Diamondback Industries, Inc., which develops, manufactures, and sells setting tools, power charges, and igniters for use in completing oil and gas wells, has sought Chapter 11 protection.
The Debtors have negotiated a term sheet for DIP financing with the Lender that provides for the advancement of a senior secured and superpriority debtor-in-possession term loan in the aggregate amount of up to $5,000,000. The Debtors plan to file a motion for approval of such debtor in possession financing shortly after the commencement of the Chapter 11 Case.
Cade Kennedy, CRO, explains that the Debtors’ business and financial performance depend heavily on sales generated by a limited customer base — i.e., oil and gas companies engaged in drilling and well services — that purchase the Debtors’ products. Despite unfavorable conditions in the oil and gas market over the last several years, the Debtors successfully maintained their operations. This year, however, the Debtors experienced an unexpected reduction in demand for their products resulting from the sudden, unprecedented, and precipitous drop in oil prices. Moreover, the Debtors’ financial difficulties are compounded by the global events and macroeconomic effects of the COVID-19 pandemic. Many businesses, including the Debtors, have suffered from COVID-19’s significant toll on the United States’ and global economies.
Further, a judgment of $40 million and a permanent injunction prohibiting Diamondback from making, selling, or offering to sell the SS 10 and SS 20 disposable setting tools was entered against Diamondback on April 3, 2020, by the District Court for the Western District of Texas in connection with a patent lawsuit among Diamondback, as plaintiff, Repeat Precision, LLC (“RP”) as defendant and counterclaim-plaintiff, and NCS Multistage, LLC (“NCS-M”), and NCS Multistage Holdings, Inc. (“NCS-H” and together with RP and NCS-M, the “Patent Litigation Defendants”), as defendants.
The dispute in the Patent Lawsuit generally centers around a patent license agreement (the “Patent License Agreement”) by and between Diamondback and RP, pursuant to which Diamondback licenses certain rights to RP in connection with U.S. Patent No. 9,810,035 (the “035 Patent”). The 035 Patent is owned by Diamondback and covers disposable setting tools such as the SS 10 and SS 20. The Patent Lawsuit began in 2018 after Diamondback filed a complaint against the Patent Litigation Defendants alleging claims arising from and related to the Patent License Agreement, including breach of contract, misappropriation of trade secrets, and fraudulent inducement. In response, RP filed counterclaims against Diamondback, including claims for patent infringement and tortious interference. Ultimately, the court entered the Patent Judgment awarding damages to RP in the amount of $39,946,902, and awarding costs and attorneys’ fees to the Patent Litigation Defendants in an amount to be determined.
Federal Rule of Civil Procedure 62(a) provides that execution on a judgment and proceedings to enforce a judgement are stayed for 30 days after entry of a judgement, unless the court orders otherwise. Despite the existence of the 30-day stay, the Patent Defendants, only 5 days after the Patent Judgment was entered, filed an emergency motion seeking the extraordinary relief of lifting the 30-day stay imposed by Federal Rule of Civil Procedure 62(a) in order to expedite the enforcement of the Patent Judgment. Diamondback disputes the Patent Judgment and filed its notice of
appeal of the Patent Judgment on April 21, 2020.
The Patent Judgment constituted an event of default on the Debtors’ Prepetition Credit Agreement, which entitled the lender to exercise its rights and remedies including, without limitation, the acceleration of the Debtors’ payment obligations and foreclosure against all collateral. The Debtors also failed to make their April 1, 2020, principal payment, breached certain financial covenants of the Prepetition Credit Agreement, all of which also constituted events of default on the Debtors’ Prepetition Credit Agreement. Fortunately, the Debtors were able to negotiate a forbearance with their lender until 11:00 a.m. (prevailing Central Time) on July 15, 2020 unless the Debtors breached or defaulted under the forbearance agreement or a subsequent event of default occurred pursuant to the Prepetition Credit Agreement.
Notwithstanding the Forbearance, the Debtors determined that the filing of the Chapter 11 Cases was necessary to maximize value for the benefit of all creditors.
“I believe that the Chapter 11 Cases will provide the Debtors with the best opportunity to preserve the business as a going concern through value preservation efforts including, without limitation, making any necessary changes to the Debtors’ business plan and eliminating any burdensome contracts and lease obligations,” Mr. Kennedy said.
As of April 16, 2020, the Debtors’ unaudited balance sheets reflected total assets of approximately $31.7 million, total liabilities of approximately $21.0 million (not including the Patent Judgment), and equity of approximately $10.7 million. The Debtors’ principal assets consist of cash, accounts receivable, inventory, equipment, intellectual property rights, and fixed assets. The Debtors’ prepetition debt structure primarily consists of (i) the Prepetition Credit Facility in the amount of $20 million, (ii) certain capital lease obligations, and (iii) $400 million of unsecured debt consisting of, among other things, amounts owed to vendors and landlords as well as the Patent Judgment, which the Debtors dispute and have appealed.
About Diamondback Industries
Diamondback Industries is an ISO 9001 registered company that manufactures tools and ballistics equipment including eliminators, igniters, and power charges.
On April 21, 2020, Diamondback Industries, Inc., and its affiliates sought Chapter 11 protection (Bankr. N.D. Tex. Case No. 20-41504).
The Hon. Edward L. Morris is the case judge.
Diamondback was estimated to have $10 million to $100 million in assets and liabilities.
The Debtors tapped HAYNES AND BOONE, LLP as counsel; and CR3 PARTNERS, LLC as financial advisor. STRETTO is the claims agent, maintaining the page at cases.stretto.com/diamondback.