Scilex Holding Co current report, 11 September 2023

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Business Context and Reporting Period

Scilex Holding Company filed a Form 8-K reporting events beginning September 11, 2023, in connection with the Chapter 11 bankruptcy proceedings of its controlling stockholder, Sorrento Therapeutics, Inc., and Sorrento’s subsidiary Scintilla Pharmaceuticals, Inc. The report was signed and filed on September 13, 2023.

The filing concerns non-binding term sheets under which Scilex would replace Oramed Pharmaceuticals Inc. as the successful bidder for securities of Scilex held by Sorrento. The term sheets remained subject to definitive documentation and closing.

Key Financial and Capital Structure Matters

  • The transaction consideration for the transferred securities is $110 million, consisting of a $5 million advance payment, $100 million payable at closing or through assumption of the Senior DIP Facility, and an additional $5 million payable at closing.
  • Scilex would also assume approximately $12.25 million of Sorrento’s obligations to Paul Hastings LLP for legal fees and expenses.
  • Scilex would credit bid all amounts owed to it under its Junior DIP Facility.
  • The Junior DIP Facility has a base principal amount of up to $20 million, plus specified commitment, funding and holdback amounts.
  • Sorrento’s Senior DIP Facility from Oramed has an aggregate principal amount of $100 million and was drawn in full.
  • If Hudson Bay Capital Management LP funds $115 million under Option 1, the securities transfer would be funded in cash. If Hudson Bay does not timely fund, Scilex may assume the Senior DIP Facility under Option 2.
  • Under Option 2, Scilex would issue Oramed a senior secured note equal to the unpaid principal and accrued interest under the Senior DIP Facility. The note would mature 18 months after closing and bear interest at SOFR plus 8.5%, payable in kind and capitalized monthly.
  • Under Option 2, Scilex would also issue Oramed warrants for 13.0 million common shares at an exercise price of $0.01 per share and transfer warrants for 4.0 million common shares with an $11.50 exercise price.
  • The filing does not provide revenue, profit, cash flow, liquidity balances, operating margins or other recurring financial performance metrics.

Material Changes and Transaction Terms

  • Scilex, Oramed and Sorrento executed the Securities Transfer Term Sheet and Note Term Sheet on September 11, 2023. Both were non-binding and subject to definitive agreements.
  • Scilex would acquire substantially all Scilex securities owned by Sorrento, including approximately 59.7 million common shares, 29.1 million Series A preferred shares and Sorrento-held warrants, subject to stated exclusions.
  • The Bankruptcy Court approved the term sheets in a final order entered after the September 12, 2023 hearing.
  • The expected closing date was on or about September 19, 2023, although closing was not complete as of the filing.
  • The Oramed SPA, under which Oramed had agreed to acquire the securities for $105 million, was conditionally terminated and the related sale order conditionally vacated, effective upon closing of the Securities Transfer.
  • Trading restrictions on certain Scilex common shares distributed to Sorrento shareholders were extended through March 31, 2024.

Outlook, Risks and Unusual Items

Management’s forward-looking statements relate principally to execution of definitive documentation and completion of the Securities Transfer and related transactions. The filing does not provide operating guidance or forecasts.

  • Completion depends on definitive agreements, satisfaction of closing conditions, required approvals and timely funding by Hudson Bay under Option 1.
  • The transactions could be terminated or fail to close for other reasons, potentially leaving the Senior DIP structure and bankruptcy-related obligations unresolved.
  • If Option 2 applies, Scilex would incur substantial senior secured debt with capitalized interest and grant significant warrants and other rights to Oramed, including registration rights and board observer rights.
  • The transaction includes releases among Scilex, Sorrento, Oramed and related parties, with terms differing depending on the selected funding option.
  • The bankruptcy proceedings of Sorrento and Scintilla, restrictions on share transfers, potential dilution from warrants and reliance on external financing are material unusual items.

Facts Investors Should Verify

  • Whether definitive transaction documents were executed and whether the Securities Transfer closed.
  • Whether Hudson Bay funded the $115 million Option 1 commitment or whether Scilex assumed the $100 million Senior DIP Facility under Option 2.
  • The final amount of any senior secured note, including accrued and capitalized interest, and the collateral securing it.
  • The final number, terms and potential dilution from warrants issued or transferred to Oramed.
  • The status of Sorrento’s Chapter 11 proceedings, the Oramed SPA and the related Bankruptcy Court orders.
  • The duration and practical effect of the trading restrictions on Scilex shares through March 31, 2024.