Item 5.02 Departure of Directors or Certain Officers; Election
of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Effective December 9, 2019 and in accordance
with the Letter Agreement, the Board appointed Edgar Lee as a director of the Company.
Edgar Lee, age 43, has been a Managing
Director at Oaktree Capital Management, L.P., and has served as the portfolio manager for Oaktree Capital Management, L.P.’s
Strategic Credit strategy, since 2013. From July 2018 to September 2019, Mr. Lee served as the Chairman of the Board of Directors,
Chief Executive Officer and Chief Investment Officer of Oaktree Strategic Income II, Inc. Mr. Lee also served as Chief Executive
Officer and Chief Investment Officer for Oaktree Specialty Lending Corporation and Oaktree Strategic Income Corporation from October
2017 to September 2019. From 2010 to 2013, Mr. Lee was a Senior Vice President within Oaktree Capital Management, L.P.’s
Distressed Debt group and led a number of the group’s investments in the media, technology and telecom industries. Prior
to joining Oaktree Capital Management, L.P. in 2007, Mr. Lee worked within the Investment Banking division at UBS Investment Bank
in Los Angeles, where he was responsible for advising clients on a number of debt and preferred stock restructurings, leveraged
financings, buy-side and sell-side M&A, mezzanine financings and recapitalizations. Before that, he was employed within the
Fixed Income division at Lehman Brothers Inc. Prior experience includes work at Katzenbach Partners LLP and the Urban Institute.
Mr. Lee has served on the board of directors of Neo Performance Materials Inc. (TSX: NEO) since August 2016 and previously served
on the boards of directors of Nine Entertainment Co. (ASX: NEC) and Charter Communications, Inc. (NASDAQ: CHTR) from January 2011
to May 2013. Mr. Lee received a B.A. degree in economics from Swarthmore College and an M.P.P. with a concentration in applied
economics from Harvard University.
On December 9, 2019, Mr. Lee will be granted
an option to purchase 75,000 shares of the Company’s common stock that will vest on a monthly basis over 12 months commencing
on December 9, 2019. The option will have an exercise price that is equal to the closing price of the Company’s common stock
on the date of grant. As a non-employee director, Mr. Lee will be entitled to receive the Company’s standard cash retainers
for membership on the Board and any committees of the Board, as disclosed under “Outside Director Compensation Policy”
in the Company’s definitive proxy statement for its 2019 Annual Meeting of Stockholders on Schedule 14A filed with the SEC
on August 14, 2019.
The Company also entered into an indemnification
agreement with Mr. Lee in the same form as its standard form of indemnity agreement with its other directors.
There are no family relationships between
Mr. Lee and any director or executive officer of the Company. He was selected by the Board to serve as a director pursuant to the
Letter Agreement.
The following are descriptions of transactions
or series of transactions since January 1, 2018, or any currently proposed transaction, to which the Company has been a party,
in which the amount involved in the transaction or series of transactions exceeds $120,000 and in which Mr. Lee had or will have
a direct or indirect material interest, other than compensation arrangements that are described above:
2018 Purchase Agreements and Indenture
for Scilex Pharmaceuticals Inc.
On September 7, 2018, Scilex Pharmaceuticals
Inc. (“Scilex Pharma”) entered into purchase agreements (the “2018 Purchase Agreements”) with certain investors
(the “Purchasers”) and the Company. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma,
among other things, issued and sold to the Purchasers senior secured notes due 2026 (the “Scilex Notes”) with an aggregate
principal of $224.0 million for an aggregate purchase price of $140.0 million (the “Offering”). In connection with
the Offering, Scilex Pharma also entered into an indenture governing the Scilex Notes (the “Indenture”) with U.S. Bank
National Association, as trustee (the “Trustee”) and collateral agent (the “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. The holders of the Scilex
Notes will be entitled to receive quarterly payments of principal of the Scilex Notes equal to a percentage, in the range of 10%
to 20% of the net sales of ZTlido® (lidocaine topical system) 1.8% for the prior fiscal quarter, beginning on February 15,
2019. Pursuant to the terms of the Indenture, the percentage of net sales payable and the aggregate principal amount due are subject
to increase if certain conditions are not met.
Certain entities affiliated with Oaktree purchased $80 million aggregate principal amount of the Scilex Notes in the Offering. Mr. Lee was a Managing
Director at Oaktree at the time of the Offering.
Oaktree Term Loan Agreement
On November 7, 2018, the Company and the Guarantors entered into the Original Loan Agreement for the Initial Loan and a
second tranche of $50.0 million, subject to the achievement of certain commercial and financial milestones between August 7, 2019
and November 7, 2019 and the satisfaction of certain customary conditions (the “Conditional Loan”). In connection with
the Original Loan Agreement, the Company and the Guarantors entered into a Collateral Agreement with the Agent (the “Collateral
Agreement”). The Collateral Agreement provides that the Initial Loan and the Conditional Loan are secured by substantially
all of the Company’s and the Guarantors’ assets and a pledge of 100% of the equity interests in other entities that
each of the Company and the Guarantors holds (subject to certain exceptions and other than equity interests held by the Company
or a Guarantor in certain foreign subsidiaries, which is limited to 65% of such voting equity interests).
In connection with the Loan Agreement,
on November 7, 2018, the Company issued to the Lenders warrants to purchase 6,288,985 shares of the Company’s common stock
(the “Initial Warrants”). The Initial Warrants have an exercise price per share of $3.28, subject to adjustment for
stock splits, reverse stock splits, stock dividends and similar transactions, are exercisable from May 7, 2019 through May 7, 2029
and are exercisable solely on a cash basis, unless there is not an effective registration statement covering the resale of the
shares issuable upon exercise of the Initial Warrants, in which case the Initial Warrants shall also be exercisable on a cashless
exercise basis.
On May 3, 2019, the Company, the Guarantors
and the Lenders and the Agent entered into an amendment (the “First Amendment”) to the Loan Agreement. Under the terms
of the First Amendment, among other things, on May 3, 2019, the Lenders loaned to the Company $20.0 million of the Conditional
Loan in the form of the Early Delayed Draw Loan, notwithstanding that the commercial and financial milestones had not occurred.
The Initial Loan will mature on November 7, 2023. The Early Delayed Draw Loan will mature on May 3, 2020. The Term Loans may be
prepaid by the Company, in whole or in part at any time, subject to a prepayment fee. Upon any prepayment or repayment of all or
a portion of the Term Loans, the Company has agreed to pay the Lenders an exit fee equal to 1.25% of the principal amount paid
or prepaid amounting to approximately $1.5 million.
In connection with the First Amendment,
on May 3, 2019, the Company issued to the Lenders warrants to purchase an aggregate of 1,333,304 shares of the Company’s
common stock (the “2019 Warrants”). The 2019 Warrants have an exercise price per share of $3.94, subject to adjustment
for stock splits, reverse stock splits, stock dividends and similar transactions, are exercisable from November 3, 2019 through
November 3, 2029 and are exercisable solely on a cash basis, unless there is not an effective registration statement covering the
resale of the shares issuable upon exercise of the 2019 Warrants, in which case the 2019 Warrants shall also be exercisable on
a cashless exercise basis.
The information contained under Item 1.01
is hereby incorporated by reference in its entirety into this Item 5.02.
The Company pays Oaktree an annual fee
of $100,000 for certain advisory services provided to the Board and an annual fee of $100,000 for certain advisory services provided
to the Board of Scilex Holding Company.
Mr. Lee was a Managing Director at Oaktree, which is the manager of each of the Lenders, during each of the above transactions. In addition, Oaktree is the parent of OCM Investments LLC, which is the investment manager of each of the Lenders. Mr. Lee
was the Chairman of the Board of Directors, Chief Executive Officer and Chief Investment Officer of Oaktree Strategic Income II,
Inc., which is one of the Lenders, during each of the above transactions. Mr. Lee was the Chief Executive Officer and Chief Investment
Officer for Oaktree Specialty Lending Corporation, which is the sole owner and managing member of OCSL SRNE, LLC, which is one
of the Lenders, during each of the above transactions.
On December 9, 2019, the Company issued
a press release announcing the appointment of Mr. Lee to the Board. A copy of the press release is filed herewith as Exhibit 99.1