Debt

6 Months Ended

Jun. 30, 2022

Debt Disclosure [Abstract]

Debt

7. Debt

2018 Purchase Agreements and Indenture for Scilex Pharmaceuticals Inc. (“Scilex Pharma”)

On September 7, 2018, Scilex Pharma entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and the Company. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of $224.0 million (the “Scilex Notes”) for an aggregate purchase price of $140.0 million (the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex Pharma also entered into an Indenture (the “Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee and collateral agent, and the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.

Actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 did not equal or exceed 95% of a predetermined target sales threshold for such period, which resulted in a $28.0 million increase in the principal

amount of the Scilex Notes, effective February 15, 2022. As a result, the Company recorded the increase of $28.0 million in principal and non-operating expense at December 31, 2021. Pursuant to the Indenture, if actual cumulative net sales of ZTlido for the period from October 1, 2022 through September 30, 2023 do not equal or exceed 80% of a predetermined target sales threshold for such period, the aggregate principal amount shall also be increased on November 15, 2023 by an amount equal to an amount to be determined by reference to the amount of such deficiency. In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounted for this feature as an embedded derivative (the “Scilex Notes Derivative”) that is required to be bifurcated from the Scilex Notes and measured at fair value in each reporting period (see Note 3 for details).

Effective February 14, 2022, Scilex Pharma issued to the Company a draw notice under the Letter of Credit as required under the terms of the Indenture because actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 were less than a specified sales threshold for such period. As a result of the draw notice being issued, the Company paid to Scilex Pharma $35.0 million in a single lump-sum amount as a subordinated loan. In February 2022, Scilex Pharma repurchased Scilex Notes from the holders thereof on a pro rata basis in an aggregate amount equal to $20.0 million.

On June 2, 2022, the Company and Scilex Pharma entered into a Consent Under and Amendment No. 4 to Indenture (the “Indenture Amendment”) with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association) and the Scilex Note Purchasers. Pursuant to the Indenture Amendment, (1) on June 3, 2022, Scilex Pharma repurchased approximately $41.4 million of the aggregate principal amount of the outstanding Scilex Notes at 100% of the principal amount thereof, (2) the Scilex Note Purchasers agreed that Scilex Pharma can repurchase the remaining principal amount of the Scilex Notes at any time on or before September 30, 2022 for $41.4 million (subject to reduction for any quarterly royalty payments) and upon such repurchase the Scilex Note Purchasers will forgive and discharge $28.0 million of the aggregate principal amount of the Scilex Notes (the “Early Paydown Provision”), (3) the minimum cash requirement under the Indenture was reduced to $5.0 million in aggregate unrestricted cash equivalents at the end of each calendar month, and (4) the maximum aggregate principal amount of that certain Intercompany Promissory Note issued by Scilex Pharma to the Company on October 5, 2018 was increased from up to $25.0 million to up to $50.0 million. The Company concluded that the Indenture Amendment was a troubled debt restructuring for accounting purposes. The future undiscounted cash flows of the Scilex Notes were higher than the carrying value of the Scilex Notes at the time of the entry into the Indenture Amendment, and accordingly, no gain was recognized in the quarter ended June 30, 2022. Due to a decrease of $30.4 million in the fair value of the Scilex Notes Derivative caused by the Indenture Amendment, the carrying value of the Scilex Notes was increased by $30.4 million.

Borrowings of the Scilex Notes consisted of the following (in thousands):

	June 30, 2022		December 31, 2021
Principal	$	74,877	$	133,998
Unamortized debt discount		—		(30,601	)
Unamortized debt issuance costs		—		(2,235	)
Carrying value	$	74,877	$	101,162
Estimated fair value	$	39,500	$	115,400

Future minimum payments under the Scilex Notes, based on a percentage of projected net sales of ZTlido, are estimated as follows (in thousands):

Year Ending December 31,
2022 (Remaining six months)	$	4,413
2023		12,005
2024		13,637
2025		14,746
2026		30,076
Total future minimum payments		74,877
Current portion		(10,131	)
Long-term portion of Scilex Notes	$	64,746

The Company made principal payments of $64.6 million and $42.4 million during the six months ended June 30, 2022 and 2021, respectively. The amount of debt discount and debt issuance costs included in interest expense for the three months ended June 30, 2022 and 2021 was approximately $1.2 million and $1.9 million, respectively. The amount of debt discount and debt issuance costs included in interest expense for the six months ended June 30, 2022 and 2021 was approximately $3.1 million and $4.0 million,

respectively. The Company recorded a loss on debt extinguishment of $4.8 million and $14.0 million in connection with its repayments of principal made during the six months ended June 30, 2022 and 2021, respectively.

Bridge Loan Agreement

On February 16, 2022, the Company entered into a Bridge Loan Agreement pursuant to which the Company borrowed $45.0 million in the form of a bridge loan (the “Bridge Loan”), which bore no interest and matured on June 16, 2022. Upon the occurrence and during the continuance of an “Event of Default” under the Loan Agreement, the Bridge Loan was to bear interest at the rate of 15% per annum. An “Event of Default” under the Loan Agreement included, among other things, the Company’s failure to pay any principal of, or interest on, the Bridge Loan when such principal or interest became due and payable or to otherwise perform or observe the terms of the Loan Agreement (subject to cure periods), a material inaccuracy of the Company’s representations and warranties under the Loan Agreement, a failure by the Company to generally pay its debts as they become due or a bankruptcy, insolvency or similar event involving the Company. The amount of debt discount and debt issuance costs included in interest expense for the six months ended June 30, 2022 was $0.9 million. The Company recorded a loss on debt extinguishment of $0.9 million in connection with its repayments of principal made during the six months ended June 30, 2022. The Company fully repaid the Bridge Loan during the six months ended June 30, 2022.

ACEA Significant Debt Arrangements

Borrowings under significant debt arrangements assumed in connection with the Company’s acquisition of ACEA consisted of the following (in thousands):

	June 30, 2022			December 31, 2021
Principal	$	27,555		$	29,048
Unamortized debt discount		(9,154	)		(10,642	)
Carrying value	$	18,401		$	18,406
Estimated fair value	$	14,200		$	17,100