Sale of Luminostics, Inc. d/b/a Clip Health

Gerbsman Partners (gerbsmanpartners.com) has been retained by Luminostics, Inc. d/b/a Clip Health (“Clip” or “Clip Health” or the company), (cliphealth.com) to solicit interest for the acquisition of all, or substantially all, of the assets of Clip Health.   Please see attached: Exhibit A, two-way NDA;  Exhibit B Equipment List; Exhibit C Patent and Trademark List; Exhibit D, Detail Sales Letter with company, product and technical information.

Clip Health is a Fremont, CA-based company that has built a scale-ready, validated, mobile app connected, decentralized-diagnostics platform—with multiple biosensing modalities—for the accurate detection or measurement of viruses, bacteria, proteins, enzymes, hormones, drugs, small molecules, bacteria, and hapten-tagged DNA/RNA from respiratory/genital swabs, blood & blood products, saliva, and urine, also usable for veterinary, food safety, industrial, and environmental applications.

The acquisition of Clip Health’s assets will enable immediate access to a broad portfolio of proprietary technology, comprising 3 issued patents, 4 pending patents, and trade secrets in software and process know-how. These patents and trade secrets cover labeling chemistry composition and methods of use, sample preparation, data acquisition/analysis for sample processing, and manufacturing. Also available is ready access to validated, customized equipment (see Exhibit B) and proprietary tooling to enable high-volume manufacturing of test kits; these assets are currently under an equipment lease. 

Clip Health’s funding total, not including product revenue, is $53M. This includes $3.5M in venture capital funding from prominent Silicon Valley investors including Khosla Ventures and Y Combinator; $43M in service contract revenue from the National Institutes of Health (NIH), Biomedical Advanced Research and Development Authority (BARDA), and the Department of Defense (DoD); $3M in NIH grants; $3.5M in strategic partnership revenues. No secured debt obligations.

The Clip Health technology platform’s unique combination of…

1. accuracy (97.3% average accuracy in 3 clinical studies with ~900 participants; 100x lower LoD vs. conventional rapid testing methods) and speed (5 to 15 minutes from sample to result);
2. usability in home and non-laboratory settings (ease-of-use by lay users validated in a multi-side study with 300 participants aged 14 to 89); 
3. low unit cost (~$1 test COGS and ~$30 hardware COGS); and 
4. analytical versatility (immunoassays with proprietary “glow in the dark” persistent luminescence chemistry, colorimetry, and fluorescence readout; platform expandable to electrochemistry)

…is unmatched amongst mature biosensing technologies globally. Tests based on this platform have been manufactured at-scale already (>700,000 units produced compliant with FDA 21 CFR Part 820) on validated manufacturing lines and other infrastructure readily usable for future tests. Clip Health’s technical leadership stems from patented inventions in nanomaterials chemistry and biosensing, along with proprietary know-how in disciplines ranging from electromechanical design to machine learning and AI. 

The 1st generation of Clip’s platform received FDA EUA authorization in the form of the Clip COVID Rapid Antigen Test; this product was distributed nationwide in 2021 and 2022 for CLIA-waived point-of-care use, e.g., in drive-through testing centers, primary and urgent care clinics, and employer settings. 

The 2nd generation of Clip’s technology platform, the consumer-focused Core Analyzer Platform, which is >10x cheaper than Clip’s 1st generation platform while improving performance, has been validated for accuracy and at-home usability in a prospective clinical study. The Core Analyzer is a portable, palm-sized piece of hardware—powered by AA batteries and re-usable 1000s of times—that works in concert with a smartphone app. It mates with single-use cartridges containing Clip’s biosensing chemistry specific to the target being measured. The Clip Health iOS/Android app guides a user through the testing, provides a result, and serves as the gateway to personalized treatment decisions, EHR/LIMS integrations, and other follow-up testing- or monitoring-led care delivery for acute and chronic disease.

Clip Health highlights

For-sale assets (products, IP, infrastructure):

• Patented persistent luminescent strontium aluminate “glow in the dark” nanoparticle technology that can enable >100-fold lower limits of detection (LoD)—all else being equal—compared to colorimetric lateral flow assays that incorporate colloidal gold labels. Proven multiple times, e.g., Chlamydia trachomatis and Neisseria gonorrhoeae assays using Clip’s glow-in-the-dark technology have an LoD of ~250 genome-equivalents/mL (~20 femtomolar detection of LPS antigen). Chlamydia assay validated in ~400-participant clinical studies to be 98% accurate compared to Cepheid GeneXpert. 
• Two design-locked, transferred-to-manufacturing lateral flow assays on the Core Analyzer platform for SARS-CoV-2 detection (~5-minute test) and multiplexed detection and differentiation of SARS-CoV-2, Flu A, and Flu B (~15-minute test); other in-development assays besides chlamydia/gonorrhea include HIV p24 antigen, and NT-proBNP.
• Capital equipment for high-volume automated manufacturing of lateral flow assays, validated operationally in 2022 under a Department of Defense inspection, with a maximum annual capacity of >40 million test kits/year; key know-how on efficiently setting up manufacturing lines using this equipment.
• IP assets (3 issued patents, 4 pending patents, and trade secrets) covering:
  • Granted patents in US, EU, China, with broad claims (and continuation claims under prosecution) to “glow in the dark” sensitivity-enhancing technology co-invented by Clip Health co-founder/CTO (these patents are part of active exclusive license from the University of Houston, with license readily assignable to Clip Health’s acquirer)
  • Core Analyzer hardware (production-ready) for high-sensitivity multiplexing and precise quantitation with CVs under 10%, with built-in detection modalities compatible with persistent luminescence, colorimetry (can digitize existing visual LFAs for enhanced usability and lower FDA risk), and chemiluminescence; easily upgradable compatibility with fluorescent quantum dots, europium (Eu³⁺) labels, and electrochemistry
  • Sample preparation methods and devices including for analyte extraction from swabs (nasal/nasopharyngeal, genital, etc.) via mechanically actuated sequential fluid dispensing and metering mechanisms
  • Proprietary libraries of signal processing algorithms for quantitative image processing, deployable on iOS/Android mobile devices or the cloud, that enable precise quantitation, positional registration of critical features, background correction, kinetic analysis (i.e. time-series data processing), noise reduction, and other features which enhance accuracy
  • Machine learning models for enhanced classification accuracy (result interpretation) compared to conventional threshold-based algorithms  

Corporate history & team: 

• $53M funding total. $3.5M in venture capital funding from prominent Silicon Valley investors including Khosla Ventures and Y Combinator; $43M in contract revenue from NIH RADx program, BARDA, and DoD; $3M in NIH grants; $3.5M in strategic partnership revenues. No secured debt obligations.
• Founded in 2014 in Houston, TX by Bala Raja and Andrew Paterson to commercialize their PhD research. Raised seed financing in November 2016 and capital-efficiently de-risked technology through STD test development, with a small team, from 2017 to early 2020, culminating in successful clinical study. 
• COVID-19 focus beginning mid-2020 led to significant funding followed by commercial launch and nationwide distribution of 1st product, EUA-approved rapid antigen test for point-of-care use, in 2021. This was followed by the ground-up design, development, and validation in 2021-2022 of the 2nd generation, consumer-focused Core Analyzer platform followed by an FDA EUA submission for an over-the-counter (OTC) COVID-19 test. FDA de-prioritization of this OTC EUA resulted in an attempted pivot in 2023 to product focus on at-home heart failure management; fundraising attempts to support further development failed.  
• Summary highlights of current executive team’s backgrounds:
  • Bala Raja, CEO/founder — PhD in Chem/BioE with focus on bacterial diagnostics & microfluidics; Y Combinator alum
  • Andrew Paterson, CTO/founder — PhD in Chem/BioE; co-inventor of Clip’s core “glow in the dark” technology; Y Combinator alum
  • Cynthia Merrell, VP of QA/RA — 30-year medical device veteran with >15 FDA/CE approvals in HW/SW/chemistry products
  • Annie McKenna, VP of Clinical & BizOps — led ops-heavy health initiatives in Africa & India; Harvard BA & Hopkins MPH
  • Rahil Jain, Head of Product Management — PM in Health at Apple; 2x consumer electronics founder; PhD in Electrical Engineering
  • Jeremy Walker, Head of Assay Development — technical or team lead on 7 commercialized point-of-care rapid tests; inventor on 6 patents

Clip Health currently has no recurring revenues from product sales or collaborations. Its value lies in the company’s assets produced by its proprietary technology, along with key Intellectual Capital

LEGAL NOTICE 

The information in this memorandum does not constitute the whole or any part of an offer or a contract.

The information contained in this memorandum relating to Clip Health’s assets has been supplied by Clip Health.  It has not been independently investigated or verified by Gerbsman Partners or its agents.

Potential purchasers should not rely on any information contained in this memorandum or provided by Clip Health or Gerbsman Partners (or their respective staff, agents, and attorneys) in connection herewith, whether transmitted orally or in writing as a statement, opinion, or representation of fact. Interested parties should satisfy themselves through independent investigations as they or their legal and financial advisors see fit.

Clip Health, Gerbsman Partners, and their respective staff, agents, and attorneys, (i) disclaim any and all implied warranties concerning the truth, accuracy, and completeness of any information provided in connection herewith and (ii) do not accept liability for the information, including that contained in this memorandum, whether that liability arises by reasons of Clip Health’s or Gerbsman Partners’ negligence or otherwise. 

Any sale of the Clip Health Assets will be made on an “as-is,” “where-is,” and “with all faults” basis, without any warranties, representations, or guarantees, either express or implied, of any kind, nature, or type whatsoever from, or on behalf of Clip Health or Gerbsman Partners.  Without limiting the generality of the foregoing, Clip Health and Gerbsman Partners and their respective staff, agents, and attorneys, hereby expressly disclaim any and all implied warranties concerning the condition of the Clip Health Assets and any portions thereof, including, but not limited to, environmental conditions, compliance with any government regulations or requirements, the implied warranties of habitability, merchantability, or fitness for a particular purpose.

This memorandum contains confidential information and is not to be supplied to any person without Gerbsman Partners’ prior consent. This memorandum and the information contained herein are subject to the non-disclosure agreement attached hereto as Exhibit A.

 THE BIDDING PROCESS FOR INTERESTED BUYERS

Interested and qualified parties will be expected to sign a nondisclosure agreement (attached hereto as Exhibit A) to have access to key members of the management and intellectual capital teams and the due diligence “war room” documentation (the “Due Diligence Access”).  Each interested party, as a consequence of the Due Diligence Access granted to it, shall be deemed to acknowledge and represent (i) that it is bound by the bidding procedures described herein; (ii) that it has an opportunity to inspect and examine the Clip Health Assets and to review all pertinent documents and information with respect thereto; (iii) that it is not relying upon any written or oral statements, representations, or warranties of Clip Health, Gerbsman Partners, or their respective staff, agents, or attorneys; and (iv) all such documents and reports have been provided solely for the convenience of the interested party, and neither Clip Health nor Gerbsman Partners (or their respective, staff, agents, or attorneys) makes any representations as to the accuracy or completeness of the same.  

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the Clip Health Assets.  Sealed bids must be submitted so that the bid is actually received by Gerbsman Partners no later than Friday, June 9, 2023 at 3:00 pm Pacific Time (the “Bid Deadline”) at Clip Health’s office, located at 48389 Fremont Blvd Ste 112, Fremont, CA 94538.  Please also email steve@gerbsmanpartners.com with any bid.

Bids should identify those assets being tendered for in a specific and identifiable way.  Bidders interested in specific Clip Health Assets must submit a separate bid for such assets.  Be specific as to the assets desired. 

Any person or other entity making a bid must be prepared to provide independent confirmation that they possess the financial resources to complete the purchase where applicable.  All bids must be accompanied by a refundable deposit check in the amount of $200,000 (payable to Luminostics, Inc. DBA Clip Health).  The winning bidder will be notified within 3 business days after the Bid Deadline.  Non-successful bidders will have their deposit returned to them.

Clip Health reserves the right to, in its sole discretion, accept or reject any bid, or withdraw any or all assets from sale.  Interested parties should understand that it is expected that the highest bid will be chosen as the winning bidder and bidders may not have the opportunity to improve their bids after submission.

Clip Health will require the successful bidder to close within 7 business days.  Any or all of the assets of Clip Health will be sold on an “as is, where is” basis, with no representation or warranties whatsoever.

All sales, transfer, and recording taxes, stamp taxes, or similar taxes, if any, relating to the sale of the Clip Health Assets shall be the sole responsibility of the successful bidder and shall be paid to Clip Health at the closing of each transaction.

For additional information, please see below and/or contact:

• Steven R. Gerbsman 

steve@gerbsmanpartners.com

• Kenneth Hardesty

ken@gerbsmanpartners.com

     •    Eric Bell

     

          eric@gerbsmanpartners.com

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As a life long NY Yankee fan, I saw Joe D, the Mick, Whitey, Billy, Casey, Moose, Bobby, Roger, the Scooter, etc. Really enjoyed the film as “Yogi” was the glue that was the New York Yankees in the 50’s. Enjoy

Sony Pictures Classics has landed worldwide rights to “It Ain’t Over,” a documentary about baseball Hall of Famer Yogi Berra.

Sean Mullin directed the doc, which premiered at this year’s Tribeca Film Festival. The specialty studio has yet to detail any release plans for the movie.

Described as “an intimate portrait of a misunderstood American icon, “It Ain’t Over” illustrates the life and career of Berra, a sports legend whose accomplishments on the baseball diamond were often overshadowed by his off-the-field persona. Berra, considered one of the best catchers in baseball history, won 10 World Series championships during his 19 seasons in Major League Baseball, 18 of which were with the New York Yankees. He also became known for Yogi-isms, like “It ain’t over ’til it’s over” and “It’s déjà vu all over again.”

In the documentary, his granddaughter Lindsay Berra tells his story along with his sons, former Yankee teammates, writers, broadcasters and admirers. It includes interviews with Joe Torre, Derek Jeter, Don Mattingly, Bob Costas, Vin Scully and Billy Crystal, among others.

“I’m incredibly grateful to the Berra family for entrusting me and my team with Yogi’s legacy. This film has been a true passion project for everyone involved — and we could not have imagined a better home than Sony Pictures Classics,” said Mullin.

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Sony Pictures Classics added, “Inspiring and warmly humorous, Sean Mullin’s ‘It Ain’t Over’ is a sports movie unlike any other, the full rich story of Yogi Berra, one of pro baseball’s great figures, a true original. We are excited to bring this movie to audiences all over the world.”

Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and much more. This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the information it requires from public sources.

The following is a summary of the most significant legal and business due diligence activities that are connected with a typical M&A transaction. By planning these activities carefully and properly anticipating the related issues that may arise, the target company will be better prepared to successfully consummate a sale of the company.

Of course, in certain M&A transactions such as “mergers of equals” and transactions in which the transaction consideration includes a significant amount of the stock of the buyer, or such stock comprises a significant portion of the overall consideration, the target company may want to engage in “reverse diligence” that in certain cases can be as broad in scope as the primary diligence conducted by the buyer. Many or all of the activities and issues described below will, in such circumstances, apply to both sides of the transaction.

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1. Financial Matters. The buyer will be concerned with all of the target company’s historical financial statements and related financial metrics, as well as the reasonableness of the target’s projections of its future performance. Topics of inquiry or concern will include the following:

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• What do the company’s annual, quarterly, and (if available) monthly financial statements for the last three years reveal about its financial performance and condition?
• Are the company’s financial statements audited, and if so for how long?
• Do the financial statements and related notes set forth all liabilities of the company, both current and contingent?
• Are the margins for the business growing or deteriorating?
• Are the company’s projections for the future and underlying assumptions reasonable and believable?
• How do the company’s projections for the current year compare to the board-approved budget for the same period?
• What normalized working capital will be necessary to continue running the business?
• How is “working capital” determined for purposes of the acquisition agreement? (Definitional differences can result in a large variance of the dollar number.)
• What capital expenditures and other investments will need to be made to continue growing the business, and what are the company’s current capital commitments?
• What is the condition of assets and liens thereon?
• What indebtedness is outstanding or guaranteed by the company, what are its terms, and when does it have to be repaid?
• Are there any unusual revenue recognition issues for the company or the industry in which it operates?
• What is the aging of accounts receivable, and are there any other accounts receivable issues?
• Should a “quality of earnings” report be commissioned?
• Are the capital and operating budgets appropriate, or have necessary capital expenditures been deferred?
• Has EBITDA and any adjustments to EBITDA been appropriately calculated? (This is particularly important if the buyer is obtaining debt financing.)
• Does the company have sufficient financial resources to both continue operating in the ordinary course and cover its transaction expenses between the time of diligence and the anticipated closing date of the acquisition?

2. Technology/Intellectual Property. The buyer will be very interested in the extent and quality of the target company’s technology and intellectual property. This due diligence will often focus on the following areas of inquiry:

• What domestic and foreign patents (and patents pending) does the company have?
• Has the company taken appropriate steps to protect its intellectual property (including confidentiality and invention assignment agreements with current and former employees and consultants)? Are there any material exceptions from such assignments (rights preserved by employees and consultants)?
• What registered and common law trademarks and service marks does the company have?
• What copyrighted products and materials are used, controlled, or owned by the company?
• Does the company’s business depend on the maintenance of any trade secrets, and if so what steps has the company taken to preserve their secrecy?
• Is the company infringing on (or has the company infringed on) the intellectual property rights of any third party, and are any third parties infringing on (or have third parties infringed on) the company’s intellectual property rights?
• Is the company involved in any intellectual property litigation or other disputes (patent litigation can be very expensive), or received any offers to license or demand letters from third parties?
• What technology in-licenses does the company have and how critical are they to the company’s business?
• Has the company granted any exclusive technology licenses to third parties?
• Has the company historically incorporated open source software into its products, and if so does the company have any open source software issues?
• What software is critical to the company’s operations, and does the company have appropriate licenses for that software (and does the company’s usage of that software comply with use limitations or other restrictions)?
• Is the company a party to any source or object code escrow arrangements?
• What indemnities has the company provided to (or obtained from) third parties with respect to possible intellectual property disputes or problems?
• Are there any other liens or encumbrances on the company’s intellectual property?

3. Customers/Sales. The buyer will want to fully understand the target company’s customer base including the level of concentration of the largest customers as well as the sales pipeline. Topics of inquiry or concern will include the following:

• Who are the top 20 customers and what revenues are generated from each of them?
• What customer concentration issues/risks are there?
• Will there be any issues in keeping customers after the acquisition (including issues relating to the identity of the buyer)?
• How satisfied are the customers with their relationship with the company? (Customer calls will often be appropriate.)
• Are there any warranty issues with current or former customers?
• What is the customer backlog?
• What are the sales terms/policies, and have there been any unusual levels of returns/exchanges/refunds?
• How are sales people compensated/motivated, and what effect will the transaction have on the financial incentives offered to employees?
• What seasonality in revenue and working capital requirements does the company typically experience?

4. Strategic Fit with Buyer. The buyer is concerned not only with the likely future performance of the target company as a stand-alone business; it will also want to understand the extent to which the company will fit strategically within the larger buyer organization. Related questions and areas of inquiry will include the following:

• Will there be a strategic fit between the company and the buyer, and is the perception of that fit based on a historical business relationship or merely on unproven future expectations?
• Does the company provide products, services, or technology the buyer doesn’t have?
• Will the company provide key people (is this an acqui-hire?) and if so what is the likelihood of their retention following the closing?
• What integration will be necessary, how long will the process take, and how much will it cost?
• What cost savings and other synergies will be obtainable after the acquisition?
• What marginal costs (e.g., costs of obtaining third party consents) might be generated by the acquisition?
• What revenue enhancements will occur after the acquisition?

5. Material Contracts. One of the most time-consuming (but critical) components of a due diligence inquiry is the review of all material contracts and commitments of the target company. The categories of contracts that are important to review and understand include the following:

• Guaranties, loans, and credit agreements
• Customer and supplier contracts
• Agreements of partnership or joint venture; limited liability company or operating agreements
• Contracts involving payments over a material dollar threshold
• Settlement agreements
• Past acquisition agreements
• Equipment leases
• Indemnification agreements
• Employment agreements
• Exclusivity agreements
• Agreements imposing any restriction on the right or ability of the company (or a buyer) to compete in any line of business or in any geographic region with any other person
• Real estate leases/purchase agreements
• License agreements
• Powers of attorney
• Franchise agreements
• Equity finance agreements
• Distribution, dealer, sales agency, or advertising agreements
• Non-competition agreements
• Union contracts and collective bargaining agreements
• Contracts the termination of which would result in a material adverse effect on the company
• Any approvals required of other parties to material contracts due to a change in control or assignment

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6. Employee/Management Issues. The buyer will want to review a number of matters in order to understand the quality of the target company’s management and employee base, including:

• Management organization chart and biographical information
• Summary of any labor disputes
• Information concerning any previous, pending, or threatened labor stoppage
• Employment and consulting agreements, loan agreements, and documents relating to other transactions with officers, directors, key employees, and related parties
• Schedule of compensation paid to officers, directors, and key employees for the three most recent fiscal years showing separately salary, bonuses, and non-cash compensation (e.g., use of cars, property, etc.)
• Summary of employee benefits and copies of any pension, profit sharing, deferred compensation, and retirement plans
• Evidence of compliance with IRS Section 409A in connection with stock option issuances
• Summary of management incentive or bonus plans not included in above as well as other forms of non-cash compensation
• Likelihood of need for compliance with IRS Section 280G (golden parachute) rules in connection with any potential acquisition
• Employment manuals and policies
• Involvement of key employees and officers in criminal proceedings or significant civil litigation
• Plans relating to severance or termination pay, vacation, sick leave, loans, or other extensions of credit, loan guarantees, relocation assistance, educational assistance, tuition payments, employee benefits, workers’ compensation, executive compensation, or fringe benefits
• Appropriateness of the company’s treatment of personnel as independent contractors vs. employees
• Actuarial reports for past three years
• What agreements/incentive arrangements are in place with key employees to be retained by the buyer? Will these be sufficient to retain key employees?
• What layoffs and resultant severance costs will be likely in connection with the acquisition?

7. Litigation. An overview of any litigation (pending, threatened, or settled), arbitration, or regulatory proceedings involving the target company is typically undertaken. This review will include the following:

• Filed or pending litigation, together with all complaints and other pleadings
• Litigation settled and the terms of settlement
• Claims threatened against the company
• Consent decrees, injunctions, judgments, or orders against the company
• Attorneys’ letters to auditors
• Insurance covering any claims, together with notices to insurance carriers
• Matters in arbitration
• Pending or threatened governmental proceedings against the company (SEC, FTC, FDA, etc.)
• Potentially speaking directly to the company’s outside counsel

8. Tax Matters. Tax due diligence may or may not be critical, depending on the historical operations of the target company, but even for companies that have not incurred historical income tax liabilities, an understanding of any tax carryforwards and their potential benefit to the buyer may be important. Tax due diligence will often incorporate a review of the following:

• Federal, state, local, and foreign incomes sales and other tax returns filed in the last five years
• Government audits
• Copies of any correspondence or notice from any foreign, federal, state, or local taxing authority regarding any filed tax return (or any failure to file)
• Tax sharing and transfer pricing agreements
• Net operating losses or credit carryforwards (including how a change in control might affect the availability thereof)
• IRS Form 5500 for 401(k) plans
• Agreements waiving or extending the tax statute of limitations
• Allocation of acquisition purchase price issues
• Correspondence with taxing authorities regarding key tax items
• Settlement documents with the IRS or other government taxing authorities

9. Antitrust and Regulatory Issues. Antitrust and regulatory scrutiny of acquisitions has been increasing in recent years. The buyer will want to undertake the following activities in order to assess the antitrust or regulatory implications of a potential deal:

• If the buyer is a competitor of the target company, understanding and working around any limitations imposed by the company on the scope or timing of diligence disclosures
• Analyzing scope of any antitrust issues
• If the company is in a regulated industry that requires approval of an acquisition from a regulator, understanding the issues involved in pursuing and obtaining approval
• Confirming if the company has been involved in prior antitrust or regulatory inquiries or investigations
• Addressing issues that may be involved in preparing a Hart-Scott-Rodino filing (if thresholds are met) and effectively responding to any “second request” from the Department of Justice or Federal Trade Commission
• Considering Exon-Florio issues if the transaction involves national security or foreign investment issues
• Other Department of Commerce filings if the buyer is a foreign entity
• Understanding how consolidation trends in the company’s industry might impact the likelihood and speed of antitrust or regulatory approval

10. Insurance. In any acquisition, the buyer will want to undertake a review of key insurance policies of the target company’s business, including:

• If applicable, the extent of self-insurance arrangements
• General liability insurance
• D&O insurance
• Intellectual property insurance
• Car insurance
• Health insurance
• E&O insurance
• Key man insurance
• Employee liability insurance
• Worker’s compensation insurance
• Umbrella policies

The Advantages of a “Date-Certain M&A Process” over an “Assignment for the Benefit of Creditors – ABC” 

Apart from a formal bankruptcy (Chapter 7 or 11), there are two basic approaches to maximizing enterprise value for underperforming and/or under-capitalized technology, life science, medical device, digital marketing, information & cyber security and solar companies and their Intellectual property:  “Date-Certain M&A Process” and an Assignment for the Benefit of Creditors (ABC).

Both of these processes have significant advantages over a formal bankruptcy in terms of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “Date Certain M&A Process” has resulted in numerous transactions that have maximized value anywhere from two to nine times what a normal M&A process or “ABC” would have generated for distressed assets. With a “Date-Certain M&A Process”, the company’s Board of Directors hires a crisis management/private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets.

The advisor works with the board and corporate management to:

1. Focus on the control, preservation and forecasting of CASH.

2. Develop a strategy/action plan and presentation to maximize value of the assets, including drafting sales materials, preparing information due diligence war-room, assembling a list of all possible interested buyers for the IP and assets of the company, and identifying and retaining key employees on a go-forward basis.

3. Stabilize and provide leadership, motivation and morale to all employees.

4. Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest. The company’s attorney prepares very simple “as is, where is” asset-sale documents (“as is, where is – no reps or warranties” agreements is very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors, investment bankers and lawyers in Europe, Israel, China, Australia, India and the US). It also includes the coordination of their interactions with company personnel and the arrangement of on-site visits. Typical terms for a “Date Certain M&A” asset sale include no representations and warranties, a sales date typically three to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $200,000 range to bid, and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date Certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the Board of Directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.

5. The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is five to six weeks. Such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program, D&O insurance and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a “Date Certain M&A Process” can be concluded in five to six weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the Date Certain M&A Process’ compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the ‘tire-kickers.’ In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the board of directors retains complete control over the process. For example, it can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

Clean Exit – Upon closing of the auction, considerations received are distributed and the advisor, under the leadership of the insolvency counsel, then takes all remaining steps to effect an orderly shut-down of the remaining corporate entity. To this end, the insolvency counsel then takes the lead on all orderly shutdown items.

In an Assignment for the Benefit of Creditors (ABC), the company (assignor) enters into a contract by which it transfers all rights, titles, interests, custody and control of all assets to an independent third-party trustee (Assignee). The Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors. We feel that an ABC is most appropriate in a situation with one or more highly contentious creditors, as it tends to insulate a board of directors from the process. Nevertheless, we have found that most creditors are rational and will support a quick process designed to maximize the value that they receive. A good advisor will manage relationships with creditors and can often successfully convince them that a non-ABC process is more to their advantage. Apart from its one advantage of insulating the board of directors from the process, an ABC has a number of significant disadvantages, including:

Longer Time-to-Cash – Creditors and investors will not receive proceeds for at least 7 months (more quickly than in a bankruptcy but far slower than with a “date-certain” auction).

Higher Cost – Ultimately, ABCs tend to be more expensive than a “Date-Certain M&A Process”. It is not uncommon for the entire value received from the sale of company assets to be consumed by fees and/or a transaction for maximizing value may not be consummated in a timely fashion.

Loss of Control – Once the assets are assigned to the independent third-party trustee, the board of directors has no further control over the process. It cannot modify the process in any way or discontinue the process. Thus, it is not possible to explore multiple options in parallel.

Higher Public Relations Profile – The longer time frame for the ABC process and the more formal (and public) legal nature of an ABC make it more difficult to put a positive spin on the final outcome.

Messy Exit – Most independent third-party trustees do not perform the services of cleanly shutting down the remaining corporate shell. Thus, investors must either pay another party to do this job or leave it undone, resulting in increased liability.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 118 technology, medical device, life science, digital marketing, information & cyber security and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Virginia/Washington DC, Boston, Europe and Israel.

Steven R. Gerbsman
Principal

steve@gerbsmanpartners.com

“Do not go where the path may lead, go instead where there is no path and leave a trail.” – R.W. Emerson

“Never, never, never give up.” – Winston Churchill

“The seeds planted today are the flowers that will bloom tomorrow.”

There are numerous events in Ukraine, China, the Mideast, debt limit vote, EU banks, French riots, Israeli protests, and many others. The “Tipping Point” may be just around the corner.

Personally, stay liquid whether in cash, Treasuries, CDs, or gold for part of your portfolio. The unknowns are everywhere. Preservation is more important now than growth.

If your company is one of those affected by the bank and liquidity crisis, it is vitally important that you retain professional help immediately to prepare for CASH shortages. Gerbsman Partners has a decades long track record in negotiating with creditors in difficult and complex situations and restructuring prohibitive real estate and intellectual property leases.

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property, as well as maximizing value for Intellectual Property Patents. Since 2001, Gerbsman Partners has been involved in maximizing value for 118 technology, medical device, life science, solar, fuel cell, cyber security, consumer and digital marketing companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations.

Since inception in 1980, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M & A Transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, McLean, VA/Washington DC, Orange County, Boston, Europe and Israel.

Bob, Ken Hardesty and I, as well as the rest of the Gerbsman Partners team are available to strategize and develop action for maximizing and monetizing value. 

Best regards

Steve Gerbsman and Bob Tillman

http://gerbsmanpartners.com