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Otologics looks to sell assets

by Aviva Gat | Published July 24, 2012 at 3:20 PM

Hearing aid maker Otologics LLC aims to operate through a sale with debtor-in-possession financing from its proposed purchaser.

Otologics filed for Chapter 11 protection on Monday, July 23, with plans to sell its assets to prepetition lender Cochlear Ltd. Cochlear would be the stalking-horse bidder for an auction with a $14 million offer consisting of cash and credit. The publicly traded rival hearing aid maker also is providing a $1.645 million DIP.

Otologics and Cochlear of Macquarie University, Australia, have a long-standing relationship from an intellectual property licensing arrangement, documents show.

Judge Charles E. Rendlen III of the U.S. Bankruptcy Court for the Eastern District of Missouri in St. Louis is set on Wednesday to consider authorizing interim use of $700,000 of the postpetition loan.

Court papers show the loan, priced at 15%, would mature Sept. 28. The interest rate, however, could drop to 12% if the court allowed Cochlear to prime Otologics' other secured lenders.

Otologics owed Cochlear $10.3 million as of the petition date. It was unclear from documents whether the DIP rolls up any of the prepetition debt.

Under the DIP, Otologics must file its bidding procedures motion by Friday and obtain approval by Aug. 15. Otologics must host an auction by Sept. 4 and win sale approval by Sept. 19. The sale must close by Sept. 28.

According to a declaration by CEO, manager and founder Jose H. Bedoya, he launched Otologics in 1996 to acquire implantable hearing device technology from Storz Instrument Co. and further develop and test the technology for commercial marketability.

Otologics' first hearing aid product, the semi-implantable MET, or middle ear transducer, is sold in Europe. The company completed clinical trials in Europe of its second product, a fully implantable hearing aid, in October 2006 and is conducting Phase 2 trials for the device in the U.S., Bedoya said.

Otologics has 40 U.S. patents, 17 pending patent applications and 46 proposed patent applications. The company also has 11 international patents and 18 pending international patent applications.

All of the debtor's components are manufactured at its Boulder, Colo., headquarters. The facility has the capacity to produce 125 units per month.

Otologics' bankruptcy came after the company defaulted on its debt to Wells Fargo Bank NA on July 19.

Otologics had obtained a $5.95 million line of credit from Wells Fargo on May 20, 2010. The loan was increased by $4 million that July. Two letters of credit from Westpac Banking Corp. in favor of Wells Fargo secured the loan.

When Otologics defaulted, Wells Fargo drew on the Westpac letters of credit, triggering Otologics' obligation to repay Cochlear. Cochlear's claim is secured by a first-priority lien on the debtor's assets.

Otologics' liquidity problems stem from litigation with French hearing aid maker Neurelec SA. Otologics sought to purchase Neurelec in 2006, but talks broke down. When the sale fell through, some of Neurelec's research and development team left and joined Otologics.

Neurelec then filed a lawsuit against Otologics in Colorado District Court in Denver. In the suit, a jury issued a verdict in favor of Neurelec in February 2011. The court entered a judgment against Otologics for $5.5 million plus at least $1.5 million for attorneys' fees.

Otologics appealed the verdict to the Colorado Court of Appeals, where it is still pending.

Otologics filed a counterclaim against Neurelec in the district court, which Neurelec has sought to dismiss.

The litigation prevented Otologics from completing the trials for its products and obtaining approval from the Food and Drug Administration. Otologics therefore decided that selling the company to a third party would be the only way to generate sufficient capital.

In its petition, Otologics pegged its assets and liabilities between $10 million and $50 million apiece.

As of the petition date, Otologics owed $1.9 million to bridge noteholders under a June 30, 2011, agreement. Their claim is secured by the debtor's assets.

Otologics also has about 120 trade vendors owed $1.1 million. Gordon & Rees LLP has also asserted a trace claim of $1 million, but Otologics disputes the claim.

Some 397 parties that have collectively contributed about $94.7 million own the debtor.

Neither debtor counsel David A. Warfield of Thompson Coburn LLP nor John R. Marcil and Elizabeth K. Flaagan of Faegre Baker Daniels LLP, counsel to Cochlear, could be reached for comment Tuesday.

Otologics special counsel Keith M. Olivia of Roberts & Olivia LLC declined comment.

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