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June 30, 2023 – The Debtors requested Court authority to: (i) access $21.6mn of junior debtor-in-possession (“DIP”) financing from non-debtor subsidiary Scilex Holding Company (“Scilex,” or the “Junior DIP Lender”) and (ii) use cash collateral [Docket No. 978, with a Junior DIP Term Sheet attached at Exhibit 1].
*The aggregate amount of Junior DIP Facility is inclusive of $200k Commitment fees, $200k Funding fees and a $1.2mn Junior DIP Lender Holdback (NTD: Subject to negotiation), leaving the Debtors with $20.0mn of new money.
The request for further DIP funding comes as additional liquidity from an earlier approved $75.0mn [now senior] DIP facility provided by JMB Capital Partners Lending, LLC ("JMB") has proved insufficient to carry the Debtors through what is a longer than expected stay in bankruptcy. The additional $20.0mn of liquidity now sought with the proposed junior DIP is expected to see the Debtors through the end of July, at which point the senior DIP is otherwise scheduled to mature.
Amongst many balls still up in the air is Court approval of a proposed settlement with the "Nant Parties," with consideration of that Judge Isgur-guided settlement now scheduled to be considered on July 11th. That "toggle" settlement effectively provides the Debtors with two paths: (i) find the funding necessary to pay the Nant Parties the $175.0mn owed to them in respect of a judgment or (ii) "walk away" in what would be a "full divorce" further to which "the Debtors will convey all of their ownership in NANTibody, NantCancerStemCell, LLC, and NantBio, Inc. to those respective entities…" (see "Proposed Settlement," below).
The Debtors note as to their predicament: "The Senior DIP Facility matures on July 31, 2023, but the liquidity provided by the Senior DIP Facility was only intended to last until on or around June 30, 2023. The Debtors have efficiently managed costs, allowing them to extend such liquidity for an extra week—but the Debtors’ current liquidity is expected to last only until July 7, 2023….The Junior DIP Facility will help the Debtors continue their efforts to obtain a value-maximizing result in these chapter 11 cases, including the potential attainment of exit financing, the potential consummation of asset sales, and the confirmation of a chapter 11 plan that provides significant recoveries to the Debtors’ stakeholders. In connection with the Debtors’ sale and financing process, the Debtors’ advisors are evaluating various bids and financing proposals, all of which require some runway to consummate."
An emergency hearing on the motion is scheduled for July 5, 2023.
On February 13, 2023, Sorrento Therapeutics, Inc and one affiliated debtor (NASDAQ CM: SRNE; together “Sorrento Therapeutics“ or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the San Diego-based Sorrento Therapeutics, “a clinical and commercial stage biopharmaceutical company developing new therapies to treat cancer, pain (non-opioid treatments), autoimmune disease and COVID-19,” noted the entrance of "enforceable judgments" ($50.0mn of a $175.0mn arbitration award enforceable immediately) in favor of the Nant Companies and "a short-term liquidity crunch" (see "Events…" below) as the factors compelling their bankruptcy filings.
On March 20th, the Court hearing the Sorrento Therapeutics cases issued an order approving the Debtors' motion to remove an affiliate of the Nant Companies ("NantCell") from the official committee of unsecured creditors (the "Committee"). The Debtors had argued that NantCell is an "active litigant," in connection with disputes with the Debtors, is a competitor of the Debtors and "may want to purchase the Debtors' assets at the lowest price possible." As a result, the Debtors argued NantCell's "conflicting motives" makes it inappropriate for it to serve on the Committee. Judge David R. Jones said he will leave the U.S. Trustee to decide whether to simply leave the Committee as is, minus NantCell, or to completely reconstitute it.
On March 30th, the Court issued a final order authorizing the Debtors to access the $45.0mn balance, of what is in total $75.0mn of new money debtor-in-possession (“DIP”) financing being provided by JMB Capital Partners Lending, LLC. With a February 21st interim DIP order, the Debtors were given the authority to access a first $30.0mn tranche of the new money DIP.
On April 14th, the Court issued an order: (i) approving proposed bidding procedures for the sale of substantially all of the Debtors’ assets, (ii) authorizing the Debtors to select one or more stalking horse bidders (none selected yet), and (iii) approving a proposed auction/sale timetable culminating in a 2023 auction and 2023 sale hearing. The now approved bidding procedures are part of the Debtors' announced commitment to pursue a "toggle" Plan.
Junior DIP Financing Motion
The motion [Docket No. 978] states, “The Debtors commenced these chapter 11 cases in February 2023 on an emergency basis to protect against impending enforcement actions by certain judgment creditors. Shortly after filing, the Debtors obtained a $75 million senior secured postpetition financing facility from JMB Capital Partners Lending (the ‘Senior DIP Facility’ and the ‘Senior DIP Lender,’ respectively), which the Court approved by a final order on March 30, 2023.
The Senior DIP Facility matures on July 31, 2023, but the liquidity provided by the Senior DIP Facility was only intended to last until on or around June 30, 2023. The Debtors have efficiently managed costs, allowing them to extend such liquidity for an extra week—but the Debtors’ current liquidity is expected to last only until July 7, 2023. As a result, the Debtors have been seeking additional liquidity (whether through financing and/or sale proceeds) to continue with their chapter 11 cases.
Ultimately, the Debtors’ Chief Restructuring Officer (Mr. Mo Meghji) has determined that the best source of liquidity under the current circumstances is the Junior DIP Facility proposed here—a $20 million junior term loan from Scilex Holding Company (‘Scilex’ or the ‘Junior DIP Lender’), a non-debtor subsidiary of Debtor Sorrento Therapeutics, Inc. The Junior DIP Facility matures on September 30, 2023, and the liquidity provided by the Junior DIP Facility is expected to last through July 2023. The Junior DIP Facility (which will be junior and subordinate to the Senior DIP Facility) was negotiated at arms’ length and in good faith through the Debtors’ Chief Restructuring Officer and the Junior DIP Lender’s Chief Accounting Officer (Mr. Stephen Ma, who has no relationship with the Debtors) and their respective independent advisors.
The Junior DIP Facility will help the Debtors continue their efforts to obtain a value-maximizing result in these chapter 11 cases, including the potential attainment of exit financing, the potential consummation of asset sales, and the confirmation of a chapter 11 plan that provides significant recoveries to the Debtors’ stakeholders. In connection with the Debtors’ sale and financing process, the Debtors’ advisors are evaluating various bids and financing proposals, all of which require some runway to consummate.
Absent access to the Junior DIP Facility, however, the Debtors will have no liquidity to continue operations and will be forced to shut down and liquidate. Thus, the Debtors believe that entering into the Junior DIP Facility is the only viable path forward, is in the best interests of the Debtors’ estates and all stakeholders, is fair and reasonable, and is a sound exercise of the Debtors’ business judgment.”
Key Terms of Junior DIP Facility
- Sorrento Therapeutics, Inc.
- Scintilla Pharmaceuticals, Inc.
- DIP Lender: Scilex Holding Company.
- Guarantors: Each of Sorrento Therapeutics, Inc.’s existing and future, direct and indirect domestic or foreign subsidiaries that become debtors and debtors-in-possession in these chapter 11 cases.
- Commitment: A non-amortizing super-priority junior secured term loan facility in an aggregate principal amount not to exceed the sum of (i) $20,000,000, plus (ii) the amount of the Commitment Fee ($200,000) and the Funding Fee ($200,000), plus (iii) the amount of the Junior DIP Lender Holdback ($1.2mn).
- New Money: $21.6mn
- Roll-Up: None
- Interest Rate: 12% per annum
- Default Rate: 2% above applicable rate
- Commitment Fee: The Borrowers shall pay to the Junior DIP Lender a commitment fee equal to 1% of the total amount of the Base Amount. The Commitment Fee shall be fully earned and non-refundable upon entry of the Interim Order, and shall be payable on the date of the Draw by being added to the principal amount of the DIP Loans.
- Funding Fee: The Borrowers shall pay to the Junior DIP Lender a funding fee equal to 1.0% of the amount of the Base Amount, which shall be fully earned and non-refundable upon entry of the Interim Order and shall be payable on the date of the Draw by being added to the principal amount of the DIP Loans.
- Exit Fee: Upon repayment or satisfaction of the DIP Loans in whole or in part the Borrowers shall pay to the Junior DIP Lender in cash an exit fee equal to 2% of the aggregate principal amount of the Junior DIP Facility on the date of the Draw, which shall be fully earned and non-refundable upon the Bankruptcy Court’s entry of the Interim Order. If the DIP Termination Date has occurred solely as a result of the occurrence and continuation of an Event of Default under the DIP Documents, then the Exit Fee shall not be payable until the DIP Obligations have been accelerated by the Junior DIP Lender or the DIP Obligations have matured in accordance with their terms.
- Maturity: Subject to the Subordination Agreement, all DIP Obligations (as defined in the DIP Term Sheet) shall be due and payable in full in cash (or such other form of consideration as the Junior DIP Lender and the Borrowers may mutually agree) on the earliest of:
- September 30, 2023;
- the effective date of any chapter 11 plan of reorganization with respect to the Borrowers or any other Debtor;
- the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code;
- the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance with the DIP Documents;
- dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; and
- July 31, 2023, unless the Final Order has been entered by the Bankruptcy Court on or prior to such date.
- Use of Proceeds:The proceeds of the Junior DIP Facility shall be used only for the following purposes and, excluding payments pursuant to clause (ii) below, subject to the Budget and 20% permitted variances as set forth below:
- working capital and other general corporate purposes of the Borrowers and the Guarantors and certain subsidiaries;
- professional fees and expenses of administering the Chapter 11 Cases, to the extent the Bankruptcy Court authorizes payment (including fees incurred prior to the Closing Date);
- interest, fees and expenses payable under the Junior DIP Facility, including, without limitation, the Commitment Fee, the Funding Fee, the Exit Fee and the Junior DIP Lender Legal Expenses; and
- interest and other amounts payable under the Priming Credit Agreement.
- Milestone(s): The only milestones are the entry of the Interim Order on or before July 7, 2023 and the entry of the Final Order on or before July 31, 2023.
The Debtors have historically financed themselves primarily through equity sold in “at the market offerings,” pursuant to various sales agreements, including the most recent agreement dated December 3, 2021, with Cantor Fitzgerald & Co., B. Riley Securities, Inc., and H.C. Wainwright & Co., LLC, in their capacities as sales agents (the “ATM Sales Agreement”). Under this ATM Sales Agreement, STI may issue and sell shares of its common stock by any method permitted by law deemed to be an “at the market offering” under the Securities Act of 1933. As of the Petition Date, STI has raised net proceeds of approximately $457.6 million (in the aggregate) through various sales under the ATM Sales Agreement.
In February 2022 and September 2022, STI entered into two bridge loans for $45 million and $41.6 million, respectively. Both bridge loans have been repaid in full and are no longer outstanding.
As of the Petition Date, the Debtors do not have any funded debt obligations but have approximately $235 million in general unsecured debt — primarily consisting of approximately $60 million in trade payables and approximately $175 million on account of the Nant Award, although only $50 million of that is presently due and owing (the remainder of the Nant Award has been stayed).
Proposed Settlement with Nant Parties
The Debtors' motion seeking approval of the settlement provides: "The Settlement has a toggle framework whereby the Debtors can either (i) raise sufficient funds to irrevocably pay the more than $175 million owed to NantCell and NANTibody (on account of their two respective judgments) (the 'Nant Payments') or (ii) elect to not make such payments and 'walk away' with a full “divorce” from the Nant Parties.
In the payment scenario, referred to in paragraph 9(i) above, the Debtors have agreed with the DIP Lender, the Unsecured Creditors’ Committee, and the Equity Committee that they will not make the Nant Payments unless they have secured committed financing (without material contingencies) to pay each of (i) the DIP Facility, and (ii) unless otherwise agreed in advance in writing by the Unsecured Creditors’ Committee, all allowed general unsecured claims in full in cash on the effective date of a chapter 11 plan of reorganization (a 'Plan').
In the walk-away scenario, referred to in paragraph 9(ii) above, (i) the Debtors and the Nant Parties (including their respective Related Parties) will mutually release their pending litigation matters and all other claims and judgments against each other, including the approximately $175 million owed to NantCell and NANTibody; (ii) the Debtors will convey all of their ownership in NANTibody, NantCancerStemCell, LLC, and NantBio, Inc. to those respective entities (and Sorrento’s membership, directorship, and any other rights in those entities, as applicable, will be canceled); (iii) NantBio will pay the Debtors $1.5 million; and (iv) NantCell and the Nant Parties will obtain a full release of the Debtors’ royalty rights with respect to the PD-L1 antibody that is the subject of the April 21, 2015 Exclusive License Agreement between NantCell and Sorrento.
In short, the walk-away would be a full divorce of all relationships between the Debtors and the Nant Parties (and their respective Related Parties), so that both sides can continue operating without needing to interact with each other, thereby minimizing the prospect of future litigation.
This toggle framework will allow the Debtors to preserve optionality in the near term and determine the most value-maximizing path forward, as they continue their ongoing sale and financing marketing process. The implementation of the Settlement with the Nant Parties (i) will be effectuated through the Plan if the Plan is effective on or prior to July 14, 2023, or (ii) if the Plan is not effective on or prior to July 14, 2023, will be effectuated prior to and separate from the Plan pursuant to the Order."
Proposed Interim Budget
Petition Date Perspective
The Debtors provided in a press release: "As of its chapter 11 filing, Sorrento had over approximately $1 billion in assets, including a $125 million arbitration award against NantPharma, LLC for a dispute related to Sorrento’s sale of Cynviloq™. The company had approximately $235 million in liabilities as of its filing and faced a short-term liquidity crunch, due to insufficient cash or other short-term assets to satisfy certain obligations. Included among those obligations was a $175 million arbitration award against Sorrento, which was reduced to enforceable judgments on February 7, 2023 in favor of NantCell, Inc. and Immunotherapy NANTibody LLC. While $125 million of those judgments was stayed for 70 days, $50 million was not stayed and could be enforced immediately.
Sorrento assessed that enforcement actions with respect to the $50 million unstayed portion of these judgments, such as attachment of Sorrento’s assets and bank accounts, could lead to significant business disruption. As a result, Sorrento sought chapter 11 relief to safeguard business operations and its ability to continue developing life-saving therapeutics, while protecting and maximizing value for stakeholders.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Meghji Declaration”), Mohsin Meghji, the Debtors’ chief restructuring officer, detailed the events leading to Sorrento Therapeutics' Chapter 11 filing. The Meghji Declaration provides: “Prior to commencing these chapter 11 cases, Sorrento had a healthy balance sheet but faced a short-term liquidity crunch, as it had insufficient cash or other short-term assets to satisfy certain obligations.
As detailed below, a $175 million arbitration award against Sorrento was recently reduced to enforceable judgments in favor of the Nant Companies. Sorrento feared that enforcement actions with respect to these judgements, such as attachment of Sorrento’s assets and bank accounts, was going to lead to significant business disruptions, including its ability to continue developing life-saving and cutting-edge drugs. As a result, Sorrento has sought chapter 11 relief to obtain some breathing room, protect its business, and seek to maximize value for stakeholders.”
In an 8-K filed in respect of the Chapter 11 filings, the Debtors provide: "Ongoing Litigation. …the Company had also been engaged in arbitration before the American Arbitration Association against NantCell and NANTibody relating to alleged breaches of the April 21, 2015 Exclusive License Agreement entered into between the Company and NantCell and the June 11, 2015 Exclusive License Agreement entered into between the Company and NANTibody (the NantCell/NANTibody Arbitration'').
On December 2, 2022, the arbitrator in the NantCell/NANTibody Arbitration issued an award granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9% per annum (the “Nant Award”)….On February 7, 2023, the Court confirmed the Nant Award and issued a 70-day stay of enforcement of the judgment beyond $50 million. Following such confirmation, the Company believed that NantCell and NANTibody, in an attempt to satisfy the unstayed $50 million portion of the Nant Award, would imminently take steps to levy the Company’s assets, which would cause significant disruption and harm to the Company’s business, including its ability to continue developing life-saving and cutting-edge drugs."
About the Debtors
According to the Debtors: “Sorrento is a clinical and commercial stage biopharmaceutical company developing new therapies to treat cancer, pain (non-opioid treatments), autoimmune disease and COVID-19. Sorrento’s multimodal, multipronged approach to fighting cancer is made possible by its extensive immuno-oncology platforms, including key assets such as next-generation tyrosine kinase inhibitors (“TKIs”), fully human antibodies (“G-MAB™ library”), immuno-cellular therapies (“DAR-T™”), antibody-drug conjugates (“ADCs”), and oncolytic virus (“Seprehvec™”). Sorrento is also developing potential antiviral therapies and vaccines against coronaviruses, including STI-1558, COVISHIELD™ and COVIDROPS™, COVI-MSCTM; and diagnostic test solutions, including COVIMARK™.
Sorrento’s commitment to life-enhancing therapies for patients is also demonstrated by our effort to advance a TRPV1 agonist, non-opioid pain management small molecule, resiniferatoxin (“RTX”), and SP-102 (10 mg, dexamethasone sodium phosphate viscous gel) (SEMDEXA™), a novel, viscous gel formulation of a widely used corticosteroid for epidural injections to treat lumbosacral radicular pain, or sciatica, and to commercialize ZTlido® (lidocaine topical system) 1.8% for the treatment of postherpetic neuralgia (PHN). RTX has been cleared for a Phase II trial for intractable pain associated with cancer and a Phase II trial in osteoarthritis patients. Positive final results from the Phase III Pivotal Trial C.L.E.A.R. Program for SEMDEXA™, its novel, non-opioid product for the treatment of lumbosacral radicular pain (sciatica), were announced in March 2022. ZTlido® was approved by the FDA on February 28, 2018."
Corporate Structure Chart
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