November 30, 2023 – The Court hearing the Sorrento Therapeutics, Inc. cases issued an order confirming the Debtors’ Modified Joint Plan of Liquidation [Docket No. 1616].
In approving the Plan, Judge Christopher Lopez rejected an objection filed by the Debtors' equity committee which had argued that the equity was very much in the money and would have had a recovery barring the Debtors' mismanagement of the cases.
The equity committee had argued: "At the commencement of these Chapter 11 Cases, the Debtors’ largest asset, its controlling equity interest in Scilex Holding Company (“Scilex”), alone had a total market value of over $450 million. Sorrento itself had a market capitalization of approximately $150 million. The Debtors had no funded debt, little trade debt, and an outstanding litigation judgment that was subject to set-off and a promising mediation. In other words, the Debtors were unquestionably solvent, equity was 'in the money,' and the Debtors had the potential to emerge from Chapter 11 as a healthy going concern….All of that changed due to what the Equity Committee believes to be a grossly mismanaged bankruptcy case. In the Equity Committee’s view, from the outset, the Debtors failed to implement a robust asset sale process, failed to pursue actionable financing sources to extend the runway and to prevent the current liquidity shortfall (including financing sources introduced to the Debtors by the Equity Committee), incurred burdensome and expensive DIP financing with an insufficient runway for a meaningful sale process, and were not fully transparent to the Equity Committee’s professionals about the Debtors’ assets and value."
In a long, whispered, fatigued summary of his views, Judge Lopez made it clear that these freefall cases had no better outcomes and that although he felt the pain of equity holders (including as to concerns relating to the "administrative burn" of the cases [$60.0m in professional fees]), he had not seen any proposals that paid creditors in full and left something on the table for equity.
That said, he did note that effectiveness remains 4-5 months down the road and that he was fully comfortable that should a better proposal emerge that the U.S Trustee assigned to the cases (and his own chambers) would make sure that any such proposal, a "home run deal" would get a fair look. He did not, however, nothwithstanding that he hopes one of the Debtors' pipeline drugs "makes some money," hold out much hope that such a turn of events would occur. Regardless, that had nothing to do with the decision he was making on the day, based on all of the "real time" evidence in front of him. In arguing for the integrity of the imperfect Plan in front of him Judge Lopez noted the lack of releases and exculpation provisions in the Plan (something he had not seen "in all his years on the bench") as well as the alignment of unsecured creditors (not being made whole) with the Debtors and equity as to finding that "home run deal."
UPDATE: On December 13th, the Court hearing the Sorrento Therapeutics, Inc. cases issued a corrected order confirming the Debtors’ Modified Joint Plan of Liquidation, with the only change apparent change (the document/version number unchanged) being that it attaches the Plan of Liquidation as Exhibit A [Docket No. 1652]. NB: The order itself provides the following footnote: "This Corrected Order modifies the Order Approving Debtors’ Disclosure Statement and Confirming Modified Joint Plan of Liquidation of Sorrento Therapeutics, Inc. and Scintilla Pharmaceuticals, Inc. Under Chapter 11 of the Bankruptcy Code [Docket No. 1616] by attaching the Plan as Exhibit A."
Case Evolution
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” as the factors compelling their bankruptcy filings.
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 approving proposed bidding procedures for the sale of substantially all of the Debtors’ assets as part of a “toggle Plan.”
On July 5th, the Court issued an order authorizing the Debtors to access $21.6mn in new money, junior debtor-in-possession (“DIP”) financing, on an interim basis, being provided by non-debtor subsidiary Scilex Holding Company (“Scilex,” or the “Junior DIP Lender”). The request for further DIP funding comes as additional liquidity from the earlier approved $75.0mn [and now senior] DIP facility proved insufficient to carry the Debtors through what is a longer than expected stay in bankruptcy. The Junior DIP Lender had a right of first refusal as to the provision of further DIP financing, which it declined to exercise as to the Oramed DIP, to which it otherwise consented.
On August 7th, the Court issued a final order authorizing the Debtors to access $100.0mn of replacement, new money, debtor-in-possession (“DIP”) financing being provided by Oramed Pharmaceuticals, Inc. (“Oramed,” the “Replacement DIP Lender,” and the “Stalking Horse Buyer”) and continue using cash collateral.
On August 14th, the Court issued an order approving the Judge Isgur-led NANT mediation (please see our separate coverage on this critical development).
On September 12th, the Court issued an order approving the sale of the Debtors’ Scilex Stock to Junior DIP Lender Scilex Holding Company (“Purchaser” or “Scilex,” $145.25mn purchase price), which conditionally vacates an earlier August 30th Oramed sale order. The sale closed on September 21st.
On October 18th, the Court issued an order approving the sale of all of the Debtors’ common shares in ImmuneOncia Therapeutics Inc., along with certain related patents, technology, inventory and books and records to Yuhan Corporation (the “Buyer,” $20.0mn cash purchase price).
On November 16th, the Debtors filed an amended Joint Plan of Liquidation showing slight changes to the version filed on October 11, 2023.
On November 27th, the official committee of equity security holders appointed for the Debtors' Chapter 11 cases (the "Equity Committee") objected to a motion filed by the Debtors and joined by former Jackson Walker partner Elizabeth C. Freeman and and the Law Office of Liz Freeman PLLC seeking a protective order in respect of certain discovery requests, arguing, in part, that failure to obtain the requested information on a romantic relationship between Freeman and Judge David R. Jones could affect plan confirmation issues.
Plan Overview
The Debtors' memorandum of law in support of Plan confirmation (the "Memorandum") states, "The Plan should be confirmed. It satisfies the Bankruptcy Code’s requirements. It was proposed in good faith by the Debtors and negotiated by various stakeholders, including the Unsecured Creditors’ Committee (which supports the Plan) and the U.S. Trustee. It contains no releases. It is a value-maximizing conclusion to these cases and provides for recoveries greater than the chapter 7 alternative. And it was overwhelmingly accepted by the sole voting class (Class 3, General Unsecured Claims) — with over 96% of voting creditors (in number) and over 94% of voted claims (in amount) accepting the Plan.
The Debtors have resolved all objections to the Plan, other than the objection filed by the Equity Committee [Docket No. 1525] and the joinder filed by certain shareholders [Docket No. 1563]. And though the Debtors do not expect to consummate the Plan until spring 2024 for certain operational reasons, confirmation should not be delayed as the Debtors cannot afford the expense of continuing to entertain potential plan alternatives….
The Debtors filed these chapter 11 cases on February 13, 2023 — more than nine months ago. Since then, the Debtors and their professionals have spent significant time, resources, and efforts working to maximize the value of these estates, for the benefit of the Debtors’ stakeholders. These efforts included a lengthy, extensive marketing process where the Debtors solicited financing and sale proposals. As a result of that process, the Debtors consummated three post-petition financing facilities (all of which have been paid or otherwise satisfied in full) and two major asset sales (the ~$145 million Scilex stock sale and the $20 million ImmuneOncia Therapeutics joint venture sale).
To date, however, no legitimate, actionable reorganization solution has been proposed to the Debtors. Thus, under these circumstances, the Debtors and the Unsecured Creditors’ Committee have determined that the best value-maximizing solution to conclude these cases is a chapter 11 plan of liquidation (i.e., the Plan)."
In response to the Equity Committee's objection, the Memorandum provides, "The Equity Committee’s objection (interestingly signed by only one of the committee’s two law firms) and the joinder thereto filed by certain shareholders are irrelevant distractions to confirmation, are overflowing with inaccurate statements and assumptions, and were filed by out-of-the-money constituents that now want to second-guess the Debtors’ business judgment over the last nine months — even when such constituents did not object to many of the transactions about which they now complain.
While the Debtors or other parties may have believed that the Debtors were solvent when they filed these cases more than nine months ago, the market has spoken. So while the Debtors’ advisors and stakeholders may have hoped for a better solution, the reality is that the Debtors are insolvent with limited liquidity remaining. The Debtors and their professionals reserve all rights with respect to the claims made in the Equity Committee’s objection and the shareholders’ joinder thereto."
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms not otherwise defined below, are as defined in the Plan and/or Disclosure Statement, See also the Liquidation Analysis below):
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2(“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 3 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 56.9%. Each Holder will receive its Pro Rata share of the Liquidation Trust Recovery.
- Class 4 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 5 (“Scintilla Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 6 (“Sorrento Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
Definition:
- “Liquidation Trust Recovery” means the distribution available to Holders of Allowed Claims from the Liquidation Trust Assets, all as set forth in and pursuant to the Liquidation Trust Agreement and the terms herein; provided that after Allowed Claims have been paid in full in Cash, any remaining Liquidation Trust Assets shall be distributed to Holders of Allowed Equity Interests.
Voting Results
On November 16th, the Debtors’ claims agent notified the Court of the Plan voting results [Docket No. 1560], which were as follows:
- Class 3 (“General Unsecured Claims”) 112 claim holders, representing $46,756,777.36 (94.29%) in amount and 96.55% in number, voted in favor of the Plan. 4 claim holders, representing $2,829,336.88 (5.71%) in amount and 3.45% in number, rejected the Plan.
Key Documents
The revised Disclosure Statement [Docket No. 1430] attaches following exhibits:
- Exhibit A: Chapter 11 Plan
- Exhibit B: Scheduling Order
- Exhibit C: Liquidation Analysis
- Exhibit D: Equity Committee Proposal (to be filed)
The Debtors filed Plan Supplements [Docket Nos. 1491, 1564 and 1596], which attach the following documents:
Docket No. 1491
- Exhibit A: Liquidation Trust Agreement
- Exhibit B: Assumed Executory Contracts and Unexpired Leases
- Exhibit C: D&O Liability Insurance Policies
- Exhibit D: Liquidation Trust Causes of Action
Docket No. 1564
- Exhibit A: Liquidation Trust Agreement (no changes)
- Exhibit B: Assumed Executory Contracts & Unexpired Leases (no changes)
- Exhibit C-1: D&O Liability Insurance Policies
- Exhibit C-2: Redline Against Initial Plan Supplement
- Exhibit D-1: Liquidation Trust Causes of Action
- Exhibit D-2: Redline Against Initial Plan Supplement
Docket No. 1596
- Exhibit A-1: Liquidation Trust Agreement
- Exhibit A-2: Redline against Second Plan Supplement
- Exhibit B: Assumed Executory Contracts & Unexpired Leases (no changes)
- Exhibit C: D&O Liability Insurance Policies (no changes)
- Exhibit D: Liquidation Trust Causes of Action (no changes)
General Background
Petition Date Perspective
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.”
The Debtors and Scilex Holding Company (Nasdaq: SCLX, “Scilex”), a majority-owned subsidiary of Sorrento Therapeutics, Inc. (Nasdaq: SRNE, “Sorrento”) issued a press release in connection with Sorrento’s Chapter 11 filing.
Henry Ji, Ph.D., Chairman and Chief Executive Officer of Sorrento, commented: “Today, Sorrento Therapeutics, Inc. and its wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (‘Scintilla’), commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the ‘Bankruptcy Court’).
While Scilex is majority-owned by Sorrento, Scilex is not a debtor in Sorrento Therapeutics’ voluntary Chapter 11 filing. Scilex will continue to operate its business as usual.
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.”
Jaisim Shah, Chief Executive Officer and President of Scilex Holding Company, added: “Scilex is not a debtor in Sorrento’s chapter 11 filing and will continue to operate business as usual, with a focus on growing revenues, offering innovative, non-opioid pain management products and developing meaningfully differentiated programs that address significant unmet needs and lead to better health outcomes for the millions of acute and chronic pain patients.”
Goals of the Chapter 11 Filings
According to the Meghji Declaration (defined below): “While the Debtors and their advisors worked hard in the lead-up to this filing, they are still finalizing certain ‘first-day motions,’ which they intend to file as soon as possible within the next couple of days so that the Debtors can obtain authority to fund this week’s payroll by Thursday morning (February 16, 2023). Finally, the Debtors have started and will continue soliciting proposals for postpetition financing to provide additional funding for the remainder of these chapter 11 cases, so that Sorrento can pursue confirmation of a chapter 11 plan — which it fully intends to do. In the meantime, Sorrento is and will remain focused on maximizing value for the benefit of its estate and all stakeholders.
Given the valuable (but currently locked up and restricted (with exceptions and carveouts)) Scilex stock that STI owns, the Debtors are hopeful that — with the benefit of the breathing spell provided by the automatic stay and the opportunity to secure debtor-in-possession financing to address their short-term liquidity needs — they will be able to propose a plan of reorganization that pays off all creditors (including the Nant Companies) in full and reinstates equity.”
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.”
Prepetition Indebtedness
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).
Liquidation Analysis (see Exhibit C to Docket No. 1443]
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.”
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The post Sorrento Therapeutics, Inc. – Court Confirms San Diego-Based Biopharmaceutical’s Modified Joint Plan of Liquidation; Rejects Equity Committee Challenge (Although Noting Equity Still Has Four to Five Months Before Effectiveness to Find “Home Run Deal”) appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.