Direct Flow Medical in Santa Rosa shuts down, 250 people laid off

Santa Rosa med-tech developer Direct Flow Medical Inc. has closed its doors and laid off all 250 employees, the result of a decision by its lender to pull the plug on the once-promising company after a hectic yearlong effort to secure new financing fell apart.

Approximately 140 people were employed in Sonoma County. Workers were furloughed Nov. 18 and the company was officially closed Nov. 30, said Dan Lemaitre, former president and CEO.

Direct Flow had expected an influx of funding from a Chinese pharmaceutical company on Nov. 18, Lemaitre said in a phone interview. But the deal collapsed two days before the money was scheduled to arrive, Lemaitre said, as “the terms of which were changed dramatically in a very unacceptable fashion.”

The 12-year-old company had no other options and its lender, PDL BioPharma Inc., refused to extend the $65 million funding arrangement it had with Direct Flow for the past three years and foreclosed upon the business.

Direct Flow made devices that replace human heart valves without invasive surgery.

Mass layoffs have become very unusual in Sonoma County, where the economic climate has been strong since the region rebounded from the Great Recession. The county’s unemployment rate was 3.7 percent in November, the fifth-lowest in the state.

“We are kind of rusty as we haven’t had these closures for a while,” said Ben Stone, executive director for the Sonoma County Economic Development Board.

In fact, a state database of mass layoffs announced in the past five months listed only one local company - Sutter Care at Home in Santa Rosa, which eliminated the jobs of 10 workers earlier this month.

Athleta, the women’s athletic apparel retailer based in Petaluma, will move its offices to San Francisco in February. At least 30 of its 250 workers in Petaluma have expressed interest in staying in the area and not relocating to the headquarters of its parent company, Gap Inc., said Heather LoBue, business services program manager for the Sonoma County Economic Development Board.

Those employees are working with Job Link, the Sonoma County Workforce Investment Board’s one-stop career center, to find new jobs with local employers, LoBue said. Those white-collar professionals have experience in areas such as information technology, marketing, design and store operations.

The shutdown of Direct Flow came with little warning, said one former employee who resigned several days before the Nov. 18 furlough to take a new job, suspecting that the company was not on firm financial ground.

The company did not give workers 60 days notice of mass layoffs, as required by federal law, said Kristina Gardenal, who worked in human resources. Many employees have not received final paychecks nor instructions on how to enroll in COBRA to keep health insurance, she said.

“It’s just a really terrible thing to do employees,” she said.

Lemaitre became CEO of Direct Flow in May 2015, replacing Bernard Lyons, who retired after nine years. Its primary equity investor was SV Life Sciences.

The Santa Rosa company had nearly doubled in size in 2014 as it worked to bring its transcatheter aortic valve replacement system into the multibillion-dollar marketplace to treat those suffering from heart disease. It received permission in 2013 to market its valve in Europe.

Direct Flow’s system is used for frail patients who pose too much of a risk to undergo valve replacement through open-heart surgery. A promising study released last year found that 82 percent of patients who had valves replaced with the Direct Flow device were still alive after one year.

“We have a product that’s very viable,” Lemaitre told The Press Democrat last year as Direct Flow worked to obtain FDA approval for use in the United States.

The private company, however, was competing against larger rivals - such as Medtronic, which has facilities in Sonoma County, and Edwards Lifesciences of Irvine - that had already received FDA approval for their devices. Direct Flow had aimed to complete clinical trials by the end of this year and to submit data to the FDA by late 2017.

“I don’t think there is any doubt we were producing some of the best clinical outcomes” both in the United States and Europe, Lemaitre said. “The team was focused.”

According to SEC filings by PDL BioPharma, the Incline Village, Nevada, biotech financier entered into a lending agreement with Direct Flow on Nov. 5, 2013 to loan $35 million immediately and another $15 million once it met specific revenue milestones. The annual interest rate was 15.5 percent.

A year later, the loan was amended to allow for the $15 million to be sent to Direct Flow once it received some proceeds from an equity offering. The overall interest of the loan was lowered to 13.5 percent, according the SEC filing.

But on Dec. 21, 2015, the two sides modified the terms of the loan because Direct Flow would not be able to make interest payments, according to filings. A month later, the loan terms were changed to give Direct Flow more time to make interest payments and on Jan. 28, PDL provided $5 million in short-term promissory note that was later converted into a loan.

To provide more time, PDL in July and September provided separate $1.5 million funding in note payments that could be later converted into equity stakes.

On Sept. 30, PDL entered into the 10th waiver of the credit agreement that would allow it to buy shares of Direct Flow’s stock in the future for 1 cent per share.

Lemaitre said the deal with the Chinese firm began to unravel at the eleventh hour, or as he put it “11:58.” He declined to state the requested change of the financing terms, calling it a “nonstarter.”

But a SEC filing by PDL said the financing changed from an equity investment to a loan “in a substantially lower amount and proposing other less-favorable terms.”

PDL received Direct Flow’s assets under terms of the loan, though Lemaitre said he did not know what it would do with its devices and intellectual property. PDL did not return a request for comment.

“It is extraordinarily sad for a team that was truly motivated and focused to hit a wall for financing,” Lemaitre said.

In its Nov. 17 filing, PDL said it was unknown how much value it may receive from Direct Flow’s assets, noting “it is likely the investment will be further impaired, resulting in a write-down of a portion or all of the value of the investment.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com.