
- A strong portfolio of documented associations between specific microbes and disorders, including HPV, STD’s, and IBS/IBD.
- In-house expertise in the form of trade secrets with respect to various gene sequencing technologies.
- The largest sample data base in the industry of nearly 300,000 samples, over 8,000 of which have metadata.
- A portfolio of over 45 patents, with particular strength in wet-and dry-lab methodology and associations demonstrating the Debtor’s strength with academic and corporate partners.
- A highly qualified, experienced team “with deep academic training and commercial experience that would take significant time and resources to re-assemble.”
- A strong reputation, despite the Investigation, in the industry and academia for the quality of its people and capabilities.
About the Debtor
Founded in 2012 by Drs. Jessica Richman and Zachary Apte (together, the “Founders”), and initially crowdfunded on the Indiegogo platformu, Biome is a leader in "microbial genomics." uBiome "combines its patented proprietary precision sequencing™ with machine learning and artificial intelligence to develop wellness products and therapeutic targets. uBiome has filed for over 250 patents on its technology, which includes sample preparation, computational analysis, molecular techniques, as well as diagnostic and therapeutic applications."
The scientific basis for uBiome’s analytical process is the DNA sequencing of the microbe, which are microscopic organisms that exist throughout nature and are present in many parts of the human body. For example, the microbes in the gastro-intestinal (“GI”) system are an essential part of the digestive process. Using advanced DNA sequencing and utilizing the world’s largest microbiome database, the Debtor has historically offered a variety of products to patients and consumers to analyze the DNA of their microbiomes, including “Explorer,” “SmartGut,” and samples from home, complete a survey, and within a few weeks, the customer receives his or her results by email or on the web portal.
According to the Debtor, "uBiome's platform has been used by hundreds of thousands of consumers, patients, and doctors and more than 200 research institutions around the world, including the US Centers for Disease Control (CDC), US National Institutes of Health (NIH), Harvard University, Stanford University, the Massachusetts Institute of Technology (MIT), University of California, San Francisco, Oxford University, and the University of Sydney."
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