Scilex Holding Co. Form 8-K Summary
Business Context and Reporting Period
Report date: September 21, 2023; the filing was signed September 26, 2023. The filing reports the closing of financing, securities-purchase, and related transactions involving Scilex, Oramed Pharmaceuticals, Inc. and Sorrento Therapeutics, Inc., during Sorrento’s Chapter 11 bankruptcy proceedings.
Scilex purchased securities from Sorrento, assumed certain senior debtor-in-possession obligations, and replaced the prior Oramed transaction structure. The transactions also resulted in Sorrento no longer holding a majority of Scilex’s voting power.
Key Financial Metrics and Capital Structure
- Oramed Note: Scilex issued a senior secured promissory note with an original principal amount of $101.875 million, maturing March 21, 2025.
- The note balance comprised $100.0 million of principal, $875,000 of accrued and unpaid interest, and $1.0 million of fees and expenses under the Senior DIP Facility.
- Interest accrues at Term SOFR or 4%, whichever is greater, plus 8.5%, and is payable in kind monthly. The filing does not provide a specific effective interest rate as of the reporting date.
- Scheduled principal installments are $5.0 million on December 21, 2023; $15.0 million on March 21, 2024; $20.0 million on each of June 21, September 21 and December 21, 2024; and the remaining balance on March 21, 2025.
- If the note is not repaid by March 21, 2024, a $3.056 million exit fee becomes earned and payable when the note is repaid.
- After the earlier of April 1, 2024 or repayment of specified acceptable indebtedness, 70% of net cash proceeds from specified financings or ELOC advances must be used for mandatory prepayment.
- The note is secured by substantially all property of Scilex and its guarantor subsidiaries. Subsidiaries also provided a guarantee, subject to specified limitations.
- Scilex paid Oramed $1.91 million of transaction-related fees at closing and included an additional $1.0 million in the note principal. Scilex also assumed approximately $12.25 million of certain Sorrento legal fees and expenses.
- The filing provides no revenue, net income, cash flow, margin, cash balance, or liquidity figures for the reporting period.
Material Changes Versus the Prior Comparable Period
- Scilex replaced the Senior DIP Facility obligations with the Oramed Note and related transaction documents.
- Scilex acquired from Sorrento 60,068,585 common shares, 29,057,097 Series A preferred shares, and warrants exercisable for 4,490,617 common shares at $11.50 per share.
- The purchase consideration included assumption of $100.0 million of Senior DIP obligations, a credit bid for amounts outstanding under Scilex’s Junior DIP Facility, $10.0 million in cash, and assumption of approximately $12.25 million of legal fees and expenses.
- Scilex issued Oramed warrants for up to 4.5 million common shares and additional warrants for up to 8.5 million shares, generally exercisable at $0.01 per share subject to vesting, timing and ownership restrictions.
- Scilex transferred to Oramed warrants exercisable for up to 4.0 million common shares at $11.50 per share, expiring November 10, 2027.
- Sorrento’s Stockholder Agreement with Scilex terminated at closing, and Sorrento ceased to hold majority voting control.
Outlook, Risks, Contingencies and Unusual Items
- The Oramed Note includes restrictive covenants limiting additional indebtedness, liens, asset dispositions, investments, dividends, stock repurchases, affiliate transactions and other corporate actions, subject to negotiated exceptions.
- Oramed has information rights and may designate a board observer while obligations remain outstanding. The observer may receive director-equivalent fees capped at $80,000 annually, plus up to $10,000 of annual expenses, subject to the note’s terms.
- Events of default include specified cross-defaults, change-of-control or fundamental transactions, and certain registration-rights or warrant-related failures. Default provisions may increase interest and require repayment at 125% of principal, plus accrued interest and other amounts.
- Voluntary prepayments before the one-year anniversary generally require a make-whole payment equal to 50% of additional interest that otherwise would accrue through maturity.
- Scilex agreed to register the resale of shares underlying the transferred and penny warrants. Failure to meet registration obligations may result in liquidated damages of 2.0% per applicable 30-day period, capped at 12.0% of the aggregate subscription amount.
- Under the subordination agreement, the ABL lender retains first-priority liens on specified collateral, while the Oramed-related obligations receive first-priority liens on other collateral and second-priority liens on the ABL priority collateral. The ABL facility cap may not exceed $30.0 million.
- The penny warrants are subject to a 9.9% beneficial ownership limitation, although Oramed may change that limitation with 61 days’ notice. Potential future exercises could materially dilute existing shareholders.
- The filing does not provide management guidance or an operating outlook.
Important Facts for Investors to Verify
- Verify the current outstanding principal, accrued payment-in-kind interest, and repayment status of the Oramed Note.
- Review whether the December 2023, March 2024 and subsequent scheduled installments were paid or refinanced.
- Confirm compliance with the note’s mandatory prepayment sweep, restrictive covenants and potential exit-fee provisions.
- Check the status and effectiveness of registration statements for the shares underlying the warrants and any resulting liquidated damages.
- Assess potential dilution from the 13.0 million penny warrants, 4.0 million transferred warrants and other acquired or outstanding securities.
- Review the effect of the Sorrento transaction on voting control, preferred-stock rights, collateral ownership and the bankruptcy proceedings.
- Consult the full exhibits for the precise definitions of events of default, collateral priorities, permitted indebtedness and exceptions to the financing restrictions.