SPARTAN BIOSCIENCE PLAN TO RESTRUCTURE OFF THE TABLE. NEXT UP: SALE OF ASSETS.
OTTAWA • When we last tucked into the insolvency proceedings involving Spartan Bioscience, the Ottawa Dna-testing firm was trying to finalize a restructuring — one that offered a glimmer of hope for 140-plus suppliers and more than 300 private investors. That optimism is fading.
A family-owned trust — Casa-dea Finance Ltd. of Trenton, Ont. — last month had been organizing a $20-million investment for two-thirds of Spartan’s private equity. The arrangement was to have provided sufficient working capital to allow Spartan to exit court protection as a going concern. This would have permitted the firm to continue selling its portable COVID-19 test kits and devices to governments across the country. Unsecured creditors were to have received a portion of Spartan’s profits from 2022 to 2027.
The restructuring deal is now off the table. It had been contingent upon Casa-dea’s ability to raise the money. Investors balked, according to the most recent report by Ernst & Young, the monitor managing the insolvency proceedings.
Not only did potential investors have difficulties with Spartan’s proposed business plan and the terms of the restructuring, they were uncertain whether the federal government would stand by its $149-million contract for COVID-19 test kits and portable testing devices.
Casa-dea, a secured creditor with a claim of $7 million, has instead put forward a bare-bones bid to buy Spartan’s assets through a separate entity, 2856031 Ontario Inc.
Under Casa-dea’s latest proposal, Spartan’s existing shareholders and unsecured creditors would see no potential gain.
E&Y said it hopes the court will approve the asset purchase deal by Sept. 3. If it doesn’t, the monitor added, “No alternative transaction is available” other than “liquidation or receivership.” E&Y pointed out the asset purchase bid would at least allow Spartan to maintain its supply lines and key employees. A court session is scheduled for Friday.
The fact that no other investor is willing to come forward speaks volumes about the perceived risks associated with Spartan, which early this year had been spending heavily to develop a supply chain and workforce capable of producing 200,000 COVID-19 test kits per week. That would have represented close to 30 per cent of the country’s total.
Following this spring’s court filing, E&Y and Spartan approached 129 financial and corporate entities to determine if there was interest in buying Spartan outright or recapitalizing the firm. Two dozen firms studied Spartan’s business in detail after signing a non-disclosure agreement. However, just two — Casa-dea and an unidentified entity — submitted bids. The second bidder wanted only part of Spartan’s business, most likely its $2 million-a-year operation involving NONCOVID-19 testing technology. It bid $4.2 million.
In the end, Casa-dea was the only firm that offered Spartan’s unsecured creditors and existing investors a way to recoup their losses. But it all hung on that failed $20-million financing.
Spartan’s journey in 2021 has been a steep descent. In February, the company closed a private financing that valued the firm at roughly $140 million. But, shortly after, the company was forced to halt sales to deal with an unspecified technical glitch that was producing inconsistent COVID-19 test results.
The move squeezed Spartan’s cash flow, prompting it to seek protection from its creditors. Chief among the latter were provincial and federal governments, which had advanced $42 million in cash deposits for future orders. Nearly $15 million is owed to various suppliers. Casa-dea and the federal government’s Business Development Bank ($8.8 million) are the two main secured creditors — E&Y revealed they are in a dispute over which of them has top priority.
E&Y provided a snapshot of Spartan’s balance sheet as of year-end 2020, when the value of the company’s inventory — COVID-19 test kits and a testing platform known as the Cube — was estimated at $21 million. Footnotes to the balance sheet observe that the test kits “have expired or are expiring”. However, there is still some value in the Cube platform, which can be adapted to do different DNA tests, including one for detecting the bacteria that causes legionnaires’ disease.
It’s not what Casa-dea and so many others signed up for last year when Spartan looked to be on its way to $200 million in annual revenues. But it’s where they are.