Item 1.03 Bankruptcy or Receivership.
On September 16, 2019, Sienna Biopharmaceuticals, Inc. (the “Company”) filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The case is being administered under the caption “In re: SIENNA BIOPHARMACEUTICALS, INC.” (the “Chapter 11 Proceeding”). The Company intends to continue to manage and operate its business and assets as a“debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.
Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under anOff-Balance Sheet Arrangement.
The Company is party to the Loan and Security Agreement, dated as of June 29, 2018, as amended on January 28, 2019 (the “Loan Agreement”), with Silicon Valley Bank (“SVB”). The filing of the Chapter 11 Proceeding is an “Event of Default” under the Loan Agreement. The occurrence of an Event of Default in connection with a voluntary bankruptcy proceeding under the Loan Agreement automatically triggers the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon and certain fees to become immediately due and payable, and SVB may seek relief from the Bankruptcy Court in connection with its rights.
On September 16, 2019, prior to filing the Chapter 11 Proceeding, and as a condition to SVB’s consent to the Company’s use of cash collateral to fund its operations during the Chapter 11 Proceeding, the Company made a payment to SVB in the amount of $21.3 million, which included $20.0 million principal amount plus the 6.5% final payment fee of $1.3 million under the Loan Agreement, and excluded the prepayment fee which SVB agreed to waive. The remaining aggregate principal balance outstanding under the Loan Agreement is $10.0 million.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
In anticipation of the Chapter 11 Proceeding, the Company implemented a corporate restructuring (the “Restructuring”) resulting in a reduction in force to reduce operational costs and preserve capital. The Restructuring resulted in an immediate elimination of 7 positions. The Company estimates that it willincur a one-time employee benefits and severance charge of approximately $1.3 million in the third quarter of 2019, in connection with the Restructuring.
On September 11, 2019, the Board of Directors of the Company (the “Board”) approved a management retention plan (the “MRP”) and key employee incentive bonus plan (the “KEIP”). The MRP and the KEIP are designed to retain Frederick Beddingfield, the President and Chief Executive Officer, Alexander Azoy, the Chief Financial Officer, Timothy Andrews, the General Counsel and Corporate Secretary, and Paul Lizzul, the Chief Medical Officer (collectively, the “Executive Officers”) through the completion of the Chapter 11 Proceeding and a potential asset sale and/or exit investment.
The MRP provides for a retention bonus for each of the Executive Officers, the amount of which ranges from 33% to 50% of such officer’s annual compensation. The retention bonuses under the MRP are earned in four installments subject to the officer being employed with the Company on such date: 25% on September 13, 2019; 25% on the 45th day following the date the Company files a bankruptcy petition in a U.S. Bankruptcy Court (the “Petition Date”); 25% on the 90th day following the Petition Date; and 25% on the earlier of the closing of a sale of all or substantially all of the Company’s assets or the effective date of the Chapter 11 plan.
The KEIP provides for a tieredone-time bonus for each of the Executive Officers in the event the Company consummates either (a) the sale of all or substantially all of its assets over a minimum aggregate level of proceeds (an “Asset Sale”) or (b) an exit investment in which a party sponsors a Chapter 11 reorganization and invests over a minimum level of funds in the Company (an “Exit Investment”), and such officer is employed by the Company on such date. The amount of theone-time bonus ranges from 25% to 62.5% of such officer’s annual compensation in the event of an Asset Sale and, in the event of an Exit Investment, the Executive officers are entitled to aone-time bonus equal to 62.5% of such officer’s annual compensation; provided, that in the event of an Asset Sale or Exit Investment with proceeds to the Company greater than a specified level, such officers are eligible to receive a pro-rata portion of 2.5% of the proceeds above such level.
