UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

(Rule 14a-101)

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant  Filed by a Party other than the Registrant 

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    Preliminary Proxy Statement

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    Definitive Proxy Statement

    Definitive Additional Materials

    Soliciting Material under § 240.14a-12

Sorrento Therapeutics, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other Than the Registrant)

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4955 Directors Place
San Diego, California 92121

NOTICE OF 2020 ANNUAL MEETING OF
STOCKHOLDERS AND PROXY STATEMENT

Dear Stockholder:

On behalf of our Board of Directors, I cordially invite you to attend the annual meeting of stockholders (the “Annual Meeting”) of Sorrento Therapeutics, Inc. (the “Company”) to be held virtually, via live webcast at www.virtualshareholdermeeting.com/SRNE2020, on Friday, October 16, 2020 at 12:00 p.m. Pacific Time, for the following purposes:

 

1.

To elect seven (7) directors for a one-year term to expire at the 2021 annual meeting of stockholders;

 

2.

To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020;

 

3.

To approve the Sorrento Therapeutics, Inc. 2020 Employee Stock Purchase Plan;

 

4.

To approve the amendment to the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares;

 

5.

To approve the CEO Performance Award for Henry Ji, Ph.D.; and

 

6.

To transact such other matters as may properly come before the Annual Meeting and any adjournment or postponement thereof.

Our board of directors has fixed August 17, 2020 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting and at any adjournment or postponement of the Annual Meeting. We intend to mail this proxy statement and the accompanying proxy card on or about September 1, 2020 to all stockholders of record entitled to vote at the Annual Meeting.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held Virtually, Via Live Webcast at www.virtualshareholdermeeting.com/SRNE2020, on October 16, 2020 at 12:00 p.m. Pacific Time.

The proxy statement and annual report to stockholders are available at www.proxyvote.com.

By the Order of the Board of Directors

/s/ Henry Ji, Ph.D.                                                         
Henry Ji, Ph.D.
Chairman of the Board, President and Chief Executive Officer

Dated: September 1, 2020

You are cordially invited to attend the Annual Meeting virtually, via live webcast. Whether or not you expect to attend the Annual Meeting, we urge you to vote your shares at your earliest convenience. This will ensure the presence of a quorum at the Annual Meeting. Promptly voting your shares will save the Company the expenses and extra work of additional solicitation. An addressed envelope for which no postage is required if mailed in the United States is enclosed if you wish to vote by mail. Submitting your proxy now will not prevent you from voting your shares at the Annual Meeting if you desire to do so, as your proxy is revocable at your option. Your vote is important, so please act today!

If you have questions or need assistance voting your shares please contact:

Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, NY 10022
Stockholders in the U.S. and Canada please call toll-free: (888) 750-5834
Stockholders in other locations please call: + (412) 232-3651
Banks and Brokers may call collect: (212) 750-5833

 

 


 

TABLE OF CONTENTS

 

 

Page

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

1

PROPOSAL 1: ELECTION OF DIRECTORS

8

PROPOSAL 2: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

18

PROPOSAL 3: APPROVAL OF THE SORRENTO THERAPEUTICS, INC. 2020 EMPLOYEE STOCK PURCHASE PLAN

21

PROPOSAL 4: AMENDMENT TO THE SORRENTO THERAPEUTICS, INC. 2019 STOCK INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE THEREUNDER BY 12,500,000 SHARES

26

PROPOSAL 5: APPROVAL OF THE CEO PERFORMANCE AWARD FOR HENRY JI, PH.D.

35

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

46

EXECUTIVE COMPENSATION

48

DIRECTOR COMPENSATION

59

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

60

ADDITIONAL INFORMATION

64

OTHER MATTERS

64

APPENDIX A - SORRENTO THERAPEUTICS, INC. 2020 EMPLOYEE STOCK PURCHASE PLAN

A-1

APPENDIX B – 2019 STOCK INCENTIVE PLAN

B-1

APPENDIX C - CEO PERFORMANCE AWARD

C-1

 

 

 

i

 


 

4955 Directors Place
San Diego, California 92121

PROXY STATEMENT FOR THE 2020 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 2020

The Board of Directors (the “Board”) of Sorrento Therapeutics, Inc. (“Sorrento” or the “Company”) is soliciting your proxy to vote at the Annual Meeting of Stockholders (the “Annual Meeting”) to be held virtually, via live webcast at www.virtualshareholdermeeting.com/SRNE2020, on October 16, 2020 at 12:00 p.m. Pacific Time, including at any adjournments or postponements of the Annual Meeting. You are invited to attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the Annual Meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card if you received paper copies of the proxy materials, or follow the instructions below to submit your proxy over the Internet.

We intend to mail this proxy statement and the accompanying proxy card on or about September 1, 2020 to all stockholders of record entitled to vote at the Annual Meeting.

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

How do I attend the Annual Meeting?

Due to the emerging public health impact of the coronavirus, or COVID-19, we have decided to hold the Annual Meeting virtually. We are sensitive to the public health and travel concerns our stockholders may have and the protocols that federal, state and local governments may impose.

The Annual Meeting will be held on October 16, 2020 at 12:00 p.m. Pacific Time and will be conducted solely online via live webcast. You will be able to attend and participate in the Annual Meeting online, vote your shares electronically and submit your questions prior to and during the meeting by visiting www.virtualshareholdermeeting.com/SRNE2020 on Friday, October 16, 2020 at 12:00 p.m. Pacific Time.

To be admitted to the Annual Meeting at www.virtualshareholdermeeting.com/SRNE2020, you must enter the control number included in your proxy materials. There is no physical location for the Annual Meeting. We recommend you log in at least 15 minutes before the Annual Meeting to ensure you are logged in when the meeting starts. Further instructions on how to attend and participate online are available at www.virtualshareholdermeeting.com/SRNE2020.

Who is Entitled to Vote?

The Board has fixed the close of business on August 17, 2020 as the record date (the “Record Date”) for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. As of August 17, 2020, there were 255,096,642 shares of common stock outstanding. Each share of common stock represents one vote that may be voted on each proposal that may come before the Annual Meeting.

What is the Difference Between Holding Shares as a Record Holder and as a Beneficial Owner (Holding Shares in Street Name)?

If your shares are registered in your name with our transfer agent, Philadelphia Stock Transfer, Inc., you are the “record holder” of those shares. If you are a record holder, these proxy materials have been provided directly to you by the Company.

If your shares are held in a stock brokerage account, a bank or other holder of record, you are considered the “beneficial owner” of those shares held in “street name.” If your shares are held in street name, these proxy materials have been forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Annual Meeting. As the beneficial owner, you have the right to instruct this organization on how to vote your shares. Because you are not the stockholder of record, you may not vote your shares electronically during the Annual Meeting unless you request and obtain a valid proxy issued in your name from the broker, bank or other nominee considered the stockholder of record of the shares.

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Who May Attend the Annual Meeting?

Only record holders and beneficial owners of our common stock, or their duly authorized proxies, may attend the Annual Meeting. If your shares of common stock are held in street name and you wish to vote your shares at the Annual Meeting, you will need to request and obtain a valid proxy issued in your name from the broker, bank or other nominee considered the stockholder of record of the shares. Stockholders may also attend the Annual Meeting as a “Guest”. To join as a “Guest”, enter your name and email address; there will be no password. If you join as a “Guest”, you will not have the option to vote your shares or ask questions during the Annual Meeting.

What am I Voting on?

There are five matters scheduled for a vote:

 

1.

To elect seven (7) directors for a one-year term to expire at the 2021 annual meeting of stockholders;

 

2.

To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020;

 

3.

To approve our 2020 Employee Stock Purchase Plan;

 

4.

To approve the amendment to our 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares; and

 

5.

To approve the CEO Performance Award for Henry Ji, Ph.D.

What if Another Matter is Properly Brought Before the Annual Meeting?

The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote on those matters in accordance with their best judgment.

What is the Board’s Voting Recommendation?

The Board recommends that you vote your shares:

 

1.

For” the election of each of the seven (7) nominees to our Board;

 

2.

For” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2020;

 

3.

For” the approval of our 2020 Employee Stock Purchase Plan;

 

4.

For” the approval of the amendment to our 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares; and

 

5.

For” the approval of the CEO Performance Award for Henry Ji, Ph.D.

How Do I Vote?

Stockholders of Record

For your convenience, record holders of our common stock have three methods of voting:

 

1.

Vote by Internet. The website address for Internet voting is on your vote instruction form.

 

2.

Vote by mail. Mark, date, sign and promptly mail the enclosed proxy card (a postage-paid envelope is provided for mailing in the United States).

 

3.

Vote online during the Annual Meeting Log in to www.virtualshareholdermeeting.com/SRNE2020 using the control number included in your proxy materials and vote during the Annual Meeting online.

Beneficial Owners of Shares Held in Street Name

For your convenience, beneficial owners of our common stock have three methods of voting:

 

1.

Vote by Internet. The website address for Internet voting is on your vote instruction form.

 

2.

Vote by mail. Mark, date, sign and promptly mail your vote instruction form (a postage-paid envelope is provided for mailing in the United States).

 

3.

Vote at the Meeting. Obtain a valid legal proxy from the organization that holds your shares and log in to www.virtualshareholdermeeting.com/SRNE2020 using the control number included in the legal proxy and vote during the Annual Meeting online.

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If you vote by Internet, please DO NOT mail your proxy card.

All shares entitled to vote and represented by a properly completed and executed proxy received before the Annual Meeting and not revoked will be voted at the Annual Meeting as instructed in a proxy delivered before the Annual Meeting. If you do not indicate how your shares should be voted on a matter, the shares represented by your properly completed and executed proxy will be voted as the Board recommends on each of the enumerated proposals, with regard to any other matters that may be properly presented at the Annual Meeting and on all matters incident to the conduct of the Annual Meeting. If you are a registered stockholder and attend the Annual Meeting online, you may vote online using the web page for the Annual Meeting. If you are a street name stockholder and wish to vote during the Annual Meeting, you will need to obtain a legal proxy from the institution that holds your shares and log in using the control number included in the legal proxy and vote online using the web page for the Annual Meeting. All votes will be tabulated by the inspector of elections appointed for the Annual Meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes.

We provide Internet proxy voting to allow you to vote your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

How Many Votes do I Have?

On each matter to be voted upon, you have one vote for each share of common stock you own as of the close of business on the Record Date.

Is My Vote Confidential?

Yes, your vote is confidential. Only the inspector of elections, individuals who help with processing and counting your votes and persons who need access for legal reasons will have access to your vote. This information will not be disclosed, except as required by law.

What Constitutes a Quorum?

To carry on business at the Annual Meeting, we must have a quorum. A quorum is present when the holders of a majority of the voting power of all shares entitled to vote, as of the Record Date, are represented at the Annual Meeting. Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote during the Annual Meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. Shares owned by us are not considered outstanding or considered to be present at the Annual Meeting. If there is not a quorum at the Annual Meeting, the chairperson of the Annual Meeting may adjourn the Annual Meeting.

How Will my Shares be Voted if I Give No Specific Instruction?

We must vote your shares as you have instructed. If there is a matter on which a stockholder of record has given no specific instruction but has authorized us generally to vote the shares, they will be voted as follows:

 

1.

For” the election of each of the seven (7) nominees to our Board;

 

2.

For” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2020;

 

3.

For” the approval our 2020 Employee Stock Purchase Plan;

 

4.

For” the approval of amendment to our 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares; and

 

5.

For” the approval of the CEO Performance Award for Henry Ji, Ph.D.

This authorization would exist, for example, if a stockholder of record merely signs, dates and returns the proxy card but does not indicate how his, her or its shares are to be voted on one or more proposals. If other matters properly come before the Annual Meeting and you do not provide specific voting instructions, your shares will be voted at the discretion of the proxies.

If your shares are held in street name, see “What is a Broker Non-Vote?” below regarding the ability of banks, brokers and other such holders of record to vote the uninstructed shares of their customers or other beneficial owners in their discretion.

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How are Votes Counted?

Votes will be counted by the inspector of election appointed for the Annual Meeting, who will separately count, for the election of directors, “For,” “Withhold” and broker non-votes; and, with respect to the other proposals, votes “For” and “Against,” abstentions and broker non-votes. Broker non-votes will not be included in the tabulation of the voting results of any of the proposals and, therefore, will have no effect on such proposals, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for each of the proposals by reducing the total number of shares from which the majority is calculated.

What is a Broker Non-Vote?

If your shares are held in street name, you must instruct the organization who holds your shares how to vote your shares. If you sign your proxy card but do not provide instructions on how your broker should vote on “routine” proposals (discussed in the next question), your broker will vote your shares as recommended by the Board. If you do not provide voting instructions, your shares will not be voted on any “non-routine” proposals. This vote is called a “broker non-vote.” Because broker non-votes are not considered under Delaware law to be votes cast at the Annual Meeting, broker non-votes will not be included in the tabulation of the voting results of any of the proposals and, therefore, will have no effect on these proposals, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for each of the proposals by reducing the total number of shares from which the majority is calculated.

Brokers cannot use discretionary authority to vote shares on the election of directors (Proposal 1), on the approval of our 2020 Employee Stock Purchase Plan (Proposal 3), on the approval of the amendment to our 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares (Proposal 4) or on the approval of the CEO Performance Award for Henry Ji, Ph.D. (Proposal 5) if they have not received instructions from their clients. Please submit your vote instruction form so your vote is counted.

Which Proposals are Considered “Routine” or “Non-Routine”?

Proposal 2, the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2020, is considered a “routine” proposal. All of the other proposals to be voted upon at the Annual Meeting are considered “non-routine”, and if you do not provide voting instructions, your shares will be treated as broker non-votes and, therefore, will have no effect on such proposals, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for each of such proposals by reducing the total number of shares from which the majority is calculated.

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What is an Abstention?

An abstention is a stockholder’s affirmative choice to decline to vote on a proposal. Our Amended and Restated Bylaws provide that an action of our stockholders (other than the election of directors) is approved if a majority of the votes cast are in favor of such action, and the directors are elected by a plurality of the votes cast. Under Delaware law (under which Sorrento is incorporated), abstentions are counted as shares present and entitled to vote at the Annual Meeting, but they are not counted as shares cast. Therefore, abstentions will have no effect on Proposal 1, Proposal 2, Proposal 3, Proposal 4 or Proposal 5, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for such matter by reducing the total number of shares from which the majority is calculated.

How Many Votes are Needed for Each Proposal to Pass?

Proposal

 

Vote Required

 

Broker

Discretionary

Vote Allowed

Election of each of the seven (7) nominees to our Board

 

Plurality of the votes cast (the seven (7)  persons receiving the most “For” votes)

 

No

Ratification of the Appointment of Ernst & Young LLP as our Independent Registered Public Accounting Firm for our Fiscal Year Ending December 31, 2020

 

A majority of the votes cast

 

Yes

Approval of the Sorrento Therapeutics, Inc. 2020 Employee Stock Purchase Plan

 

A majority of the votes cast

 

No

Approval of the amendment to our 2019 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 12,500,000 shares

 

A majority of the votes cast

 

No

Approval of the CEO Performance Award for Henry Ji, Ph.D.

 

A majority of the votes cast; and a majority of the votes cast by holders of shares of common stock that are not beneficially owned, directly or indirectly, by Henry Ji, Ph.D.

 

No

What Are the Voting Procedures?

In voting by proxy with regard to the election of directors, you may vote in favor of all nominees, withhold your votes as to all nominees or withhold your votes as to specific nominees. With regard to other proposals, you may vote in favor of or against the proposal, or you may abstain from voting on the proposal. You should specify your respective choices on the accompanying proxy card or your vote instruction form.

Is My Proxy Revocable?

You may revoke your proxy and reclaim your right to vote at any time before your proxy is voted by giving written notice to the Company’s Secretary, by delivering a properly completed, later-dated proxy card or vote instruction form or by voting at the Annual Meeting. All written notices of revocation and other communications with respect to revocations of proxies should be addressed to: Sorrento Therapeutics, Inc., 4955 Directors Place, San Diego, California 92121, Attention: Corporate Secretary. Your most current proxy card or Internet proxy is the one that will be counted.

Who is Paying for this Proxy Solicitation?

The entire cost of soliciting proxies, including the costs of preparing, assembling, printing and mailing this proxy statement, the proxy card and any additional soliciting materials furnished to stockholders, will be borne by us. Copies of solicitation material will be furnished to banks, brokerage houses, dealers, voting trustees, their respective nominees and other agents holding shares in their names, which are beneficially owned by others, so that they may forward such solicitation material, together with our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, to beneficial owners. In addition, if asked, we will reimburse these persons for their reasonable expenses in forwarding these materials to the beneficial owners.

We have engaged Innisfree M&A Incorporated (“Innisfree”) to solicit proxies from stockholders in connection with the Annual Meeting. We will pay Innisfree a fee of approximately $20,000, plus an agreed upon fee per call made or received from certain retail investors plus reasonable out-of-pocket fees and expenses for soliciting proxies. In addition, Innisfree and certain related persons will be indemnified against certain liabilities arising out of or in connection with the engagement.

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What does it mean if I receive more than one proxy card?

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

Do I Have Dissenters’ Rights of Appraisal?

Our stockholders do not have appraisal rights under Delaware law or under our governing documents with respect to the matters to be voted upon at the Annual Meeting.

How can I Find out the Results of the Voting at the Annual Meeting?

Preliminary voting results will be announced at the Annual Meeting. In addition, final voting results will be disclosed in a Current Report on Form 8-K that we expect to file with the Securities and Exchange Commission (the “SEC”) within four business days after the Annual Meeting. If final voting results are not available to us in time to file a Form 8-K with the SEC within four business days after the Annual Meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file an additional Form 8-K to publish the final results.

When are Stockholder Proposals Due for the 2021 Annual Meeting?

Any appropriate proposal submitted by a stockholder and intended to be presented at the 2021 Annual Meeting of Stockholders (the “2021 Annual Meeting”) must be submitted in writing to the Company’s Secretary at 4955 Directors Place, San Diego, California 92121, and received no later than May 4, 2021, to be includable in the Company’s proxy statement and related proxy for the 2021 Annual Meeting. However, if the date of the 2021 Annual Meeting is convened more than 30 days before, or delayed by more than 30 days after, October 16, 2021, to be considered for inclusion in proxy materials for the 2021 Annual Meeting, a stockholder proposal must be submitted in writing to the Company’s Secretary at 4955 Directors Place, San Diego, California 92121 a reasonable time before we begin to print and send our proxy materials for the 2021 Annual Meeting. A stockholder proposal will need to comply with the SEC regulations under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Although the Board will consider stockholder proposals, we reserve the right to omit from our proxy statement, or to vote against, stockholder proposals that we are not required to include under the Exchange Act, including Rule 14a-8.

If you wish to submit a proposal that is not to be included in the proxy materials for the 2021 Annual Meeting, your proposal must be submitted in writing to the Company’s Secretary at 4955 Directors Place, San Diego, California 92121 by July 18, 2021 and no earlier than June 18, 2021. However, if the date of the 2021 Annual Meeting is convened more than 30 days before, or delayed by more than 30 days after October 16, 2021, to be brought before our 2021 Annual Meeting, a stockholder proposal must be submitted in writing to the Company’s Secretary at 4955 Directors Place, San Diego, California 92121, not later than the close of business on the later of (1) the 90th day before the 2021 Annual Meeting, or (2) the 10th day following the day on which we first make a public announcement of the date of the 2021 Annual Meeting.

Please review our Amended and Restated Bylaws, which contain additional requirements regarding advance notice of stockholder proposals. You may view our Amended and Restated Bylaws by visiting the SEC’s website at www.sec.gov.

Who will Solicit Proxies on behalf of the Board?

The Company has retained Innisfree, a proxy solicitation firm, who may solicit proxies on the Board’s behalf.

The original solicitation of proxies by mail may be supplemented by telephone, telegram, facsimile, electronic mail, and personal solicitation by our directors and officers (who will receive no additional compensation for such solicitation activities). You may also be solicited by advertisements in periodicals, press releases issued by us and postings on our corporate website. Unless expressly indicated otherwise, information contained on our corporate website is not part of this proxy statement.

I also have received a copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Is that a part of the proxy materials?

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 3, 2020, accompanies this proxy statement. This document constitutes our Annual Report to Stockholders, and is being made available to all stockholders entitled to receive notice of and to vote at the Annual Meeting. Except as otherwise stated, the Annual Report on Form 10-K is not incorporated into this proxy statement and should not be considered proxy solicitation material.

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Do the Company’s Officers and Directors have an Interest in Any of the Matters to Be Acted Upon at the Annual Meeting?

Members of the Board have an interest in Proposal 1, the election to the Board of the seven (7) director nominees set forth herein, as each of the nominees is currently a member of the Board. Members of the Board and our executive officers do not have any interest in Proposal 2, the ratification of the appointment of our independent registered public accounting firm. Executive officers of Sorrento will be eligible to purchase shares of our common stock under the terms of our 2020 Employee Stock Purchase Plan, and they therefore have an interest in Proposal 3. Members of the Board and executive officers of Sorrento are eligible to receive awards under the terms of our 2019 Stock Incentive Plan, and they therefore have an interest in Proposal 4. Additionally, Dr. Ji, our President, Chief Executive Officer and Chairman of the Board, has an interest in Proposal 5, the approval of the CEO Performance Award.

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PROPOSAL 1:

ELECTION OF DIRECTORS

You are requested to vote for seven nominees for director, whose terms expire at the Annual Meeting and who will be elected for a new one-year term and will serve until their successors are elected and qualified. The nominees are Henry Ji, Ph.D., Dorman Followwill, Kim D. Janda, Ph.D., David Lemus, Jaisim Shah, Dr. Robin L. Smith and Yue Alexander Wu, Ph.D. All of the nominees are existing directors of Sorrento and each of the nominees has consented to being named as a nominee for director of Sorrento and has agreed to serve if elected.

If no contrary indication is made, proxies in the accompanying form are to be voted for the aforementioned directors or in the event that any of the aforementioned directors is not a candidate or is unable to serve as a director at the time of the election (which is not currently expected), for any nominee who is designated by our Board to fill the vacancy.

All of our directors bring to the Board significant leadership experience derived from their professional experience and service as executives or board members of other corporations and/or venture capital firms. Certain individual qualifications and skills of our directors that contribute to the Board’s effectiveness as a whole are described in the following paragraphs.

The ages of the nominees as of September 1, 2020, their positions and biographies are set forth below.

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS

For a One-Year Term Expiring at the 2021 Annual Meeting of Stockholders

 

Name

 

Age

 

Present Position with Sorrento Therapeutics, Inc.

Henry Ji, Ph.D.

 

 

56

 

Chairman of the Board, President and Chief Executive Officer

Dorman Followwill

 

 

57

 

Lead Independent Director

Kim D. Janda, Ph.D.

 

 

63

 

Director

David Lemus

 

 

57

 

Director

Jaisim Shah

 

 

60

 

Director

Dr. Robin L. Smith

 

 

55

 

Director

Yue Alexander Wu, Ph.D.

 

 

56

 

Director

 

Henry Ji, Ph.D. co-founded and has served as a director of Sorrento Therapeutics, Inc. since January 2006, served as its Chief Scientific Officer from November 2008 to September 2012, as its Interim Chief Executive Officer from April 2011 to September 2012, as its President and Chief Executive Officer since September 2012 and as Chairman of the Board since August 2017. Dr. Ji also served as our Secretary from September 2009 to June 2011. In 2002, Dr. Ji founded BioVintage, Inc., a research and development company focusing on innovative life science technology and product development, and has served as its President since 2002. From 2001 to 2002, Dr. Ji served as Vice President of CombiMatrix Corporation, a publicly traded biotechnology company that develops proprietary technologies, including products and services in the areas of drug development, genetic analysis, molecular diagnostics and nanotechnology. During his tenure at CombiMatrix, Dr. Ji was responsible for strategic technology alliances with biopharmaceutical companies. From 1999 to 2001, Dr. Ji served as Director of Business Development, and in 2001 as Vice President, of Stratagene Corporation (later acquired by Agilent Technologies, Inc.) where he was responsible for novel technology and product licensing and development. In 1997, Dr. Ji co-founded Stratagene Genomics, Inc., a wholly owned subsidiary of Stratagene Corporation, and served as its President and Chief Executive Officer from its founding until 1999. Dr. Ji previously served as a director of NantKwest, Inc. from December 2014 through November 25, 2015. Dr. Ji is the holder of several issued and pending patents in the life science research field and is the sole inventor of Sorrento Therapeutics Inc.’s intellectual property. Dr. Ji has a Ph.D. in Animal Physiology from the University of Minnesota and a B.S. in Biochemistry from Fudan University.

Dr. Ji has demonstrated significant leadership skills as President and Chief Executive Officer of Stratagene Genomics, Inc. and Vice President of CombiMatrix Corporation and Stratagene Corporation and brings more than 18 years of biotechnology and biopharmaceutical experience to his position on our Board. Dr. Ji’s extensive knowledge of the industry in which we operate, as well as his unique role in our day-to-day operations as our President and Chief Executive Officer, allows him to bring to our Board a broad understanding of the operational and strategic issues we face.

Dorman Followwill has served as a director of our Company since October 2017 and as our lead independent director since August 2020. Mr. Followwill has been Senior Partner, Transformational Health at Frost & Sullivan, a business consulting firm involved in market research and analysis, growth strategy consulting and corporate training across multiple industries, since 2016. Prior to that time, he served in various roles at Frost & Sullivan, including Partner on the Executive Committee managing the P&L of the business in Europe, Israel and Africa, and Partner overseeing the Healthcare and Life Sciences business in North America, since initially joining Frost & Sullivan to help found the Consulting practice in January 1988. Mr. Followwill has more than 30 years of organizational leadership and management consulting experience, having worked on hundreds of consulting projects across all major regions and across multiple industry sectors, each project focused around the strategic imperative of growth. He obtained his BA from Stanford University in The Management of Organizations in 1985.

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We believe that Mr. Followwill’s extensive knowledge and understanding of the healthcare and life sciences industries qualify him to serve on our Board.

Kim D. Janda, Ph.D. has served as a director of our Company since April 2012. Dr. Janda has served as Ely R. Callaway, Jr. Chaired Professor in the Departments of Chemistry, Immunology and Microbial Science at The Scripps Research Institute since 1996 and as the Director of the Worm Institute of Research and Medicine (WIRM) at The Scripps Research Institute since 2005. Furthermore, Dr. Janda has served as a Skaggs Scholar within the Skaggs Institute of Chemical Biology, also at The Scripps Research Institute, since 1996. Dr. Janda holds a B.S. degree from the University of South Florida in Clinical Chemistry and a doctoral degree from the University of Arizona with Robert B. Bates in natural product total synthesis. A hallmark of his research is that Dr. Janda has been able to uniquely combine principles of medicinal chemistry together with modern molecular biology, immunology and neuropharmacology, allowing the creation of both synthetic/natural molecules and processes with biological, chemical and physical properties. Dr. Janda has published over 425 original publications in refereed journals and founded the biotechnological companies CombiChem, Drug Abuse Sciences and AIPartia. Dr. Janda is associate editor of Bioorg & Med. Chem., PloS ONE and serves, or has served, on numerous journals including J. Comb. Chem., Chem. Reviews, J. Med. Chem., The Botulinum Journal, Bioorg. & Med. Chem. Lett., and Bioorg. & Med. Chem. Over a career of almost 25 years, Dr. Janda has provided numerous seminal contributions and is considered one of the first scientists to merge chemical and biological approaches into a cohesive research program. Dr. Janda serves on the Scientific Advisory Boards of Materia, Inc. and Singapore Ministry of Education (MOE), EP1 Physical Sciences.

Dr. Janda has almost 25 years of experience in life sciences and very strong technical expertise relating to the discovery and development of antibody therapeutics, which gives him a unique understanding of the research challenges and opportunities facing our company. As an experienced scientist and inventor on multiple patents in the life sciences industry, Dr. Janda brings critical insights into the operational requirements of a discovery and development company as well as to our overall business and strategies relating to our ongoing development efforts, and serves as the chair of our Scientific Advisory Board.

Edgar Lee has served as a director of our Company since December 2019 and his service on our Board will cease when his current term expires at the Annual Meeting.

David Lemus has served as a director of our Company since October 2017. Mr. Lemus has served as Chief Executive Officer of IronShore Pharmaceuticals Inc. since January 2020. He also currently serves as a non-executive board member of BioHealth Innovation, Inc. Since November 2017, he has served as the Chief Operating Officer and Chief Financial Officer of Proteros biosciences GmbH, a privately held biotechnology company focused on structural biology. Previously, from January 2016 to May 2017, he served as Interim Chief Financial Officer and Chief Operating Officer of Medigene AG, a publicly-listed German biotechnology company focused on the research and development of T-Cell-Receptor based immunotherapies. Prior to that time, at Sigma Tau Pharmaceuticals, Inc., he served as Chief Executive Officer from January 2013 to July 2015, as Chief Operating Officer from March 2012 to December 2012, and as V.P. Finance from July 2011 to February 2012. Previous to this, Mr. Lemus served as Chief Financial Officer and Executive V.P. of MorphoSys AG from January 1998 to May 2011. Prior to his role at MorphoSys AG, he held various positions, including Operations Manager and Controller (Pharma International Division) and Global IT Project Manager (Pharma Division) at Hoffman La Roche, Group Treasurer of Lindt & Spruengli AG and Treasury Consultant for Electrolux AB. Mr. Lemus received an M.S. from the Massachusetts Institute of Technology Sloan School of Management in 1988 and a B.S. in Accounting from the University of Maryland in 1984. Mr. Lemus is also a certified public accountant licensed in the State of Maryland.

We believe that Mr. Lemus’ extensive accounting and financial background and business experience in the life sciences industry qualify him to serve on our Board.

Jaisim Shah has served as a director of our Company since September 2013. He has more than 25 years of global biopharma experience including over 15 years in senior management leading business development, commercial operations, investor relations, marketing and medical affairs. Mr. Shah has served as the President and Chief Executive Officer and board member of Scilex Holding Company since its inception in March 2019. He has also served as the Chief Executive Officer and a board member of Semnur Pharmaceuticals, Inc. since its inception in 2013. Prior to Semnur, Mr. Shah was a consultant to several businesses, including Sorrento Therapeutics, Inc., and was the Chief Business Officer of Elevation Pharmaceuticals, where Mr. Shah led a successful sale of Elevation to Sunovion in September 2012. Prior to Elevation, Mr. Shah was president of Zelos Therapeutics, where Mr. Shah focused on financing and business development. Prior to Zelos, Mr. Shah was the Senior Vice President and Chief Business Officer at CytRx, a biopharmaceutical company. Previously, Mr. Shah was Chief Business Officer at Facet Biotech and PDL BioPharma where he completed numerous licensing/partnering and strategic transactions with pharmaceutical and biotech companies. Prior to PDL, Mr. Shah was at Bristol-Myers Squibb, most recently as Vice President of Global Marketing where he received the “President’s Award” for completing one of the most significant collaborations in the company’s history. Previously, Mr. Shah was at F. Hoffman-La Roche in international marketing and was global business leader for corporate alliances with Genentech and Idec. Mr. Shah holds an M.A. in Economics from the University of Akron and an M.B.A. from Oklahoma University.

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We believe that Mr. Shah’s extensive operational, executive and business development experience qualifies him to serve on our Board.

Dr. Robin L. Smith has served as a director of our Company since December 2019. Dr. Smith has served as partner of BRM Holdings, LLC, a consulting firm, since March 2015. In 2007, Dr. Smith founded The Stem for Life Foundation (SFLF), a nonprofit organization, and has served as Chairman of the Board and President of the Stem for Life Foundation since its inception. The Stem for Life Foundation is now part of the Cura Foundation of which Dr. Smith serves as Chairman of the Board and President. She has been Vice President of the Science and Faith STOQ Foundation in Rome since 2015 and has served as a member of its Board of Directors since 2012. She also co-founded Spiritus Therapeutics, Inc. in 2018 and serves as President and Chairman of the Board. In addition, Dr. Smith has extensive experience serving in executive and board level capacities for various medical enterprises and healthcare-based entities. From 2006 to 2015, Dr. Smith served as Chairman and CEO of Caladrius Biosciences, Inc. (formerly NeoStem Inc.) (Nasdaq: CLBS). She has been Chairman of the board of directors of Mynd Analytics, Inc. (Nasdaq: MYND) since August 2015 and then its successor Emmaus Medical, Inc. (OTC: EMMA) until September 2019, served on the board of directors of Rockwell Medical, Inc. (Nasdaq: RMTI) from June 2016 to November 2019, served on the board of Seelos Therapeutics, Inc. (Nasdaq: SEEL) from January 2019 to May 2020 and served on the board of directors of Celularity, Inc. since August 2019. She has been a member of the Board of Overseers at the NYU Langone Medical Center in New York since 2014, a member of the International Board of Sanford Health since 2016, co-chairman of the Life Sci advisory board on gender diversity since April 2016, a member of the board of directors of Alliance for Regenerative Medicine (ARM) Foundation since 2017 and a co-founder and member of the board of directors of Unite to Prevent Cancer Foundation since 2018. She has served as a voluntary Clinical Associate Professor in the Department of Medicine at the Rutgers, New Jersey Medical School since 2017. She served on the Board of Trustees of the NYU Langone Medical Center from 2006 to 2014 and was on the board of directors of Signal Genetics, Inc. (Nasdaq: SGNL) from July 2014 to February 2016, BioXcel Corporation from August 2015 to June 2017 and ProLung Inc. from February 2017 to July 2018. Dr. Smith received her M.D. from Yale University, an M.B.A. from the Wharton School of Business and a B.A. from Yale University.

We believe that Dr. Smith’s scientific background, as well as Dr. Smith’s broader business development and corporate experience, qualify her to serve on our Board.

Yue Alexander Wu, Ph.D. has served as a director of our Company since August 2016. He was previously President, Chief Executive Officer and Chief Strategy Officer of Crown Bioscience International, a leading global drug discovery and development solutions company, which he co-founded in 2006, until 2017. From 2004 to 2006, Dr. Wu was Chief Business Officer of Starvax International Inc. in Beijing, China, a biotechnology company focusing on oncology and infectious diseases. From 2001 to 2004, Dr. Wu was a banker with Burrill & Company where he was head of Asian Activities. Dr. Wu has served as a director of CASI Pharmaceuticals, Inc. (Nasdaq: CASI) since June 2013. Dr. Wu received his Ph.D. in Molecular Cell Biology and his MBA from University of California at Berkeley. He earned an M.S. in Biochemistry from University of Illinois, Urbana-Champaign and his B.S. in Biochemistry from Fudan University in Shanghai, China.

We believe that Dr. Wu’s scientific background and business experience qualify him to serve on our Board.

Board Independence

Our Board is responsible for establishing corporate policies and for our overall performance, although it is not involved in our day-to-day operations. Our Board consults with our counsel to ensure that our Board’s determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the rules of The Nasdaq Stock Market LLC (the “Nasdaq Rules”), as in effect from time to time. Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, us, our senior management and our independent registered public accounting firm, our Board has determined that all of our directors, other than Dr. Ji, Dr. Janda and Mr. Shah, are independent.

Board Leadership Structure and Board’s Role in Risk Oversight

Our Board believes that our Chief Executive Officer (“CEO”), Dr. Ji, is best situated to serve as Chairman of the Board because he is the director who is most familiar with our business and industry, possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing us and is therefore best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. Our independent directors bring experience, oversight and expertise from outside the Company and industry, while the Chief Executive Officer brings Company-specific experience and expertise. The Board believes that the combined role of Chairman of the Board and Chief Executive Officer facilitates information flow between management and the Board, which is essential to effective governance. Dorman Followwill currently serves as the Company’s lead independent director (the “Lead Independent Director”). The Lead Independent Director ensures that (i) the Board operates independently of management, (ii) the independent directors continue to provide effective oversight of the Company’s management and key issues related to strategy, risk and integrity, and (iii) the directors and stockholders have an independent leadership contact.

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As the Lead Independent Director, Mr. Followwill has the following duties and responsibilities:

 

Calling and presiding over executive sessions of the independent directors and setting agendas for the executive session;

 

Advising the Chairman of the Board and the Chief Executive Officer, on behalf of the Board, of any decisions reached or suggestions made at executive sessions;

 

Serving as the primary liaison between the independent directors, Chief Executive Officer, Chairman of the Board and senior management to report or raise matters;

 

Chairing Board meetings when the Chairman of the Board is not present;

 

Reviewing Board schedules and agendas in collaboration with the Chairman of the Board and the Chief Executive Officer while seeking input from the other Board members;

 

Being available for consultation and communication with stockholders, as appropriate; and

 

Performing such other duties and responsibilities as may be delegated to the Lead Independent Director by the Board from time to time.

The Board, as a unified body and through committee participation, organizes the execution of its monitoring and oversight roles and does not expect its Chairman of the Board to organize those functions. The Board has three standing committees - Audit, Compensation and Corporate Governance and Nominating. The membership of each of the Board committees is comprised of independent directors, with each of the committees having a separate chairperson, each of whom is an independent director. Our non-management members of the Board meet in executive session, at which only they are present, at each board meeting.

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. Management is responsible for the day-to-day management of risks the company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

The Board recognizes that different leadership models may, depending upon individual circumstances, work for other companies and may be appropriate for the Company under different circumstances. Our Chief Executive Officer communicates frequently with members of the Board to discuss strategy and challenges facing the company. Senior management usually attends our regular quarterly board meetings and is available to address any questions or concerns raised by the Board on risk management-related and any other matters. Each quarter, the Board receives presentations from senior management on matters involving our areas of operations.

Board of Directors Meetings

During fiscal year 2019, our Board held four meetings and acted by written consent fourteen times. Our Audit Committee held five meetings and acted by written consent one time, our Compensation Committee held one meeting and acted by written consent seven times and our Corporate Governance and Nominating Committee held no separate meetings and acted by written consent one time. None of our incumbent directors attended fewer than 75% of the total number of meetings held by the Board and the committees on which, and for the period during which, the director served during fiscal year 2019.

Information Regarding Board Committees

Our Board has established standing Audit, Compensation and Corporate Governance and Nominating Committees to devote attention to specific subjects and to assist it in the discharge of its responsibilities.

Audit Committee. We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee is currently comprised of Messrs. Followwill and Lemus and Dr. Wu. Mr. Lemus serves as the Chairperson of the Audit Committee. The functions of the Audit Committee include, among others:

 

selecting, evaluating, engaging, overseeing, determining funding for and, when appropriate, replacing the independent auditors, or nominating the independent auditors to be proposed to the full Board for concurrence or ratification;

 

giving prior approval of all audit services and any non-audit services permissible pursuant to the Sarbanes-Oxley Act of 2002 performed by the independent auditor for the Company;

 

ensuring that the independent auditors provide, at least annually, a formal written statement to the Audit Committee setting forth all relationships between the independent auditors and the Company, consistent with applicable rules and requirements;

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reviewing with management and the independent auditors the annual audit scope and approach, critical accounting policies and practices, significant internal control issues, record keeping, audit conclusions regarding significant accounting estimates/reserves and proposed fee arrangements for ongoing and special projects;

 

meeting in executive session with the independent auditors, as may be necessary or advisable, to request their opinion on various matters including the Company’s accounting policies as applied in its financial reporting and the performance of its financial and accounting personnel;

 

reviewing with the independent auditor any problems or difficulties the auditor may have encountered during the course of its audit work, including any restrictions on the scope of its activities or access to required information or any significant disagreements with management and management’s responses to such matters;

 

reviewing with management and the independent auditors the Company’s compliance with laws and regulations having to do with accounting and financial reporting matters;

 

reviewing with management and the independent auditors the Company’s interim and year-end financial statements, including management’s discussion and analysis;

 

requesting from management and the independent auditors a briefing on any significant accounting and reporting issues, or significant unusual transactions, disagreements and how they were resolved and current developments in the accounting and regulatory areas that may affect the Company or its financial statements;

 

reviewing with management and the independent auditors disclosures, accounting policies and controls;

 

holding timely discussions with the independent registered public accounting firm regarding all critical accounting policies and practices, all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications or the use of such alternative disclosures and treatments, and the treatment preferred by the independent registered public accounting firm, and other material written communications between the independent registered public accounting firm and management including, but not limited to, the management letter and schedule of unadjusted differences;

 

discussing among the members of the Audit Committee, without management or the independent auditors present, the quality of the accounting policies applied in the preparation of the Company’s financial statements and significant judgments affecting the financial statements;

 

reviewing and approving the internal corporate audit staff functions, including: (i) purpose, authority and organizational reporting lines, (ii) annual audit plan, budget and staffing, (iii) concurrence in the appointment, compensation and rotation of the internal audit management function, and (iv) results of internal audits;

 

conducting an appropriate review of all related party transactions on an on-going basis and all such transactions and potential conflicts of interests referenced in the Company’s Code of Conduct and Ethics that must be approved by the Audit Committee or other comparable independent body of the Board;

 

establishing and reviewing the adequacy of procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters;

 

providing the Company with the report of the Audit Committee with respect to the audited financial statements for inclusion in the Company’s proxy statement;

 

discussing with management the Company’s policies with respect to risk assessment and risk management, significant financial risk exposures and the actions management has taken to limit, monitor or control such exposures; and

 

discussing with management and the independent auditor the Company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies.

Typically, the Audit Committee meets at least quarterly and with greater frequency if necessary. Our Board has adopted a written charter of the Audit Committee that is available to stockholders on our website at http://investors.sorrentotherapeutics.com/corporate-governance/governance-overview.

Under the applicable Nasdaq Rules, each member of a company’s audit committee must be considered independent in accordance with the Nasdaq Rules and Rule 10A-3(b)(1) under the Exchange Act. Our Board reviews the Nasdaq Rules and Exchange Act definitions of independence for Audit Committee members on an annual basis and has determined that all members of our Audit Committee are independent (as independence is currently defined in the Nasdaq Rules). Our Board has determined that all members of our Audit Committee also meet the requirements for financial literacy under the Nasdaq Rules.

Our Board has determined that Mr. Lemus is an audit committee financial expert, as defined under applicable SEC rules, and that Messrs. Followwill and Lemus and Dr. Wu meet the background and financial sophistication requirements under the rules of The Nasdaq Stock Market LLC. In making these determinations, the Board made a qualitative assessment of each of Messrs. Followwill’s and Lemus’ and Dr. Wu’s level of knowledge and experience based on a number of factors, including their formal education and experience. Both our independent registered public accounting firm and internal financial personnel regularly meet privately with our Audit Committee and have unrestricted access to the Audit Committee.

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Compensation Committee. Our Compensation Committee is currently comprised of Mr. Followwill and Dr. Wu. Dr. Wu serves as the Chairperson of our Compensation Committee. The functions of the Compensation Committee include, among others:

 

establishing the Company’s general compensation philosophy, and overseeing the development and implementation of compensation programs;

 

annually reviewing and approving the Company’s goals and objectives relevant to the compensation of the CEO, evaluating the CEO’s performance with respect to such goals, and subject to existing contractual obligations, setting the CEO’s compensation level based on such evaluation;

 

determining and approving (and recommending for ratification by the Board acting solely through the independent directors) the CEO’s compensation level based on the Compensation Committee’s performance evaluation;

 

reviewing and approving all compensation for all executive officers;

 

recommending to the Board the establishment and administration of incentive compensation plans and programs and employee benefit plans and programs;

 

reviewing succession planning within the Company;

 

overseeing any stock option, benefit and incentive plans established by the Company, unless otherwise determined by the Board or prohibited by the terms of such plans;

 

making recommendations to the Board with respect to non-CEO compensation, incentive-compensation plans and equity plans, that are subject to Board approval;

 

establishing and periodically reviewing policies concerning perquisite benefits;

 

reviewing and approving all employment, severance or other employment related agreements or special compensation arrangements for each officer of the Company;

 

reviewing and recommending for Board approval compensation packages for new corporate officers and termination packages for corporate officers as requested by management;

 

reviewing at least annually the adequacy of the Compensation Committee Charter and recommending any proposed changes to the Board for its approval;

 

evaluating and overseeing risk in the Company’s compensation programs;

 

producing an annual report on executive compensation for inclusion in the Company’s proxy statement, in accordance with applicable rules and regulations;

 

investigating, within the scope of its duties, any matter brought to its attention;

 

performing any other duties or responsibilities expressly delegated to the Compensation Committee by the Board from time to time; and

 

annually reviewing the compensation of members of the Board for their services to the Company and recommending changes, if any, to the Board.

Our Board has determined that all of the members of our Compensation Committee are “independent” under the Nasdaq Rules. Our Board has adopted a written charter of the Compensation Committee that is available to stockholders on our website at http://investors.sorrentotherapeutics.com/corporate-governance/governance-overview. The Compensation Committee meets periodically throughout the year as necessary. The agenda for each meeting is usually developed by the Chairperson of the Compensation Committee, in consultation with our Chief Executive Officer and other representatives of senior management as necessary. The Compensation Committee meets regularly in executive session. However, from time to time, various members of management and other employees as well as outside advisors or consultants may be invited by the Compensation Committee to make presentations, provide financial or other background information or advice or otherwise participate in Compensation Committee meetings. The Chief Executive Officer may not participate in or be present during any deliberations or determinations of the Compensation Committee regarding his compensation. The charter of the Compensation Committee grants the Compensation Committee full access to all of our books, records, facilities and personnel, as well as authority to obtain, at our expense, advice and assistance from internal and external legal, accounting or other advisors and consultants and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties. In particular, the Compensation Committee has the sole authority to retain or consult compensation consultants to assist in its evaluation of executive and director compensation, including the authority to approve the consultant’s reasonable fees and other retention terms.

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The Compensation Committee meets outside the presence of all of our executive officers, including the named executive officers, in order to consider appropriate compensation for our Chief Executive Officer. For all other named executive officers, the Compensation Committee meets outside the presence of all executive officers except our Chief Executive Officer. The annual performance reviews of our executive officers are considered by the Compensation Committee when making decisions on setting base salary, targets for and payments under our bonus plan and grants of equity incentive awards. When making decisions on executive officers, the Compensation Committee considers the importance of the position to us, the past salary history of the executive officer and the contributions we expect the executive officer to make to the success of our business.

In 2019, the Compensation Committee engaged Compensia, Inc. (“Compensia”), a national compensation consulting firm, to review and advise on our compensation practices. In 2019, Compensia undertook the following projects for the Compensation Committee: (i) January 2019 - Evaluated the compensation arrangements for the Company’s Chief Executive Officer against a comparable group of similar life sciences companies and its own proprietary data; (ii) January 2019 - Evaluated the compensation arrangements for the members of the Board against a comparable group of similar life sciences companies and its own proprietary data; and (iii) November 2019 - Evaluated practices with respect to employee stock purchase plans among a comparator group of similar life science companies and its own proprietary data. Compensia, who reports directly to the Compensation Committee and not to our management, is independent from us, has not provided any services to us other than to the Compensation Committee, and receives compensation from us only for services provided to the Compensation Committee. The Compensation Committee assessed the independence of Compensia pursuant to SEC rules and concluded that the work of Compensia has not raised any conflict of interest.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee consists of two directors, each of whom is a non-employee director: Mr. Followwill and Dr. Wu. Dr. Wu serves as the Chairperson of the Compensation Committee. Prior to March 18, 2019, our Compensation Committee was comprised of Messrs. Followwill and Shah and Dr. Wu. During 2019, none of Messrs. Followwill or Shah or Dr. Wu was an officer or employee of ours, was formerly an officer of ours or had any relationship requiring disclosure by us under Item 404 of Regulation S-K, except with respect to Mr. Shah’s relationship to Semnur Pharmaceuticals, Inc. as disclosed under the heading “Certain Relationships and Related Party Transactions-Semnur Pharmaceuticals, Inc. Acquisition” in this proxy statement. No interlocking relationship as described in Item 407(e)(4) of Regulation S-K exists between any of our executive officers or Compensation Committee members, on the one hand, and the executive officers or compensation committee members of any other entity, on the other hand, nor has any such interlocking relationship existed in the past.

Corporate Governance and Nominating Committee. Our Corporate Governance and Nominating Committee is currently comprised of Dr. Wu and Mr. Followwill. Mr. Followwill serves as the Chairperson of our Corporate Governance and Nominating Committee. The functions of the Corporate Governance and Nominating Committee include, among others:

 

developing and recommending to the Board the Corporate Governance Guidelines of the Company and overseeing compliance therewith;

 

assisting the Board in effecting Board organization, membership and function, including identifying qualified Board nominees;

 

assisting the Board in effecting the organization, membership and function of Board committees, including the composition of Board committees and recommending qualified candidates therefor;

 

evaluating and providing succession planning for the Chief Executive Officer and other executive officers;

 

developing criteria for Board membership, such as independence, term limits, age limits and ability of former employees to serve on the Board and the evaluation of candidates’ qualifications for nominations to the Board and its committees as well as removal therefrom, respectively;

 

periodically evaluating the desirability of, and recommending to the Board, any changes in the size and composition of the Board;

 

identifying and evaluating candidates for director in accordance with the general and specific criteria set forth in the Corporate Governance and Nominating Committee Charter or determined in accordance therewith;

 

evaluating each new director candidate and each incumbent director before recommending that the Board nominate or re-nominate such individual for election or re-election as a director based on the extent to which such individual meets the general criteria set forth in the Corporate Governance and Nominating Committee Charter and will contribute significantly to satisfying the overall mix of specific criteria identified in the Corporate Governance and Nominating Committee Charter;

 

diligently seeking to identify potential director candidates who will strengthen the Board and remedy any perceived deficiencies in the specific criteria identified in the Corporate Governance and Nominating Committee Charter;

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establishing procedures for soliciting and reviewing potential nominees from directors and for advising those who suggest nominees of the outcome of such review;

 

submitting to the Board the candidates for director to be recommended by the Board for election at each annual meeting of stockholders and to be added to the Board at any other times due to Board expansions, director resignations or retirement or otherwise;

 

monitoring performance of directors based on the general criteria and the specific criteria applicable to each such director and, if any serious problems are identified, working with such director to resolve such problems or, if necessary, seeking such director’s resignation or recommend to the Board such person’s removal;

 

developing and periodically evaluating initial orientation guidelines and continuing education guidelines for each member of the Board and each member of each Board committee regarding his or her responsibilities as a director generally and as a member of any applicable Board committee, and monitoring and evaluating each director’s cooperation in fulfilling such guidelines;

 

retaining and terminating any search firm used to identify director candidates and to approve any such search firm’s fees and other terms of retention;

 

evaluating its own performance on an annual basis, including its compliance with its Charter;

 

reviewing its Charter and providing the Board with any recommendations for changes in the Charter or in policies or other procedures governing the Corporate Governance and Nominating Committee;

 

developing and periodically reviewing and revising as appropriate, a management succession plan and related procedures including consideration and recommendation of candidates for successor to the Chief Executive Officer to the Board and, with appropriate consideration of the Chief Executive Officer’s recommendations, considering and recommending candidates for successors to other executive officers, in each case when vacancies shall occur in those offices;

 

monitoring and making recommendations to the Board on other matters of Board policy and practices relating to corporate governance; and

 

reviewing and making recommendations to the Board regarding proposals of stockholders that relate to corporate governance.

The Corporate Governance and Nominating Committee shall identify and evaluate the qualifications of all candidates for nomination for election as directors. Potential nominees are identified by our Board based on the criteria, skills and qualifications that have been recognized by the Corporate Governance and Nominating Committee. While our nomination and corporate governance policy does not prescribe specific diversity standards, the Corporate Governance and Nominating Committee and its independent members seek to identify nominees that have a variety of perspectives, professional experience, education, differences in viewpoints and skills, and personal qualities that will result in a well-rounded Board.

The Board has determined that all of the members of our Corporate Governance and Nominating Committee are “independent” under the Nasdaq Rules. The Board adopted a written charter setting forth the authority and responsibilities of the Corporate Governance and Nominating Committee. A copy of the charter is available to stockholders on our website at http://investors.sorrentotherapeutics.com/corporate-governance/governance-overview.

Hedging and Pledging Policies

Our Insider Trading Policy prohibits any director, officer, employee or consultant from engaging in “short sales” of our equity securities and from engaging in hedging transactions involving our equity securities. Further, our Insider Trading Policy restricts our designated insiders from pledging our equity securities as collateral for a loan or otherwise unless the transaction is pre-cleared by our Insider Trading Compliance Officer. As a condition of pre-approving any pledge of our equity securities, any designated insider seeking to pledge securities must clearly demonstrate his or her financial capacity to repay the loan without resort to the pledged securities.

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Director Qualifications

There are no specific minimum qualifications that our Board requires to be met by a director nominee recommended for a position on our Board, nor are there any specific qualities or skills that are necessary for one or more members of our Board to possess, other than as are necessary to meet the requirements of the rules and regulations applicable to us. The Board considers a potential director candidate’s experience, areas of expertise and other factors relative to the overall composition of our Board and its committees, including the following characteristics:

 

the highest ethical standards and integrity and a strong personal reputation;

 

a background that provides experience and achievement in business, finance, biotechnology or other activities relevant to our business and activities;

 

a willingness to act on and be accountable for Board and, as applicable, committee decisions;

 

an ability to provide wise, informed and thoughtful counsel to management on a range of issues affecting us and our stockholders;

 

an ability to work effectively and collegially with other individuals;

 

loyalty and commitment to driving our success and increasing long-term value for our stockholders;

 

sufficient time to devote to Board and, as applicable, committee membership and matters; and

 

the independence requirements imposed by the SEC and the Nasdaq Rules.

The Board retains the right to modify these qualifications from time to time.

If a stockholder wishes to propose a candidate for consideration as a nominee by the Corporate Governance and Nominating Committee, it should follow the procedures described in this section, the section entitled “Security Holder Nominations” and in the Company’s Corporate Governance and Nominating Committee Charter. Following verification of the stockholder status of persons proposing candidates, the Corporate Governance and Nominating Committee makes an initial analysis of the qualifications of any candidate recommended by stockholders or others pursuant to the criteria summarized above to determine whether the candidate is qualified for service on the Board before deciding to undertake a complete evaluation of the candidate. If any materials are provided by a stockholder or professional search firm in connection with the nomination of a director candidate, such materials are forwarded to the Corporate Governance and Nominating Committee as part of its review. Other than the verification of compliance with procedures and stockholder status, and the initial analysis performed by the Corporate Governance and Nominating Committee, a potential candidate nominated by a stockholder is treated like any other potential candidate during the review process by the Corporate Governance and Nominating Committee.

Director Attendance at Annual Meetings

Although we do not have a formal policy regarding attendance by members of our Board at our annual meeting, we encourage all of our directors to attend. Dr. Ji is the only director who attended our 2019 Annual Meeting of Stockholders.

Communications with our Board of Directors

Stockholders seeking to communicate with our Board should submit their written comments to the attention of the Company’s Secretary at Sorrento Therapeutics, Inc., 4955 Directors Place, San Diego, California 92121. The Company’s Secretary will forward such communications to each member of our Board; provided that, if in the opinion of the Company’s Secretary it would be inappropriate to send a particular stockholder communication to a specific director, such communication will only be sent to the remaining directors (subject to the remaining directors concurring with such opinion).

In addition, stockholders may contact the Lead Independent Director or the independent directors as a group by submitting their written comments to the attention of the Company’s Secretary at Sorrento Therapeutics, Inc., 4955 Directors Place, San Diego, California 92121. The Corporate Secretary will forward such communications to the Lead Independent Director, who will review and distribute, if addressed to the independent directors, such communications to the independent directors as a group; provided that, if in the opinion of the Lead Independent Director it would be inappropriate to send a particular communication to a specific independent director, such communication will only be sent to the remaining independent directors (subject to the remaining independent directors concurring with such opinion).

Security Holder Nominations

The Board does not have a formal policy regarding the consideration of director candidates recommended by our security holders. However, the Board would consider such recommendations. The Board does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether or not the candidate was recommended by a security holder. Security holders who wish to make such a recommendation should send the recommendation to the attention of the Company’s Secretary at Sorrento Therapeutics, Inc., 4955 Directors Place, San Diego, California 92121. The letter must

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identify the author as a stockholder, provide a brief summary of the candidate’s qualifications and history and be accompanied by evidence of the sender’s stock ownership, as well as consent by the candidate to serve as a director if elected. Following verification of the stockholder status of persons proposing candidates by the Company’s Secretary, director candidate recommendations will be forwarded to the Corporate Governance and Nominating Committee for further review. If the Corporate Governance and Nominating Committee believes that the candidate fits the profile of a director nominee as described above, the recommendation will be shared with the entire Board.

Nominations must be submitted, as outlined above, and received by the Company’s Secretary, by no later than May 4, 2021, to be includable in the Company’s proxy statement and related proxy for the 2021 Annual Meeting. However, if the date of the 2021 Annual Meeting is convened more than 30 days before, or delayed by more than 30 days after, October 16, 2021, to be considered for inclusion in proxy materials for the 2021 Annual Meeting, a nomination must be submitted, as outline above, a reasonable time before we begin to print and send our proxy materials for the 2021 Annual Meeting. Please review our Amended and Restated Bylaws, which contain additional requirements regarding advance notice of stockholder proposals, including nominations. You may view our Amended and Restated Bylaws by visiting the SEC’s website at www.sec.gov.

Vote Required; Recommendation of the Board of Directors

If a quorum is present and voting at the Annual Meeting, the seven nominees receiving the highest number of votes will be elected to our Board. Votes withheld from any nominee and broker non-votes will be counted only for purposes of determining a quorum. Broker non-votes will have no effect on this proposal as brokers or other nominees are not entitled to vote on such proposal in the absence of voting instructions from the beneficial owner.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF HENRY JI, PH.D., DORMAN FOLLOWWILL, KIM D. JANDA, PH.D., DAVID LEMUS, JAISIM SHAH, DR. ROBIN L. SMITH AND YUE ALEXANDER WU, PH.D. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE ON YOUR PROXY CARD.

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PROPOSAL 2:

RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has selected Ernst & Young LLP (“EY”) as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2020 and has further directed that management submit the selection of independent registered public accounting firm for ratification by the stockholders at the Annual Meeting. Representatives of EY will be present at the Annual Meeting. The representatives of EY will be able to make a statement at the Annual Meeting if they wish and will be available to respond to appropriate questions. We do not expect a representative of Deloitte & Touche LLP (“Deloitte”), our former independent registered public accounting firm, to be present at the Annual Meeting.

Stockholder ratification of the selection of EY as the Company’s independent registered public accounting firm is not required by Delaware law, our Certificate of Incorporation or our Amended and Restated Bylaws. However, the Audit Committee is submitting the selection of EY to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its stockholders.

On June 24, 2020, the Audit Committee dismissed Deloitte as our independent registered public accounting firm. On June 24, 2020, the Audit Committee approved the appointment of EY as our new independent registered public accounting firm, effective as of June 26, 2020. We filed a Current Report on Form 8-K on June 30, 2020 reporting this change. EY was not engaged to audit our financial statements for the fiscal year ended December 31, 2019.

The reports of Deloitte on our consolidated financial statements for the fiscal years ended December 31, 2019 and 2018 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the report of Deloitte on our consolidated financial statements for each of the fiscal years ended December 31, 2019 and 2018 contained an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern and included an emphasis-of-matter paragraph stating that, “As discussed in Note 1 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases, using the modified retrospective approach.”

During the fiscal years ended December 31, 2019 and 2018 and the subsequent interim period through June 24, 2020, there have been no “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) with Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference thereto in their reports on the consolidated financial statements for such fiscal years.

During the fiscal years ended December 31, 2019 and 2018 and the subsequent interim period through June 24, 2020, there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except that, as of December 31, 2018, we identified the following three material weaknesses in our internal control over financial reporting: (i) we did not attract, develop and retain sufficient accounting resources, including a Chief Accounting Officer, with appropriate knowledge and expertise commensurate with our corporate structure and financial reporting requirements to effectively operate internal controls over financial reporting in a timely manner, which caused our control activities in certain process or control areas to not operate effectively and resulted in certain deficiencies, including a lack of precise reviews of significant assumptions underlying fair value of embedded derivatives, fair value of indefinite-lived intangible assets and income tax related balances, (ii) a deficiency in evaluating the underlying assumptions associated with the accounting for key terms identified in significant transactions, which included convertible note and debt agreements during the fiscal year ended December 31, 2018, and (iii) a deficiency in reviewing and assessing assumptions underlying the determination of fair value of contingent consideration liabilities. As reported in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 3, 2020, we remediated each of these material weaknesses as of December 31, 2019.

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Independent Registered Public Accounting Firm’s Fees

The following table represents aggregate fees billed to us for the fiscal years ended December 31, 2019 and December 31, 2018 by Deloitte, our prior independent registered public accounting firm for such period. All fees described below were pre-approved by the Audit Committee.

 

 

Year Ended December 31

 

 

 

2019

 

 

2018

 

Audit Fees (1)

 

$

3,571,265

 

 

$

2,213,739

 

Audit-Related Fees

 

 

 

 

 

 

Tax Fees (2)

 

 

778,648

 

 

 

827,152

 

All Other Fees

 

 

 

 

 

 

Total Fees

 

$

4,349,913

 

 

$

3,040,891

 

 

(1)

Audit fees consisted of fees for services rendered in connection with the annual audit of our consolidated financial statements, quarterly reviews of financial statements included in our quarterly reports on Form 10-Q, and the audit of internal control over financial reporting. Audit fees also consisted of services provided in connection with issuances of consents included in registration statements, standalone audits, consultation on accounting matters, and SEC registration statement services.

 

(2)

Tax services consisted of fees for tax consultation and tax compliance services.

Audit Committee’s Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent auditors or on an individual explicit case-by-case basis before the independent registered public accounting firm are engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee members, but the decision must be reported to the full Audit Committee at its next scheduled meeting. By the adoption of this policy, the Audit Committee has delegated the authority to pre-approve services to the Chairperson of the Audit Committee, subject to certain limitations.

The Audit Committee has determined that the rendering of services by EY other than audit services is compatible with maintaining the principal accounting firm’s independence.

Vote Required; Recommendation of the Board of Directors

The affirmative vote of a majority of the votes cast at the Annual Meeting will be required to ratify the selection of EY. Abstentions will be counted towards a quorum, but will not be counted for any purpose in determining whether Proposal 2 has been approved as abstentions are not considered votes cast under Delaware law. The approval of Proposal 2 is a routine proposal on which a broker or other nominee has discretionary authority to vote. Accordingly, it is unlikely that any broker non-votes will result from this proposal.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE TO RATIFY THE SELECTION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2020. PROXIES SOLICITED BY OUR BOARD OF DIRECTORS WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY OTHERWISE ON THEIR PROXY CARDS.

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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

The following is the Audit Committee’s report submitted to the Board for fiscal year 2019.

The Audit Committee has:

 

reviewed and discussed our audited consolidated financial statements with management and Deloitte & Touche LLP, the Company’s prior independent registered public accounting firm;

 

discussed with Deloitte & Touche LLP the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the Securities and Exchange Commission; and

 

received from Deloitte & Touche LLP the written disclosures and the letter regarding their communications with the Audit Committee concerning independence as required by the Public Company Accounting Oversight Board and discussed the auditors’ independence with them.

In addition, the Audit Committee has met separately with management and with Deloitte & Touche LLP.

Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2019 for filing with the SEC.

Audit Committee

Mr. David Lemus

Mr. Dorman Followwill
Dr. Yue Alexander Wu

The foregoing Audit Committee Report shall not be deemed to be “soliciting material,” deemed “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act. Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act that might incorporate by reference future filings, including this proxy statement, in whole or in part, the foregoing Audit Committee Report shall not be incorporated by reference into any such filings.

 

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PROPOSAL 3:

APPROVAL OF THE SORRENTO THERAPEUTICS, INC. 2020 EMPLOYEE STOCK PURCHASE PLAN

On August 15, 2020, on the recommendation of the Compensation Committee, our Board approved the Sorrento Therapeutics, Inc. 2020 Employee Stock Purchase Plan (the “ESPP”), subject to approval by our stockholders at the Annual Meeting.

Approval of the ESPP will allow us to provide our employees (which may include employees of our subsidiaries) with the opportunity to acquire an ownership interest in us through their participation in the ESPP, thereby encouraging them to remain in our service and more closely aligning their interests with those of our stockholders.

If this Proposal 3 is approved by our stockholders, the total number of shares of our common stock initially reserved and available for issuance under the ESPP will be 7,500,000 shares. We do not maintain any other employee stock purchase plans. As of the Record Date, a total of 255,096,642 shares of our common stock were outstanding. The ESPP share reserve represents approximately 2.94% of the total number of shares of our common stock outstanding as of the Record Date.

If this Proposal 3 is approved by our stockholders, the ESPP will become effective as of the date of the Annual Meeting. In the event that our stockholders do not approve this Proposal 3, the ESPP will not become effective.

Summary of the 2020 Employee Stock Purchase Plan

The material features of the ESPP are described below. The following description of the ESPP is a summary only and is qualified in its entirety by reference to the complete text of the ESPP. Stockholders are urged to read the actual text of the ESPP in its entirety, which is attached hereto as Appendix A.

Purpose. The purpose of the ESPP is to provide our eligible employees with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in our affairs, and to provide an incentive for continued employment. We intend for the ESPP to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”).

Administration. The ESPP is administered by the Compensation Committee. The Compensation Committee has the final power to construe and interpret both the ESPP and the rights granted under it. The Compensation Committee has the power, subject to the provisions of the ESPP (i) to designate from time to time which of our subsidiaries are entitled to participate in the ESPP (each, a “Participating Subsidiary”), (ii) to construe and interpret the ESPP and rights granted thereunder, and to establish, amend and revoke rules and regulations for its administration, (iii) to settle all controversies regarding the ESPP and purchase rights granted under the ESPP, (iv) to amend or terminate the ESPP at any time as provided in the ESPP, and (v) to adopt such rules, procedures and sub-plans relating to the operation and administration of the ESPP with respect to participation in the ESPP by employees who are foreign nationals or employed or located outside the United States.

Stock Subject to ESPP. Subject to adjustment for certain changes in our capitalization, the total number of shares of our common stock initially reserved and available for issuance under the ESPP is 7,500,000 shares. If any purchase right granted under the ESPP terminates without having been exercised in full, the shares of common stock not purchased under such purchase right will again become available for issuance under the ESPP.

Offerings. The ESPP will be implemented by offerings of rights to purchase our common stock to all eligible employees. Unless otherwise specified by the Compensation Committee, the offering periods of the ESPP (each, an “Offering Period”) will (a) be of six months’ duration, and (b) commence on November 6th and end on May 5th, or commence on May 6th of each year and end on November 5th of the following year, as applicable. Each Offering Period will consist of one six-month purchase period (a “Purchase Period”) during which payroll deductions of the participants are accumulated under the ESPP. The first business day of each Offering Period is referred to as the “Offering Date”. The last business day of each Purchase Period is referred to as the “Purchase Date”.

The Compensation Committee has the authority to alter the Offering Dates, the Purchase Dates and the duration of Offering Periods (however, the duration of an Offering Period may not exceed 27 months from the Offering Date) or Purchase Periods without stockholder approval if such change is announced prior to the relevant Offering Period or prior to such other time period as specified by the Compensation Committee.

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Eligibility—Broad-Based Participation. Any individual who is employed by us or a Participating Subsidiary is eligible to participate in an Offering Period under the ESPP, so long as such individual is employed by us or a Participating Subsidiary prior to the beginning of such Offering Period or, if specified by the Compensation Committee with respect to an Offering Period, the individual has been employed by us or a Participating Subsidiary for a continuous period preceding such start of such Offering Period as the Compensation Committee may require (which in no event will be equal to or greater than two years). In addition, no employee will be eligible to be granted purchase rights under the ESPP unless such employee is customarily employed for more than 20 hours per week and five months per calendar year.

No employee will be eligible to participate in the ESPP if, as a result of being granted an option under the ESPP with respect to an Offering Period, the employee would, directly or indirectly, own common stock or hold options to purchase common stock possessing 5% or more of the total combined voting power or value of all classes of stock of us or any subsidiary of ours. In addition, no employee may purchase more than $25,000 worth of our common stock (determined at the time such rights are granted, and which, with respect to the ESPP, will be determined as of their respective Offering Dates) under all our employee stock purchase plans and any employee stock purchase plans of any subsidiary of ours for each calendar year during which such rights are outstanding at any time.

As of August 17, 2020, the Record Date, we had 242 employees, including two executive officers, who would have been eligible to participate in the ESPP had an Offering Period commenced as of the Record Date. Non-employee directors and consultants are not eligible to participate in the ESPP.

Participation in the ESPP; Limits on Employee Contributions. An eligible employee may enroll in an Offering Period under the ESPP on the Offering Date by delivering to us, prior to such Offering Date, or such other time period as specified by the Compensation Committee, a subscription agreement authorizing contributions that may not exceed the maximum amount specified by the Compensation Committee, but in any case may not exceed 15% of such employee’s compensation for such Offering Period during the period that begins on the Offering Date and ends on the last day of the Offering Period.

Once an employee becomes a participant in an Offering Period by filing a subscription agreement, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from the ESPP or terminates further participation in the Offering Period. Such participant is not required to deliver any additional subscription agreement in order to continue participation in the ESPP.

Purchase Price. The purchase price per share at which shares of our common stock are sold on each purchase date during an Offering Period will be 85% of the lesser of: (a) the fair market value of a share of our common stock on the Offering Date; or (b) the fair market value of a share of our common stock on the Purchase Date. As of the Record Date, the closing price of our common stock as reported on the Nasdaq Capital Market was $12.10 per share.

Payment of Purchase Price; Changes in Payroll Deductions; Issuance of Shares.

The purchase of shares during an Offering Period generally will be funded by a participant’s after-tax payroll deductions accumulated during each Offering Period. The deductions may be made either (a) as an election of a whole dollar amount not less than $10 per payroll period, nor greater than an amount equal to the amount that is 15% of the participant’s compensation, or (b) as a percentage of the participant’s compensation in 1% increments, not less than 1%, nor greater than 15%, or, in each case, such lower limit set by the Compensation Committee. Payroll deductions will commence on the first payday after the beginning of the Offering Period and will continue to the end of the Offering Period unless sooner altered or terminated.   Compensation for purposes of the ESPP means the participant’s base pay, incentive compensation, bonuses and commissions, although with respect to an Offering Period, a participant may elect to have his or her percentage of ESPP payroll deductions calculated with respect to (and solely deducted from) only his or her base pay.

A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with us a new authorization for payroll deductions, in which case the new rate will become effective for the next payroll period commencing after our receipt of the authorization and will continue for the remainder of the Offering Period unless changed. However, unless otherwise provided by the Compensation Committee with respect to a Purchase Period, only one such change can take effect during any Purchase Period. A participant may also increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Compensation Committee. All payroll deductions made for a participant are credited to his or her account under the ESPP and are deposited with our general funds. No interest accrues on the payroll deductions.

On each Purchase Date, for so long as the ESPP remains in effect and so long as the participant has not withdrawn from the Offering Period before that date, we will apply the funds then in the participant’s account to the purchase of whole shares of common stock reserved under the purchase right granted to such participant with respect to the Offering Period to the extent that such purchase right is exercisable on the Purchase Date. As soon as practicable after the Purchase Date, we will issue shares for the participant’s benefit representing the shares purchased upon exercise of his or her purchase right.

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Purchase Limits. Prior to the commencement of any Offering Period or prior to such time period as specified by the Compensation Committee, the Compensation Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (“Maximum Share Amount”) and unless otherwise specified by the Compensation Committee, the Maximum Share Amount will be 20,000 shares. In addition, prior to the commencement of an Offering Period or prior to such time period as may be specified by the Committee, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by all participants on any single Purchase Date (the “Aggregate Purchase Date Amount”).

If the number of shares to be purchased on a Purchase Date by all employees participating in the ESPP exceeds the number of shares then available for issuance under the ESPP (or, if applicable, the Aggregate Purchase Date Amount), then we will make a pro rata allocation of the remaining shares in as uniform a manner as will be reasonably practicable and as the Compensation Committee will determine to be equitable.

Withdrawal. Participants may withdraw from an Offering Period under the ESPP by signing and delivering a withdrawal form to us and terminating their contributions. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Compensation Committee. Upon such withdrawal, we will distribute to the employee his or her accumulated payroll deductions without interest, and such employee’s interest in the ESPP will terminate. In the event a participant voluntarily elects to withdraw from the ESPP, he or she may not resume his or her participation in the ESPP during the same Offering Period, but such withdrawal does not affect such employee’s eligibility to participate in any subsequent Offering Period under the ESPP.

Termination of Employment. A participant’s rights under any offering under the ESPP will terminate immediately upon termination of such participant’s employment for any reason, including retirement, death or the failure of such participant to remain an eligible employee of us or of a Participating Subsidiary. In such event, we will distribute the payroll deductions credited to the participant’s account to him or her or, in the case of his or her death, to his or her legal representative, without interest. The Compensation Committee will have sole discretion to determine whether a participant has terminated employment and the effective date on which the participant terminated employment.

Restrictions on Transfer. Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under the ESPP may be assigned, transferred, pledged or otherwise disposed of in any way (other than by the laws of descent and distribution or as provided in the ESPP) by the participant.

Changes in Capitalization. In the event of certain changes in our capitalization such as a stock split, stock dividend, or other similar transaction which affects the number of outstanding shares of our common stock and does not involve our receipt of consideration, the Compensation Committee will appropriately adjust: (i) the number and type of shares of common stock covered by each purchase right under the ESPP which has not yet been exercised, the Maximum Share Amount and, if applicable, any Aggregate Purchase Date Amount; (ii) the number and type of shares of common stock which have been authorized for issuance under the ESPP but have not yet been placed under a purchase right; and (iii) the price per share of common stock covered by each purchase right under the ESPP which has not yet been exercised.

Effect of Certain Corporate Transactions. In the event of a corporate transaction (as described below), (i) any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue outstanding purchase rights granted under the ESPP or may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the transaction) for outstanding purchase rights, or (ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue such purchase rights or does not substitute similar rights for such purchase rights, then the participants’ accumulated ESPP contributions will be used to purchase shares of our common stock within ten business days (or such other period specified by the Compensation Committee) prior to the transaction and the purchase rights will terminate immediately after such purchase.

For purposes of the ESPP, a corporate transaction generally will be deemed to occur in the event of the consummation of: (a) a merger or consolidation in which we are not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of us in a different jurisdiction, or other transaction in which there is no substantial change in our stockholders or their relative stock holdings and the purchase rights under the ESPP are assumed, converted or replaced by the successor corporation, which assumption will be binding on all participants), (b) a merger in which we are the surviving corporation but after which our stockholders immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with us in such merger) cease to own their shares or other equity interest in us, (c) the sale of all or substantially all of the consolidated assets of us and our subsidiaries, or (d) the acquisition, sale, or transfer of more than 50% of our outstanding shares or similar transaction.

Duration, Amendment and Termination. The Board or the Compensation Committee may amend, terminate or extend the term of the ESPP at any time. However, any such termination cannot affect purchase rights previously granted under the ESPP, nor may any amendment adversely affect a participant’s purchase right without the consent of such participant. In addition, any amendment which would (i) increase the number of shares that may be issued under the ESPP or (ii) change the designation of the employees (or class of employees) eligible to participate in the ESPP must be approved by our stockholders within 12 months of the adoption of the amendment.

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Notwithstanding the foregoing, in the event that the Board or the Compensation Committee determines that the ongoing operation of the ESPP may result in unfavorable financial accounting consequences, the Board (or the Compensation Committee) may, in its discretion and, to the extent necessary or desirable, modify, amend or terminate the ESPP to reduce or eliminate such accounting consequence.

Federal Income Tax Information

The following is a summary of the principal United States federal income taxation consequences to participants and us with respect to participation in the ESPP. This summary is not intended to be exhaustive and does not discuss the income tax laws of any local, state or foreign jurisdiction in which a participant may reside. The information is based upon current federal income tax rules and therefore is subject to change when those rules change. Because the tax consequences to any participant may depend on his or her particular situation, each participant should consult the participant’s tax adviser regarding the federal, state, local and other tax consequences of the grant or exercise of a purchase right or the sale or other disposition of common stock acquired under the ESPP.

Rights granted under the ESPP to our U.S. employees are intended to qualify for favorable federal income tax treatment associated with rights granted under an employee stock purchase plan which qualifies under the provisions of Section 423 of the Code.

Participants’ contributions to the ESPP are made on an after-tax basis. Otherwise, no income will be taxable to a participant as a result of the granting or exercise of a purchase right until a sale or other disposition of the acquired shares. The taxation upon such sale or other disposition will depend upon the holding period of the acquired shares.

If the shares are sold or otherwise disposed of more than two years after the beginning of the offering period and more than one year after the shares are transferred to the participant, then the lesser of the following will be treated as ordinary income: (i) the excess of the fair market value of the shares at the time of such sale or other disposition over the purchase price; or (ii) 15% of the fair market value of the shares as of the beginning of the offering period. Any further gain or any loss will be taxed as a long-term capital gain or loss.

If the shares are sold or otherwise disposed of before the expiration of either of the holding periods described above, then the excess of the fair market value of the shares on the purchase date over the purchase price will be treated as ordinary income at the time of such sale or other disposition. The amount of this ordinary income will be added to the participant’s basis in the shares and any resulting gain or loss recognized upon the sale or disposition will be a capital gain or loss.  If the shares were held for more than one year since the date of purchase, the capital gain or loss will be long-term.

There are no federal income tax consequences to us by reason of the grant or exercise of rights under the ESPP. We are entitled to a deduction to the extent amounts are taxed as ordinary income to a participant for shares sold or otherwise disposed of before the expiration of the holding periods described above (subject to the requirement of reasonableness and the satisfaction of tax reporting obligations).

New Plan Benefits

Participation in the ESPP is voluntary and each eligible employee will make his or her own decision regarding whether and to what extent to participate in the ESPP. In addition, the Compensation Committee has not granted any purchase rights under the ESPP that are subject to stockholder approval of this Proposal 3. Accordingly, the benefits or amounts that will be received by or allocated to our executive officers and other employees under the ESPP, as well as the benefits or amounts that would have been received by or allocated to our executive officers and other employees for fiscal year 2019 if the ESPP had been in effect, are not determinable.

Vote Required; Recommendation of the Board of Directors

The affirmative vote of a majority of votes cast will be required to approve the ESPP. Abstentions will be counted towards a quorum, but will not be counted for any purpose in determining whether Proposal 3 has been approved as abstentions are not considered votes cast under Delaware law. Broker non-votes are also not considered under Delaware law to be votes cast at the Annual Meeting, and will also not be counted for any purpose in determining whether Proposal 3 has been approved. Therefore, abstentions and broker non-votes will have no effect on Proposal 3, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for this proposal by reducing the total number of shares from which the majority is calculated.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE TO APPROVE THE SORRENTO THERAPEUTICS, INC. 2020 EMPLOYEE STOCK PURCHASE PLAN. PROXIES

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SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE ON YOUR PROXY CARD.

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PROPOSAL 4:

APPROVAL OF THE AMENDMENT TO THE SORRENTO THERAPEUTICS, INC. 2019 STOCK INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE THEREUNDER BY 12,500,000 SHARES

We are asking our stockholders to approve an amendment to the Sorrento Therapeutics, Inc. 2019 Stock Incentive Plan (the “2019 Plan”), which increases the maximum number of shares authorized for issuance under the 2019 Plan by 12,500,000 shares from 10,000,000 shares to 22,500,000 shares.

As of June 30, 2020, excluding the requested share reserve increase, 2,170,700 shares remain available for issuance under the 2019 Plan and 7,829,300 shares were subject to outstanding awards under the 2019 Plan.

Our Board approved the 2019 Plan on August 13, 2019 and our stockholders approved the 2019 Plan on September 20, 2019.  10,000,000 shares of common stock were initially authorized for issuance under the 2019 Plan.  

On August 14, 2020, the Compensation Committee approved an amendment to the 2019 Plan to provide for, and submits to our stockholders for approval, an amendment to the 2019 Plan to increase the maximum number of shares authorized for issuance under the 2019 Plan by 12,500,000 shares from 10,000,000 shares to 22,500,000 shares.

Why Our Board Recommends That You Vote in Favor of Proposal 4

Equity Incentive Awards Are Critical to Long-Term Stockholder Value Creation

Our equity incentive plan is critical to our long-term goal of building stockholder value. As discussed in the “Executive and Director Compensation and Other Information” section of this proxy statement, equity incentive awards are central to our compensation program and constitute a significant portion of our named executive officers’ total direct compensation.  Our Board and its Compensation Committee believe that our ability to grant equity incentive awards to new and existing employees, directors and eligible consultants has helped us attract, retain and motivate professionals with superior ability, experience and leadership capability.  Historically, we have issued stock options and restricted stock under the 2019 Plan.  These forms of equity compensation align the interests of our employees, directors and consultants with the interests of our stockholders, encourage retention and promote actions that result in long-term stockholder value creation.

Our equity incentive program is broad-based.  As of June 30, 2020, approximately 253 of our employees had received grants of equity awards, all seven of our non-employee directors had received grants of equity awards and approximately 8 of our approximately 12 consultants had received grants of equity awards.  As of June 30, 2020, there were approximately 278 employees, seven non-employee directors and approximately 12 consultants eligible to participate in the 2019 Plan.  As of June 30, 2020, there were also approximately 68 non-employees to whom an offer of employment had been extended by the Company or an affiliate.  We believe we must continue to offer a competitive equity compensation plan in order to attract, retain and motivate the industry-leading talent imperative to our continued growth and success.

We Manage Our Equity Incentive Award Use Carefully

We manage our long-term stockholder dilution by limiting the number of equity awards granted annually.  The Compensation Committee carefully monitors our total dilution and equity expense to ensure that we maximize stockholder value by granting only the appropriate number of equity awards necessary to attract, retain and motivate employees.

Based on historical usage and our internal growth plans, we expect that the proposed 12,500,000 share increase in the number of shares available for issuance under the 2019 Plan would be sufficient for approximately 24 months of awards, assuming we continue to grant awards consistent with our historical usage and current practices, as reflected in our recent historical burn rate discussed below, and noting that future circumstances may require us to change our current equity grant practices.  If the proposed increase to the share reserve is approved, the share reserve under the 2019 Plan could last for a longer or shorter period of time, depending upon our future equity grant practices, which we cannot predict with any degree of certainty at this time. As discussed in further detail below, in determining the proposed increase to the 2019 Plan’s share reserve, the Compensation Committee and the Board took into account, among other things, our stock price and volatility, share usage, burn rate and dilution (or “overhang percentage”), and the existing terms of our outstanding awards.

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The following table shows certain key equity metrics over the past three fiscal years:

 

Key Equity Metrics

 

2019

 

 

2018

 

 

2017

 

Equity burn rate(1)

 

4.2%

 

 

4.5%

 

 

4.3%

 

Overhang(2)

 

13.0%

 

 

15.0%

 

 

3.0%

 

 

(1)

Equity burn rate is calculated by dividing the number of shares subject to equity awards granted during the fiscal year by the weighted-average number of shares outstanding during the period.

(2)

Overhang is calculated by dividing the sum of (x) the number of shares subject to equity awards outstanding at the end of the fiscal year and (y) the number of shares available for future grants, by the number of shares outstanding at the end of the fiscal year.

If the proposed increase to the 2019 Plan’s share reserve is approved, the issuance of the additional shares to be reserved under the 2019 Plan would dilute existing stockholders by an additional 5.39% on a fully diluted basis, based on the number of shares of our common stock outstanding as of June 30, 2020.

As described in the table above, the total aggregate equity value of the additional authorized shares being requested under the 2019 Plan (above the shares currently remaining available for issuance under the 2019 Plan), based on the closing price of our common stock on the Record Date, is $151,250,000.

In light of the factors described above, and the fact that the ability to continue to grant equity compensation is vital to our ability to continue to attract and retain employees in the competitive labor markets in which we compete, the Board has determined that the proposed increased size of the share reserve under the 2019 Plan is reasonable and appropriate at this time.

Each year, the Compensation Committee and our management review our overall compensation strategy.  We are committed to effectively managing our equity compensation and we carefully review our burn rate.  As evident by our historical burn rate, we achieve burn rates within the limits published by independent shareholder advisory groups, such as Institutional Shareholder Services for biotechnology companies.

Key Features of the 2019 Plan

The proposed 2019 Plan, as amended, continues to include provisions designed to protect our stockholders’ interests, including:

 

Administrator Independence.  The Compensation Committee, comprised solely of independent non-employee directors, administers the 2019 Plan.

 

No “Evergreen” Provision.  Both the 2019 Plan and the proposed 2019 Plan, as amended, do not include an “evergreen” provision that increases the number of shares available for issuance each year.  The 2019 Plan authorizes a fixed number of shares, so that stockholder approval is required to increase the maximum number of shares that may be issued subject to awards under the 2019 Plan.

 

Minimum Vesting.  Both the 2019 Plan and the proposed 2019 Plan, as amended, provide for a one year minimum vesting requirement for all awards granted under the 2019 Plan.

 

Continued Broad-Based Eligibility for Equity Awards.  We grant equity awards to a significant number of employees, which are subject to time-based vesting, generally over a four-year period.  By doing so, we link employee interests with stockholder interests throughout the organization and motivate our employees to act as owners of the business.

 

No Discount Stock Options or Share Appreciation Rights.  All stock options and share appreciation rights will have an exercise price equal to or greater than the fair market value of our common stock on the date the stock option or share appreciation right is granted.

 

Awards Subject to Clawback. All awards are subject to the provisions of any claw-back policy implemented by us, including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder.

 

Repricing is Not Allowed.  Both the 2019 Plan and the proposed 2019 Plan, as amended, prohibit the repricing of stock options and share appreciation rights without prior stockholder approval.  In addition, cash buyouts of underwater options and share appreciation rights are prohibited without prior stockholder approval.

 

Limitation on Awards.  The 2019 Plan and the proposed 2019 Plan, as amended, include maximum numbers of shares and dollar amounts subject to awards that could be granted in a fiscal year to any non-employee director and any other individual.

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No Dividends on Awards.  No dividends will be paid on awards under the 2019 Plan unless and until such awards vest.

 

Termination, Rescission and Recapture of Awards.  The 2019 Plan permits us to terminate, rescind and/or recapture awards granted under the 2019 Plan upon the occurrence of certain events such as conduct by a participant that is contrary to our long-term interests.

 

Negative Discretion.  The 2019 Plan permits the Compensation Committee to use negative discretion to reduce, but not to increase, the amount of a performance award otherwise payable to a participant under the 2019 Plan.

 

No Tax Gross-Ups.  The 2019 Plan does not provide for, or authorize, any tax gross-ups.

 

Limited Transferability.  Generally, a participant may not transfer an award granted under the 2019 Plan other than by will, the laws of descent and distribution or, with respect to NSOs (as defined below), pursuant to a domestic relations order.  Award agreements may also allow for other limited transfers, such as to immediate family members or by gift to charitable institutions.

Description of the 2019 Plan

The following is a summary of the material features of the 2019 Plan which does not purport to be complete and is qualified in its entirety by reference to the full text of the 2019 Plan, as amended, a copy of which is included as Appendix B to this proxy statement.

Awards.  The 2019 Plan provides for the grant of the following awards:

 

Incentive Stock Options (“ISO”), which may be granted solely to our employees, including our executive officers; and

 

Non-Incentive Stock Options (“NSO”), share appreciation rights, restricted share awards, unrestricted share awards, restricted share unit awards, dividend equivalents, and performance awards, which may be granted to our directors, consultants or employees, including our executive officers.

Purpose.  The purpose of the 2019 Plan is to provide incentive and awards to certain of our employees, directors, consultants and advisors.

Administration.  The 2019 Plan is administered by the Board or the Compensation Committee, provided that the Board may not act in lieu of the Compensation Committee on certain matters.  In this Proposal 4, the Board and the Compensation Committee are collectively referred to as the “Administrator.” Subject to the terms and conditions of the 2019 Plan, the Administrator is authorized to select participants, determine the type and number of awards to be granted and the number of shares to which awards will relate or the amount of a performance award, specify dates at which awards will be exercisable or settled, including performance conditions that may be required as a condition thereof, set other terms and conditions of such awards, prescribe forms of award agreements, interpret and specify rules and regulations relating to the 2019 Plan, and make all other determinations that may be necessary or advisable for the administration of the 2019 Plan.  Acceptable forms of consideration for the purchase of our common stock issued under the 2019 Plan will be determined by the Administrator and may include cash, surrender of common stock subject to the option being exercised, common stock previously owned by the participant, payment through a cashless exercise program or any combination of the foregoing.  In addition, the Compensation Committee may delegate its authority under the 2019 Plan to the extent permitted by the Delaware General Corporation Law, except delegation is limited where necessary to meet requirements under Rule 16b-3 under the Exchange Act or Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).  Neither we nor the Administrator may reprice any stock option or share appreciation right granted under the 2019 Plan without first obtaining the approval of the Company’s stockholders.  The Administrator may delegate authority to our officers, directors or greater than ten percent stockholders who are required to file reports pursuant to the Section 16 of the Exchange Act (“Reporting Persons”) to grant Awards to non-Reporting Persons.

Share Reserve.  The 2019 Plan authorizes an aggregate of 10,000,000 shares of our common stock, prior to giving effect to the proposed amendment to increase the number of shares issuable thereunder. Shares of our common stock subject to options and other stock awards that have expired, are forfeited, are cancelled, become unexercisable or are settled for cash (in whole or in part) and Shares that are for any other reason not paid or delivered under the 2019 Plan will again become available for grant under the 2019 Plan.  Shares of our common stock issued under the 2019 Plan may include previously unissued shares or reacquired shares bought on the market or otherwise.  If any shares of our common stock subject to a stock award are not delivered to a participant because such shares are withheld for the payment of taxes or the stock award is exercised through a net exercise, then the number of shares that are not delivered to participants shall again become available for grant under the 2019 Plan.  In addition, if the exercise of any stock award is satisfied by tendering shares of our common stock held by the participant, then the number of shares tendered shall become available for grant under the 2019 Plan.

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Limitation on Awards.  The maximum number of shares that may be subject to awards granted under the 2019 Plan to any individual other than a non-employee director in any calendar year may not exceed 4,000,000 shares of our common stock (subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions).  The maximum number of shares that may be subject to awards granted under the 2019 Plan to any non-employee director in any calendar year may not exceed 250,000 shares of our common stock (subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions).  No individual may be granted, during any calendar year, awards under the 2019 Plan initially payable in cash that could result in such individual receiving cash payments exceeding $5,000,000 pursuant to such awards.

Stock Options.  Stock options will be granted pursuant to stock option agreements.  The exercise price for stock options cannot be less than 100% of the fair market value of our common stock on the date of grant.  In general, the term of stock options granted under the 2019 Plan may not exceed ten years.  Unless the terms of a participant’s stock option agreement provide for earlier or later termination, if a participant’s service relationship with us, or any of our affiliates, ceases for any reason other than for cause, disability or death, the participant may exercise any vested options for up to 3 months after the date the service relationship ends, unless the terms of the stock option agreement provide for a longer or shorter period to exercise the option.  If a participant’s service relationship with us, or any of our affiliates, ceases due to disability, the participant may exercise any vested options for up to one year after the date the service relationship ends.  If a participant’s service relationship with us, or any of our affiliates, ceases due to death, or the participant dies within 30 days following the date the service relationship ends other than for cause, the participant’s beneficiary may exercise any vested options for up to one year following the date of death.  If a participant’s relationship with us, or any of our affiliates, ceases due to termination for cause, the option will terminate at the time the participant’s relationship with us, or any of our affiliates, terminates.  In no event may an option be exercised after its expiration date.

Incentive stock options may be granted only to our employees, including executive officers and including employees of our subsidiaries.  The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to ISOs that are exercisable for the first time by a participant during any calendar year under all of our equity plans may not exceed $100,000.  The options or portions of options that exceed this limit are automatically treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock representing more than 10% of the total combined voting power of the Company or any of its affiliates unless the following conditions are satisfied:

 

the option exercise price is at least 110% of the fair market value of our common stock on the date of grant; and

 

the term of the ISO does not exceed five years from the date of grant.

Share Appreciation Rights.  Share appreciation rights will be granted through a share appreciation rights agreement.  Each share appreciation right is denominated in common stock equivalents.  The exercise price of each share appreciation right will be determined by the Administrator at the time of grant and will not be less than 100% of the fair market value of our common stock underlying the right.  In general, the term of a share appreciation right may not exceed ten years.  Upon exercise of a share appreciation right, we will pay the participant an amount equal to the excess of (i) the aggregate fair market value of our common stock on the date of exercise, over (ii) the aggregate exercise price determined by the Administrator on the date of grant.  Share appreciation rights will be paid either in cash, in shares of our common stock or partly in cash and partly in shares.  The Administrator may also impose any restrictions or conditions upon the vesting of share appreciation rights that it deems appropriate.  A recipient’s share appreciation rights agreement shall specify the terms upon which the recipient may exercise a share appreciation right in the event the recipient’s relationship with us, or any of our affiliates, ceases for any reason.  Absent this disclosure, a share appreciation right shall be governed by the same post-termination provisions applicable to options granted under the 2019 Plan, as discussed above.  Share appreciation rights carry no voting or dividend rights or other rights associated with stock ownership.

Restricted and Unrestricted Share Awards.  Restricted share awards will be granted pursuant to restricted share award agreements.  A restricted share award may be issued for nominal or no cost.  Participants receiving a restricted share award generally will have all of the rights of a stockholder with respect to such stock, including rights to vote the shares; however, in no event shall Participants holding restricted shares be entitled to receive dividends, payments or other distributions paid with respect to restricted shares prior to the time the restricted shares are vested.  Shares of our common stock acquired under a restricted share award will be subject to forfeiture to us in accordance with vesting conditions based upon a schedule or performance criteria established by the Administrator.  Generally, except as otherwise provided in the applicable restricted share award agreement, restricted share awards that have not vested will be forfeited upon the participant’s termination of continuous service with us or an affiliate of ours for any reason.  We will return the purchase price for a forfeited restricted share award only if set forth in the participant’s restricted share award agreement.

Unrestricted share awards are similar to restricted share awards, provided that shares of our common stock acquired under an unrestricted share award will be fully vested on the date of grant.

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Restricted Share Unit Awards.  Restricted share unit awards will be granted pursuant to restricted share unit award agreements.  Restricted share units are denominated in common stock equivalents.  They are typically awarded to participants without payment of consideration, but are subject to vesting conditions based upon a schedule or performance criteria established by the Administrator.  Unlike restricted stock, the stock underlying restricted share units will not be issued until the stock units have vested.  Prior to settlement, restricted share unit awards carry no voting or dividend rights or other rights associated with stock ownership, unless otherwise provided in a participant’s restricted share unit award agreement; however, in no event shall Participants holding restricted share units be entitled to receive dividends, payments or other distributions paid with respect to shares underlying the restricted share units prior to the time the restricted share units are vested.  Except as otherwise provided in the applicable restricted share unit award agreement, restricted share units that have not vested will be forfeited upon the participant’s termination of continuous service with us or an affiliate of ours for any reason.

Performance Awards.  Performance awards may be granted, vest or be exercised based upon the attainment of certain performance goals during a certain period of time.  Performance awards may be paid in the form of cash or shares of our common stock or a combination of cash and shares.  The value of performance awards may be linked to the satisfaction of performance criteria established by the Administrator.

In granting a performance award, any of the performance criteria may be measured with respect to the Company, or any subsidiary or business unit, either in absolute terms, terms of growth or as compared to any incremental increase or decrease or as compared to results of a peer group(s) or to market performance indicators or indices.  The Compensation Committee will define in an objective fashion the manner of calculating the performance criteria it selects to use for such awards.  With regard to a particular performance period, the Compensation Committee will have the discretion to select the length of the performance period, the type of performance-based awards to be granted, and the performance goals that will be used to measure the performance for the period.

Except as provided by the Compensation Committee at the time of grant, the achievement of each performance goal will be determined in accordance with applicable accounting standards. The Compensation Committee may provide that one or more objectively determinable adjustments will be made for purposes of determining the achievement of one or more of the performance goals established for an award. Any such adjustments may include one or more of the following: items related to a change in accounting principle; items relating to financing activities; expenses for restructuring or productivity initiatives; other non-operating items; items related to acquisitions; items attributable to the business operations of any entity acquired by the Company during the performance period; items related to the disposal of a business or segment of a business; items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards; items attributable to any stock dividend, stock split, combination or exchange of stock occurring during the performance period; any other items of significant income or expense which are determined to be appropriate adjustments; items relating to unusual or extraordinary corporate transactions, events or developments; items related to amortization of acquired intangible assets; items that are outside the scope of the Company’s core, on-going business activities; items related to acquired in-process research and development; items relating to changes in tax laws; items relating to major licensing or partnership arrangements; items relating to asset impairment charges; items relating to gains or losses for litigation, arbitration and contractual settlements; or items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.

As described below in “Federal Income Tax Consequences Associated with the 2019 Plan,” the exception from the Section 162(m) $1.0 million deduction limit for qualified “performance-based” compensation paid to certain covered executive officers has been repealed, effective for taxable years beginning after December 31, 2017. Consequently, performance awards granted under the 2019 Plan will be subject to the $1,000,000 limitation on the income tax deductibility of compensation paid to a covered employee imposed by Section 162(m) of the Code.

Transferability of Awards.  Generally, a participant may not transfer an award granted under the 2019 Plan other than by will or the laws of descent and distribution. However, a participant may transfer an NSO pursuant to a domestic relations order.  In addition, if provided in an award agreement, NSOs, share appreciation rights settled in shares, restricted share awards and performance awards granted under the 2019 Plan may be transferred by instrument to the participant’s immediate family or an inter vivos or testamentary trust or by gift to charitable institutions.

Changes to Capital Structure.  In the event there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split, stock dividend, combination, recapitalization or reclassification, the number of shares reserved under the 2019 Plan, the maximum number of Shares with respect to one or more stock awards that may be granted to persons during any calendar year and the number of shares and exercise price, if applicable, of all outstanding stock awards will be appropriately adjusted.

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Change in Control.  In the event of a change in control of the Company, the Administrator may take one or more of the following actions without the consent of any 2019 Plan participant or stockholder of the Company:

 

arrange for the 2019 Plan and all outstanding stock awards under the 2019 Plan to be assumed, continued or substituted for by the entity surviving the change in control, or its parent or subsidiary;

 

accelerate in part or in full the vesting provisions of stock awards held by participants;

 

arrange or otherwise provide for the payment of cash or other consideration to participants in exchange for the satisfaction and cancellation of outstanding awards;

 

accelerate in part or in full to a date prior to the effective time of such change in control as the Administrator shall determine (or, if the Administrator shall not determine such a date, to the date that is four days prior to the effective time of the change in control) the vesting of awards so that awards shall vest (and, to the extent applicable, become exercisable) as to the Shares that otherwise would have been unvested and provide that repurchase rights of the Company with respect to Shares issued upon exercise of an award shall lapse as to the Shares subject to such repurchase right; or

 

generally make such other modifications, adjustments or amendments to outstanding awards or the 2019 Plan as the Administrator deems necessary or appropriate.

In the event that an award outstanding under the 2019 Plan is not exercised in full prior to consummation of a change in control in which the award is not being assumed, continued or substituted for, the award shall automatically terminate as of immediately prior to the consummation of the transaction.  In addition, the 2019 Plan provides that in the event a participant is involuntarily terminated in connection with, or within 12 months after, a change in control of the Company, each of the participant’s stock awards outstanding under the 2019 Plan that are assumed, continued or substituted for by a surviving entity in connection with the change in control will become fully vested, and any repurchase right with respect to the award will lapse in its entirety unless the applicable award agreement provides for a more restrictive acceleration of the vesting schedule or more restrictive limitations on the lapse of repurchase rights.

Involuntary termination means a participant is terminated under the following circumstances occurring in connection with, or within 12 months following consummation of, a change in control: (i) termination without cause by the Company or an affiliate or successor thereto, as appropriate; or (ii) voluntary termination by the participant within 60 days following (A) a material reduction in the participant’s job responsibilities, provided that neither a mere change in title alone nor reassignment to a substantially similar position shall constitute a material reduction in job responsibilities; (B) an involuntary relocation of the participant’s work site to a facility or location more than 50 miles from the participant’s principal work site as of immediately prior to the change in control; or (C) a material reduction in Participant’s total compensation other than as part of a reduction by the same percentage amount in the compensation of all other similarly-situated employees, directors or consultants.

A change in control generally includes:

 

a merger or consolidation of the Company after which the Company’s stockholders as of immediately prior to the merger or consolidation own 50% or less of the voting power of the surviving entity;

 

a sale, transfer or disposition of all or substantially all of the Company’s assets;

 

a complete liquidation or dissolution of the Company; or

 

an acquisition of 50% or more of the Company’s outstanding stock by any person or group.

Plan Amendments; No Repricing without Stockholder Approval.  The Board will have the authority to amend or terminate the 2019 Plan.  However, no amendment or termination of the 2019 Plan can adversely affect any rights under outstanding awards unless agreed to in writing by the affected participant. We will obtain stockholder approval of any amendments to the 2019 Plan as required by applicable law.  Neither the Company nor the Administrator shall, without stockholder approval, allow for a repricing of options.  In addition, the 2019 Plan prohibits the cash buyout of underwater options and share appreciation rights without prior stockholder approval.

Term.  The 2019 Plan will terminate on August 13, 2029.

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Federal Income Tax Consequences Associated with the 2019 Plan

The following is a general summary under current law of the material federal income tax consequences to participants in the 2019 Plan.  This summary deals with the general tax principles that apply and is provided only for general information.  Some kinds of taxes, such as state, local and foreign income taxes and federal employment taxes, are not discussed. Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to locality.  The summary does not discuss all aspects of income taxation that may be relevant in light of a holder’s personal investment circumstances.  This summarized tax information is not tax advice.

Non-Qualified Stock Options.  For federal income tax purposes, if an optionee is granted an NSO under the 2019 Plan, the optionee will not have taxable income on the grant of the option, nor will we be entitled to any deduction.  Generally, upon exercise of NSOs the optionee will recognize ordinary income, and we will be entitled to a deduction, in an amount equal to the excess of the fair market value of a common share over the option exercise price on the date each such option is exercised.  The optionee’s basis for the stock for purposes of determining gain or loss on subsequent disposition of such shares generally will be the fair market value of the common stock on the date the optionee exercises such option.  Any subsequent gain or loss will be generally taxable as capital gains or losses.

Incentive Stock Options.  There is no taxable income to an optionee when an optionee is granted an ISO or when that option is exercised.  However, the amount by which the fair market value of the shares at the time of exercise exceeds the option price will be an “item of adjustment” for the optionee for purposes of the alternative minimum tax.  Gain realized by the optionee on the sale of an ISO is taxable at capital gains rates, and no tax deduction is available to us, unless the optionee disposes of the shares within (a) two years after the date of grant of the option or (b) within one year of the date the shares were transferred to the optionee.  If the common shares are sold or otherwise disposed of before the end of the two-year and one-year periods specified above, the excess of the fair market value of a common share over the option exercise price on the date of the option’s exercise will be taxed at ordinary income rates (or, if less, the gain on the sale), and we will be entitled to a deduction to the extent the optionee must recognize ordinary income.  If such a sale or disposition takes place in the year in which the optionee exercises the option, the income the optionee recognizes upon sale or disposition of the shares will not be considered an item of adjustment for alternative minimum tax purposes.

An ISO exercised more than three months after an optionee terminates employment, for reasons other than death or disability, will be taxed as an NSO, and the optionee will recognize ordinary income on the exercise.  We will be entitled to a tax deduction equal to the ordinary income, if any, realized by the optionee.

Restricted Stock.  An individual to whom restricted stock is issued generally will not recognize taxable income upon such issuance, and we generally will not then be entitled to a deduction, unless an election is made by the participant under Section 83(b) of the Code.  However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to a substantial risk of forfeiture, the individual generally will recognize ordinary income, and we generally will be entitled to a deduction for an amount equal to the excess of the fair market value of the shares at the date such restrictions lapse over the purchase price.  If a timely election is made under Section 83(b) with respect to restricted stock, the participant generally will recognize ordinary income on the date of the issuance equal to the excess, if any, of the fair market value of the shares at that date over the purchase price of such shares, and we will be entitled to a deduction for the same amount.

Share appreciation rights.  A participant will not be taxed upon the grant of a share appreciation right.  Upon the exercise of the share appreciation right, the participant will recognize ordinary income equal to the amount of cash or the fair market value of the stock received upon exercise.  At the time of exercise, we will be eligible for a tax deduction as a compensation expense equal to the amount that the participant recognizes as ordinary income.

Other Stock Awards and Performance Awards.  The participant will have ordinary income upon receipt of stock or cash payable under performance awards, dividend equivalents, restricted share units and stock payments.  We will be eligible for a tax deduction as a compensation expense equal to the amount of ordinary income recognized by the participant.

Section 162(m) of the Code.  Prior to 2018, Section 162(m) of the Code generally limited to $1.0 million the amount of non-performance-based remuneration the Company could deduct in any calendar year for certain executive officers. Effective January 1, 2018, the exemption from the Section 162(m) deduction limit for performance-based compensation was repealed, such that compensation paid to our covered officers in excess of $1.0 million will generally not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017. For grants under the 2019 Plan, we will not be able to take a deduction for any compensation in excess of $1 million that is paid to a covered officer.

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Internal Revenue Code Section 409A Requirements.  Certain awards under the 2019 Plan may be considered “nonqualified deferred compensation” for purposes of Section 409A of the Code (“Section 409A”), which imposes certain requirements on compensation that is deemed under Section 409A to involve nonqualified deferred compensation.  Among other things, the requirements relate to the timing of elections to defer, the timing of distributions and prohibitions on the acceleration of distributions.  Failure to comply with these requirements (or an exception from such requirements) may result in the immediate taxation of all amounts deferred under the nonqualified deferred compensation plan for the taxable year and all preceding taxable years, by or for any participant with respect to whom the failure relates, the imposition of an additional 20% income tax on the participant for the amounts required to be included in gross income and the possible imposition of penalty interest on the unpaid tax.  Generally, Section 409A does not apply to incentive awards that are paid at the time the award vests.  Likewise, Section 409A typically does not apply to restricted stock.  Section 409A may, however, apply to incentive awards the payment of which is delayed beyond the calendar year in which the award vests.  Treasury regulations generally provide that the type of awards provided under the 2019 Plan will not be considered nonqualified deferred compensation.  However, to the extent that Section 409A applies to an award issued under the 2019 Plan, the 2019 Plan and all such awards will, to the extent practicable, be construed in accordance with Section 409A.  Under the 2019 Plan, the Administrator has the discretion to grant or to unilaterally modify any award issued under the 2019 Plan in a manner that conforms with the requirements of Section 409A with respect to deferred compensation or voids any participant election to the extent it would violate Section 409A.  The Administrator also has sole discretion to interpret the requirements of the Code, including Section 409A, for purposes of the 2019 Plan and all awards issued under the 2019 Plan.

New Plan Benefits

The number of awards that a participant may receive under the 2019 Plan, as amended by the proposed amendment, is in the discretion of the Administrator and therefore cannot be determined in advance.  For illustrative purposes only, the following table sets forth (i) the aggregate number of shares subject to options granted under the 2019 Plan during the last fiscal year to our named executive officers, to all current executive officers, as a group, to all directors who are not executive officers, as a group, and to all employees who are not executive officers, as a group (even if not currently outstanding) and (ii) the weighted-average per share exercise price of such options.

 

Name of Individual or Group and Position

 

Number of

Shares Subject

to Options

 

 

Weighted-

Average

Per Share

Exercise

Price ($)

 

Dr. Henry Ji, Director, Chief Executive Officer and

   President and Chairman of the Board

 

 

1,500,000

 

 

 

3.78

 

Jiong Shao, Former Executive Vice President and Chief Financial

   Officer(1)

 

 

200,000

 

 

 

3.78

 

Najjam Asghar, Chief Financial Officer

 

 

100,000

 

 

 

3.22

 

All current executive officers, as a group (2 persons)

 

 

1,600,000

 

 

 

3.75

 

All current directors who are not current executive officers, as a

   group (7 persons)

 

 

500,000

 

 

 

3.81

 

All employees who are not current executive officers, as a group

 

 

3,420,600

 

 

 

3.19

 

 

(1)

Mr. Shao’s employment with the Company terminated in August 2020.

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Equity Compensation Plan Information

The following table sets forth additional information with respect to the shares of common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of December 31, 2019. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be issued upon exercise of outstanding options.

 

Plan Category

 

Number of

securities to be

issued upon

exercise of

outstanding

options, warrants

and rights (a)

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of

securities

remaining available

for future issuance

under equity

compensation plans

(excluding

securities reflected

in column (a))

 

 

Equity compensation plans

approved by security holders(1)

 

 

14,586,661

 

 

$

4.36

 

 

 

7,146,200

 

(2)

Equity compensation plans not

approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

14,586,661

 

 

$

4.36

 

 

 

7,146,200

 

 

 

(1)

Comprised of the 2019 Plan and our Amended and Restated 2009 Stock Incentive Plan.

(2)

Comprised solely of shares available for future issuance under the 2019 Plan.

Vote Required; Recommendation of the Board of Directors

The affirmative vote of a majority of votes cast will be required to amend our 2019 Stock Incentive Plan to increase the maximum number of shares authorized for issuance under the 2019 Plan by 12,500,000 shares.  Abstentions will be counted towards a quorum, but will not be counted for any purpose in determining whether Proposal 4 has been approved as abstentions are not considered votes cast under Delaware law. Broker non-votes are also not considered under Delaware law to be votes cast at the Annual Meeting, and will also not be counted for any purpose in determining whether Proposal 4 has been approved. Therefore, abstentions and broker non-votes will have no effect on Proposal 4, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for this proposal by reducing the total number of shares from which the majority is calculated.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE TO AMEND OUR 2019 STOCK INCENTIVE PLAN TO INCREASE THE MAXIMUM NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE 2019 PLAN BY 12,500,000 SHARES.  PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE ON YOUR PROXY CARD.

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PROPOSA5:

APPROVAL OF THE CEO PERFORMANCE AWARD FOR HENRY JI, PH.D.

At the Annual Meeting, stockholders will be asked to approve the Performance Stock Option Award Agreement to Henry Ji, Ph.D. (the “CEO Performance Award”), which was approved by the Compensation Committee on August 7, 2020, subject to stockholder approval at the Annual Meeting. The full text of the CEO Performance Award is attached to this proxy statement as Appendix C.

Under the CEO Performance Award, Dr. Ji will receive a non-qualified stock option containing ten separate tranches that vest only if certain pre-established market capitalization milestones are achieved, which requires two market capitalization prongs to be met to achieve each milestone: (1) a six calendar month trailing average (based on trading days); and (2) a 30 calendar day trailing average (based on trading days).  For the first tranche to vest, Sorrento’s market capitalization has to increase to $5 billion.  For the next two tranches to vest, Sorrento must increase its market capitalization in additional $2 billion increments, then by increments of $3 billion for the three tranches after that, then by increments of $4 billion for the next three tranches and a final increment of $5 billion for the final tranche—up to a total market capitalization of $35 billion.  For each tranche that is achieved, Dr. Ji will vest and earn the right to exercise the option for that number of shares of Sorrento common stock that corresponds to approximately 1% of Sorrento’s total outstanding shares, calculated as of August 6, 2020. The option, to the extent vested, will be exercisable until August 7, 2030 (ten years from the date of grant).

The exercise price for the CEO Performance Award is $17.30 per share, which represents a 20% premium to the closing sale price of Sorrento’s common stock on August 7, 2020, the grant date of the CEO Performance Award. Our Compensation Committee determined to use a premium to the closing sale price to ensure that Dr. Ji is further incentivized to increase value to stockholders as any options that vest under the CEO Performance Award will only have value to the extent that the Company’s stock price increases above $17.30. Neither the Tesla, Inc. CEO performance award nor the Axon CEO performance award discussed below had an exercise price that was set as a premium to the fair market value of the company’s stock on the date of grant.

Dr. Ji must hold shares that he acquires upon exercise of the CEO Performance Award for five years post-exercise (except for shares used to pay exercise price and tax withholdings, or in certain other limited circumstances described further below). Additionally, Dr. Ji must remain as Sorrento’s CEO or serve as Executive Chairman, in each case with all leadership ultimately reporting to him, at the time each milestone is met in order for the corresponding tranche to vest.  This ensures Dr. Ji’s continued active leadership of Sorrento over the long-term while also providing the flexibility to bring in another CEO who would report to Dr. Ji at some point in the future.  Although there is no current intention for this to happen, it provides flexibility as Sorrento continues to grow to potentially allow Dr. Ji to focus more of his attention on the kinds of key product and strategic matters that most impact Sorrento’s long-term growth and profitability.

Our Compensation Committee’s primary objective in designing the CEO Performance Award is to help Sorrento grow and achieve its  objectives, including developing, advancing and completing clinical trials for, and ultimately obtaining regulatory approvals for, its product candidates, which would facilitate the creation of significant stockholder value.  The Compensation Committee considered a CEO performance award for Dr. Ji from time to time since 2018, and ultimately developed the CEO Performance Award over several months in 2020 with the help of Compensia, the same external compensation consultant that advised Tesla, Inc. in creating its CEO performance awards, to assist in the design of the CEO Performance Award. There are three primary reasons why the Board recommends that stockholders approve the award, as follows:

 

The CEO Performance Award strengthens Dr. Ji’s incentives and further aligns his interests with those of Sorrento’s other stockholders;

 

The CEO Performance Award ensures Dr. Ji’s continued leadership of Sorrento (either as its Chief Executive Officer or Executive Chairman) over the long-term and provides him with the significant challenges necessary to engage him for the long-term; and

 

The CEO Performance Award serves as a catalyst for the achievement of Sorrento’s current and future strategic and financial objectives, which include slowing, or potentially even stopping, the spread of SARS-CoV-2, as well as continuing to develop Sorrento’s core cancer treatment, pain control and autoimmune disease portfolios and creating clinically meaningful therapies for patients globally.

Summary of the CEO Performance Award

The following description is only a summary of the material provisions of the CEO Performance Award.  It does not purport to summarize all of the terms of, and is qualified in its entirety by, the full text of the CEO Performance Award, which is attached to this proxy statement as Appendix C.

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General Overview

 

Award Terms

Details

Date of Grant

August 7, 2020

CEO Performance Award Value

Total size: 10% of total outstanding shares as of August 6, 2020, the day prior to the grant date (24,935,882 option shares)

Number of Vesting Tranches: Ten tranches; 1% of total outstanding shares as of August 6, 2020 per tranche, in accordance with “Award Vesting / Milestones” below.

Equity Type

Nonqualified stock options

Exercise Price

$17.30, which is a 20% premium to the closing sales price of the Sorrento common stock on August 7, 2020, the grant date

Expiration Date

August 7, 2030

Award Vesting / Milestones

The Award shall vest in ten tranches based on Sorrento’s market capitalization, as follows:

1.    First 1% shall vest when Sorrento reaches $5 billion in market capitalization;

2.    An additional 1% shall vest when Sorrento reaches $7 billion in market capitalization;

3.    An additional 1% shall vest when Sorrento reaches $9 billion in market capitalization;

4.    An additional 1% shall vest when Sorrento reaches $12 billion in market capitalization;

5.    An additional 1% shall vest when Sorrento reaches $15 billion in market capitalization;

6.    An additional 1% shall vest when Sorrento reaches $18 billion in market capitalization;

7.    An additional 1% shall vest when Sorrento reaches $22 billion in market capitalization;

8.    An additional 1% shall vest when Sorrento reaches $26 billion in market capitalization;

9.    An additional 1% shall vest when Sorrento reaches $30 billion in market capitalization; and

10.    A final 1% shall vest when Sorrento reaches $35 billion in market capitalization.

In addition to the above, a sustained market capitalization is required for each of the above milestones to be met, other than in a change in control situation.  Specifically, there are two prongs that must be met to achieve a given milestone:

    Six calendar month trailing average (based on trading days); and

    30 calendar day trailing average (based on trading days).

Term of CEO Performance Award

10 years

Post-Termination of Employment Exercise Period

Three months

Post-Exercise Holding Period

Five years, to further align Dr. Ji’s interests with Sorrento stockholders’ interests following option exercise.

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Award Terms

Details

Employment Requirement For Continued Vesting

Vesting eligibility contingent upon being:

1.    Chief Executive Officer; or

2.    Executive Chairman.

Extended exercise period: If Dr. Ji is still employed at Sorrento in a role other than the specified roles above, he will no longer be able to vest under the CEO Performance Award but can continue to hold unexercised vested options for the full term of the CEO Performance Award.

Termination of Employment

No acceleration of vesting upon termination of employment, death or disability.

Change in Control of Sorrento

No automatic acceleration of vesting upon a change in control of Sorrento, but in a change in control situation, Sorrento’s market capitalization shall be measured at the time of such change in control without regard to the six calendar month and 30 calendar day trailing averages of Sorrento’s stock price.  

The treatment of the CEO Performance Award upon a change in control is intended to align Dr. Ji’s interests with Sorrento’s other stockholders with respect to evaluating potential takeover offers.

Exercise Methods / Requirements

Exercise Methods:

1.Cashless: sufficient shares to cover exercise prices and taxes are simultaneously sold upon exercise of options; and

2.Cash: exercise price is paid in cash upon exercise of options.

Clawback

Vesting of the CEO Performance Award will be subject to a clawback in the event financial statements are restated in a way that a tranche would not have otherwise vested or as may be required under any current or future clawback policy that may be adopted by Sorrento.

Restrictive Covenants

Dr. Ji will continue to be subject to restrictive covenants relating to confidentiality, intellectual property, noncompetition, nonsolicitation and non-disparagement, as set forth in Dr. Ji’s existing employment agreement.

Administration

The CEO Performance Award will be administered by our Compensation Committee.  The Compensation Committee shall have the sole and complete discretion with respect to all matters under the CEO Performance Award.

Market Capitalization Milestone Adjustments

In the event that Sorrento acquires a business with a purchase price of more than $100,000,000, each then unachieved market capitalization milestone will be increased by the purchase price of such acquisition.

In the event that Sorrento enters into a transaction constituting a split-up, spin-off or divestiture that has a value over $100,000,000, each then unachieved market capitalization milestone will be decreased by the value of such transaction.

 

Material Terms of the CEO Performance Award

CEO Performance Award Value.  The total number of shares of Sorrento common stock underlying the CEO Performance Award will be 24,935,882, divided into nine separate tranches of options to purchase 2,493,588 shares per tranche and one tranche of an option to purchase 2,493,590 shares.  The number of shares underlying the CEO Performance Award in each tranche is equivalent to 1% of the 249,358,822 shares of Sorrento’s common stock outstanding as of August 6, 2020 and, therefore, the total number of shares underlying the CEO Performance Award is equivalent to 10% of the total number of shares of Sorrento’s common stock outstanding as of such date.

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Equity Type.  The CEO Performance Award is comprised of performance-based nonqualified stock options.  Dr. Ji will receive compensation from the CEO Performance Award only to the extent that Sorrento achieves the applicable performance milestones.  The CEO Performance Award will not be made under an individual agreement, and not under any equity incentive plan, such as the 2019 Plan.

Exercise Price.  The exercise price of the shares subject to the CEO Performance Award is $17.30 per share, which is a 20% premium to the closing sales price of Sorrento’s common stock on the Nasdaq Capital Market on August 7, 2020, the date of grant of the CEO Performance Award.

Award Vesting / Milestones.  Each of the ten vesting tranches of the CEO Performance Award will vest upon certification by the Board that the market capitalization milestone for such tranche has been achieved on or before the expiration of the CEO Performance Award on August 7, 2030.  

There are ten market capitalization milestones, each one requiring an incremental increase in Sorrento’s market capitalization, initially to $5 billion and by increments of $2 billion for the next two tranches, then by increments of $3 billion for the three tranches after that, then by increments of $4 billion for the next three tranches, and a final increment of $5 billion for the final tranche (each, a “Market Capitalization Milestone”).

To meet all ten Market Capitalization Milestones, Sorrento will have to add more than $31 billion to its market capitalization measured as of the Record Date.  The Board considers the market capitalization milestones to be challenging hurdles.

Except in a change in control situation, measurement of market capitalization will be based on both (i) a six calendar month trailing average of Sorrento’s stock price as well as (ii) a 30 calendar day trailing average of Sorrento’s stock price, in each case based on trading days only, and will thus require sustained market capitalization appreciation to be met.

Term of CEO Performance Award / Post-Termination of Employment Exercise Period.  The term of the CEO Performance Award is 10 years from the date of the grant, unless Dr. Ji’s employment with Sorrento is terminated prior to such date.  Accordingly, Dr. Ji has until August 7, 2030 to exercise any portion of the CEO Performance Award that has vested on or prior to such date, so long as he remains employed at Sorrento.  Additionally, Dr. Ji has up to three months following the termination of his employment with Sorrento to exercise any portion of the CEO Performance Award that vested prior to such termination, subject to any earlier expiration of the CEO Performance Award on August 7, 2030.  Further, the CEO Performance Award also may terminate earlier in connection with a change in control event of Sorrento, as described further below.

Post-Exercise Holding Period.  Dr. Ji must hold shares that he acquires upon exercise of the CEO Performance Award for five years post-exercise (except for shares used to pay exercise price and tax withholdings, or in certain other limited circumstances described further below).

While based on market practice generally the Compensation Committee believes that post-exercise holding periods for executive equity awards is very atypical of executive equity awards, the nature of this type of CEO compensation arrangement is unique enough that the Tesla, Inc. and Axon Enterprise, Inc. CEO performance awards, both of which have a holding period, are more similar to the CEO Performance Award than a standard executive equity award so the CEO Performance Award should follow their lead.  The Compensation Committee selected a five-year holding period, which is the same period that Tesla, Inc. chose for Mr. Musk, in order to further align Dr. Ji’s interests with Sorrento stockholders’ interests for five years following the exercise of any options under the CEO Performance Award.  Such alignment complements the requirements for sustained increases to Sorrento’s market capitalization levels in order to meet the applicable Market Capitalization Milestone under the CEO Performance Award, and ensures that Dr. Ji will be focused on sustaining Sorrento’s success both before, and even after he achieves, vesting under the CEO Compensation Award.

Moreover, the requirement of a five-year holding period significantly decreases the stock-based compensation expenses that Sorrento will recognize for the CEO Performance Award.

Employment Requirement for Continued Vesting.  Dr. Ji must continue to lead Sorrento’s management at the time each Market Capitalization Milestone is met in order for the corresponding tranche to vest under the CEO Performance Award.  Specifically, he must be serving as either Sorrento’s Chief Executive Officer or, alternatively, as its Executive Chairman.

Termination of Employment.  There will be no acceleration of vesting of the CEO Performance Award if Dr. Ji’s employment is terminated, or if he dies or becomes disabled.  In other words, termination of Dr. Ji’s employment with Sorrento will preclude his ability to earn any then-unvested portion of the CEO Performance Award following the date of his termination.  No portion of the CEO Performance Award will vest during any unpaid leave of absence by Dr. Ji.

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Change in Control of Sorrento.  If Sorrento experiences a change in control event, such as a merger with or purchase by another company, vesting under the CEO Performance Award will not automatically accelerate.  In a change in control situation, the achievement of the milestones will be based on Sorrento’s market capitalization determined by the product of the total number of outstanding shares of Sorrento common stock immediately before the change in control multiplied by the per share price (plus the per share value of any other consideration) received by Sorrento’s stockholders in the change in control.  The treatment of the CEO Performance Award upon a change in control is intended to align Dr. Ji’s interests, as a stockholder, with Sorrento’s other stockholders with respect to evaluating potential takeover offers.

Exercise Methods / Requirements.  Dr. Ji may exercise any vested options under the CEO Performance Award in one of two ways: (i) a cashless exercise or (ii) a cash exercise.  A cashless exercise occurs when the stock option is exercised and the shares are simultaneously sold to pay for the exercise price and any required tax withholding.  A cash exercise simply involves paying the Sorrento option exercise price in cash.

Clawback.  The CEO Performance Award will be subject to any current or future Sorrento clawback policy applicable to equity awards, so long as the policy does not discriminate solely against Dr. Ji except as required by applicable law.

Market Capitalization Adjustments.  In the event that Sorrento acquires a business with a purchase price of more than $100,000,000, each then unachieved Market Capitalization Milestone will be increased by the purchase price of such acquisition.  This feature of the CEO Performance Award is intended to prevent achievement of milestones based on acquisition activity that could be considered material to the achievement of those milestones.

Likewise, in the event that Sorrento enters into a transaction constituting a split-up, spin-off or divestiture that has a value over $100,000,000, each unachieved Market Capitalization Milestone will be decreased by the value of such transaction.

Other Details Regarding CEO Performance Award

Administration.  The CEO Performance Award will be administered by the Compensation Committee, or any committee of Board members or other individuals (excluding Dr. Ji) appointed by the Board and satisfying applicable laws (the “Administrator”). However, Dr. Ji will recuse himself from any approvals relating to the administration of the CEO Performance Award.  The Administrator has the power and authority, in good faith, to interpret the CEO Performance Award and adopt rules for its administration, interpretation and application of the terms of the CEO Performance Award.  All actions taken, and interpretations and determinations made, by the Administrator in good faith with respect to the CEO Performance Award will be final and binding on Dr. Ji and any other interested persons.

Certain Other Market Capitalization Provisions.  For purposes of achieving the Market Capitalization Milestones, Sorrento’s market capitalization shall be based on an average of Sorrento’s market capitalization for all trading days in the applicable trailing six calendar month period or 30 calendar day period.  As of any date of determination, the applicable six month or 30 day period ends with (and is inclusive of) such determination date.  Sorrento’s market capitalization on any particular trading day is equal to the product of the closing sales price of a share of Sorrento’s common stock on the trading day, multiplied by the outstanding shares of Sorrento common stock at the closing of the trading day.

Certain Other Termination Provisions.  In all cases, in the event that Sorrento stockholders do not approve the CEO Performance Award within 12 months after its grant date or, if at any meeting of Sorrento’s stockholders at which the CEO Performance Award is presented to the Sorrento stockholders for a vote, the Sorrento stockholders do not approve the CEO Performance Award by the requisite vote, the CEO Performance Award will automatically be forfeited and Dr. Ji will have no rights to the CEO Performance Award or the shares underlying it.  Upon a change in control of Sorrento, any vested portion of the CEO Performance Award will be assumed or substituted by the successor and any unvested portion of the CEO Performance Award will automatically terminate at the effective time of the change in control event.  If the CEO Performance Award is not assumed by the successor, the CEO Performance Award will expire as of the effective time of the change in control so long as Dr. Ji has been given at least five days’ prior notice and an opportunity to exercise any vested portion of the CEO Performance Award.  The Administrator may not accelerate the vesting of any portion of the CEO Performance Award in connection with a change in control.  The vested and unexercised portion of the CEO Performance Award will remain exercisable through its expiration date.  If Dr. Ji’s role either as Chief Executive Officer or Executive Chairman terminates while the CEO Performance Award is outstanding, the Administrator will promptly make a final determination as to whether any additional tranches have vested through the date of such termination, and any portion of the CEO Performance Award that has failed to vest based on performance through such date of termination will be automatically forfeited.

Certain Other Adjustments Upon Certain Transactions.  In the event of any dividend or other distribution (whether in the form of cash, shares of Sorrento common stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Sorrento’s securities, or other change in the corporate structure of Sorrento affecting Sorrento’s common stock, then the Administrator, in order to prevent the diminution or enlargement of the benefits or potential benefits intended to be made available under the CEO Performance Award

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(and in a manner that will not provide any greater benefit or potential benefits than intended to be made available, other than solely to reflect changes resulting from any such triggering event), will adjust the number, class and price of the shares underlying the CEO Performance Award.  In the event of a proposed dissolution or liquidation of Sorrento, the Administrator will notify Dr. Ji as soon as practicable before the effective date of the proposed transaction.  To the extent the CEO Performance Award has not been previously exercised, it will terminate immediately before, and contingent upon, the completion of such proposed transaction.

Dr. Ji will have no rights or privileges of a stockholder of Sorrento with respect to the shares underlying the CEO Performance Award unless and until the shares actually are issued, recorded on the records of Sorrento or its transfer agents or registrars, and delivered to Dr. Ji (which may occur through electronic delivery to a brokerage account).  In addition, unless and until Sorrento’s stockholders approve the CEO Performance Award, no portion of the CEO Performance Award may be exercised, regardless of whether any portion of the CEO Performance Award may have vested before such stockholder approval.

Certain Other Securities Information.  Shares issuable under the CEO Performance Award may be authorized, but unissued, or reacquired Sorrento common stock.  As of August 7, 2020, the closing sales price of a share of Sorrento’s common stock was $14.42.

Tax Withholdings.  The Administrator will determine the methods by which tax withholding obligations with respect to the CEO Performance Award will be satisfied by Dr. Ji.  For example, to the extent permissible by applicable law, the Administrator may permit Dr. Ji to satisfy tax withholding obligations relating to the CEO Performance Award by (a) paying cash, or (b) having a sufficient number of shares otherwise deliverable under the CEO Performance Award sold through means determined by Sorrento (whether through a broker or otherwise) equal to the minimum required amount to be withheld (or such greater amount that Dr. Ji elects, if permitted by the Administrator and if withholding a greater amount would not result in adverse financial accounting consequences for Sorrento).

Amendment; No Repricing.  The CEO Performance Award may be amended only by a written agreement executed by us and Dr. Ji. We may not, without the approval of the stockholders (excluding Dr. Ji), reduce, reprice or take any other action relative to the CEO Performance Award that would be treated as a repricing under applicable rules of The Nasdaq Stock Market LLC (or the rules of any other exchange on which the stock is then traded) or extend the exercise period of the CEO Performance Award beyond 10 years from the date of grant.

Restrictive Covenants.  Dr. Ji will continue to be subject to restrictive covenants relating to confidentiality, intellectual property, noncompetition, nonsolicitation and non-disparagement set forth in his current employment agreement with Sorrento.

Non-transferability.  The CEO Performance Award may not be transferred in any manner other than by will or the laws of descent or distribution and may be exercised during Dr. Ji’s lifetime only by him.  Shares issued to Dr. Ji upon exercise of the CEO Performance Award are subject to the holding period described further above, except that Dr. Ji may transfer shares to change the form in which he holds the shares, such as through certain family or estate planning trusts, or as permitted by the Administrator consistent with Sorrento’s internal policies, and Dr. Ji may sell, transfer or dispose of the shares issued to Dr. Ji upon exercise of the CEO Performance Award in connection with a change in control of Sorrento.

Supporting Statement of the Board

We are asking stockholders to vote their shares “FOR” the proposed CEO Performance Award.

Early in 2018, our Compensation Committee began preliminary discussions about a potential performance award grant to Dr. Ji. Upon reviewing the Tesla, Inc. and Axon Enterprise, Inc. CEO performance awards, our Compensation Committee was impressed with the design of these CEO performance awards to maximize alignment with stockholders while accounting for future unforeseen events. The Tesla, Inc. and Axon Enterprise, Inc. CEO performance awards stood out because they represent pay-for-performance, require a long-term commitment by the CEO, and align CEO compensation with value creation for all stakeholders, including employees, customers and stockholders.  Furthermore, they provide substantial challenges required to motivate a typical CEO personality to produce maximum growth. The members of the Compensation Committee considered these factors and contemplated a CEO performance award for Dr. Ji from time to time since 2018, and spent several months in 2020 ultimately designing a compensation award that would both incentivize Dr. Ji while maximizing value for Sorrento stockholders.  As part of this process, the Compensation Committee and the Board sought to balance a variety of important objectives, including:

 

Aligning Dr. Ji’s interests with those of Sorrento and its other stockholders;

 

Incentivizing Dr. Ji to continue to lead Sorrento over the long-term;

 

Motivating Dr. Ji to help Sorrento achieve the Market Capitalization Milestones, which would generate significant stockholder value; and

 

Ensuring that the CEO Performance Award is linked to performance and will not vest (and therefore not be of any value to Dr. Ji) unless all of Sorrento’s stockholders benefit from significant value creation.

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The CEO Performance Award is intended to reflect Sorrento’s current long-term goals and helps incentivize their achievement.

The Board recommends that stockholders approve the CEO Performance Award for the following reasons:

 

1.

Strengthening Incentives and Further Aligning of Stockholder, Company and CEO Interests

The Board believes in rewarding Dr. Ji in a fair way that provides compensation to him if, and only if, all other stockholders realize significant value.

Dr. Ji’s ability to receive any benefit from the CEO Performance Award will be dependent on him leading Sorrento’s achievement of challenging milestones, which, require Sorrento’s current market capitalization to increase to $5 billion, and to then continue increasing in additional $2-5 billion increments thereafter, up to $35 billion.  Under this award, if these ambitious milestones are met, all Sorrento stockholders will benefit, with the value of Sorrento’s equity growing by billions of dollars per milestone.  Moreover, in contrast to Dr. Ji’s rights under the CEO Performance Award, which requires the Market Capitalization Milestones to be met in order for him to receive any vesting of the corresponding tranche, Sorrento’s stockholders will realize the real-time benefit of any increases to its stock price that result even if his performance does not result in the achievement of the Market Capitalization Milestones required by the CEO Performance Award.  Finally, the CEO Performance Award creates even more stockholder alignment by incorporating features such as a 20% premium on the exercise price and a five-year holding period that ensures Dr. Ji’s continuing alignment with Sorrento’s interests for many years even after he exercises his options.

As such, the Board believes this award is a “pay-for-performance” compensation program that directly aligns Dr. Ji’s interests with the interests of stockholders and Sorrento.

 

2.

Ensuring Dr. Ji’s Continued Services

The Board believes that having the continuing active and engaged services of Dr. Ji is important to the continued growth and long-term interests of Sorrento. While the Board recognizes that Sorrento has many valuable employees who have been a critical part of Sorrento’s success, the Board believes that Dr. Ji’s leadership has been instrumental in the Company’s development as its founder and in guiding the Company through a number of recent accomplishments, including Sorrento’s pivot to focusing on developing a pipeline of both diagnostic and drug discovery product candidates to address the COVID-19 pandemic and the others discussed below. Under Dr. Ji’s visionary leadership, Sorrento began investigating potential antibody candidates for blocking SARS-CoV-2, the virus that causes COVID-19, at the beginning of 2020, just as the COVID-19 public health crisis loomed on the horizon. Since that time, Sorrento has rapidly identified, and both in-licensed and developed in-house, a pipeline of COVID-19 product candidates that cover the treatment spectrum, from diagnostic testing to preventative measures and vaccines for SARS-CoV-2 and COVID-19. In designing and approving the CEO Performance Award, the Compensation Committee recognized the tireless effort that Dr. Ji has expended in leading the Company’s development of its COVID-19 pipeline since early 2020, including the achievement of the following key milestones:

 

In March 2020, developing STI-4398 (COVIDTRAPTM) for the potential prevention and treatment of SARS-CoV-2, and completing a preclinical batch in June 2020 that completely inhibited the ability of SARS-CoV-2 virus to infect VERO/E6 cells at a low concentration in an in vitro assay;

 

In May 2020, discovering and announcing that Sorrento’s anti-SARS-CoV-2 antibody, STI-1499, demonstrated 100% inhibition of the SARS-CoV-2 virus infection in an in vitro virus infection experiment at a very low antibody concentration;

 

Submitting an Emergency Use Authorization for its COVI-TRACK™ diagnostic test for the detection of antibodies to SARS-CoV-2 in June 2020;

 

Selecting T-VIVA-19™ as a targeted protein vaccine candidate for SARS-CoV-2 in July 2020;

 

Obtaining from ACEA Therapeutics, Inc. an exclusive license (outside of the People’s Republic of China) to Abivertinib for an upfront license fee of $5.0 million, and receiving FDA clearance to initiate a Phase 2 trial in patients with COVID-19 in July 2020; and

 

In July 2020, licensing from Columbia University the rights to a rapid, one-step diagnostic test that detects SARS-CoV-2 virus in as little as 30 minutes from a sample of saliva (COVI-TRACE), for an upfront license fee of $5.0 million.

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In addition to developing the Company’s COVID-19 programs, the Compensation Committee noted that Dr. Ji has demonstrated strong leadership qualities that have been essential in Sorrento achieving other key milestones and successes, including:

 

Dr. Ji assuming responsibility for, and spearheading, the Company’s research and development in the third quarter of 2019 following the departure of the Company’s prior head of research and development;

 

Strengthening the Company’s balance sheet through capital raising, culminating in the June 2020 repayment in full and extinguishment of all debt owed under the Company’s term loans with certain funds and accounts managed by Oaktree Capital Management, L.P.;

 

In February 2020, announcing interim positive results of its Phase 1b study of resiniferatoxin (RTX) for patients with intractable cancer pain;

 

In May 2020, receiving FDA IND clearance for STI-6129, a CD38-targeting antibody drug conjugate, for potential treatment of patients with advanced relapsed and/or refractory systemic amyloid light chain (AL) amyloidosis;

 

Dr. Ji’s determination and drive continuing even in the face of certain challenges, including ongoing litigation matters and challenges with respect to certain potential licensing partners; and

 

Increasing the Company’s market capitalization from approximately $376.4 million as of March 31, 2020 to approximately $3.39 billion as of August 6, 2020, the day prior to the grant date of the CEO Performance Award.

In light of these significant developments for Sorrento under Dr. Ji’s leadership, and considering the potential for the Company’s COVID-19 programs to combat the devastating effects that the SARS-CoV-2 and the COVID-19 pandemic has had globally, the Board believes that it is critical to keep Dr. Ji incentivized to continue his efforts and lead Sorrento during this critical point in the Company’s history, and to ensure that Dr. Ji remains motivated to achieve his visionary goal of slowing, or potentially even stopping, the spread of SARS-CoV-2, as well as continuing to develop Sorrento’s core cancer treatment, pain control and autoimmune disease portfolios.

Additionally, in considering the CEO Performance Award, the Compensation Committee took into account Dr. Ji’s understanding and emphasis on the importance of rewarding the Company’s employees by advocating for the grant of options to all employees and rewarding the Company’s key scientists driving the innovation, and the fact that Dr. Ji is historically the last to take bonus payouts, having not received a bonus payment since 2016 (at Dr. Ji’s express request).

Accordingly, our Compensation Committee designed the CEO Performance Award to incentivize and motivate Dr. Ji to continue to not only lead Sorrento over the long-term, but to provide Dr. Ji with the level of challenge that the typical CEO personality requires to remain engaged and perform his or her best work.  In the Compensation Committee’s discussions with Dr. Ji, he indicated that the CEO Performance Award will accomplish that.

Dr. Ji must remain as Sorrento’s CEO or serve as Executive Chairman, in each case with all leadership ultimately reporting to him, at the time each milestone is met in order for the corresponding tranche to vest.  This ensures that he will continue to lead the management of Sorrento over the long-term while also providing the flexibility to bring in another CEO who would report to Dr. Ji at some point in the future. Although there is no current intention for this to happen, the Board believes that having flexibility as Sorrento continues to grow to potentially allow Dr. Ji to focus less of his attention on day-to-day activities and responsibilities at Sorrento and more of his attention on the kinds of key product development and strategic matters that most impact Sorrento’s long-term growth and profitability would benefit stockholders.

 

3.

Spurring the Achievement of Sorrento’s Current and Future Strategic and Financial Objectives

The Board believes that the presence of a challenging and rewarding performance reward is instrumental in motivating Dr. Ji to lead Sorrento’s achievement of increasing the Company’s overall market capitalization to $5 billion and potentially to $35 billion over time. In designing the CEO Performance Award, the Compensation Committee considered the fact that, in order to reach the market capitalization thresholds, Dr. Ji and Sorrento will have to continue to develop and advance Sorrento’s current product candidates and obtain regulatory approvals to commence pivotal trials and ultimately bring its product candidates to market. By tying the vesting of the CEO Performance Award to specific increases in the Company’s market capitalization, the Board believes that Dr. Ji’s interests in obtaining key regulatory approvals and bringing products to market are aligned with those of Sorrento’s stockholders because Sorrento stockholders will receive immediate benefits in any increase to the Sorrento stock price that might result from the receipt of regulatory approvals or sales of products.

Potential Value that Could be Realized under the CEO Performance Award

It is not possible to reliably estimate the value that may be realized under the CEO Performance Award because that value depends on the amount of dilution that Sorrento experiences over the course of the 10-year term of the award.  The more dilution, the less value that Dr. Ji will realize.  While Sorrento cannot predict how much dilution it will experience in the future, some

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amount of future dilution is a certainty, whether due to additional issuances of equity as part of (i) regular and special compensation awards to Sorrento employees, which may include Dr. Ji, (ii) capital-raising activities, or (iii) mergers or acquisitions.  Thus, at this time, it is not possible to determine the actual value that Dr. Ji will realize from the CEO Performance Award even if we were to assume that the entire CEO Performance Award vested.

Nevertheless, the table below depicts the maximum theoretical value, both in dollar value and as a percentage of total value created, that could be realized by Dr. Ji and Sorrento stockholders over various vesting scenarios.  This table only takes into account estimated dilution as a result of potential exercises or conversions from the existing employee equity pool and the Company’s outstanding convertible notes and warrants.  It also assumes that Dr. Ji does not exercise any of the stock options in the CEO Performance Award until the very end of the 10-year term, which results in a significantly larger value being attributed to Dr. Ji than would be the case if he were to exercise the CEO Performance Award as each tranche vests.  Importantly, this table does not take into account any other future dilutive events over the next ten years even though such events will occur.  Accordingly, this table should only be used for illustration purposes, recognizing that future dilutive events or earlier exercises would significantly decrease the ultimate value that Dr. Ji would realize from the CEO Performance Award over the various vesting scenarios, both in dollar value and as a percentage of total value created.

 

 

 

 

Grant (10%)

 

Total Tranches

Earned

 

CEO Value

Realized

($ in millions)(1)

 

Stockholder Value

Realized

($ in millions)

 

% of Value

Realized by

CEO via Award

 

 

% of Value

Realized by

Other

Stockholders

 

0 Tranches

 

 

 

$         0

 

N/A

 

 

 

 

 

 

 

 

1 Tranche

 

 

 

$         0(2)

 

$         543

 

 

0.00

%

 

 

100.00

%

2 Tranches

 

 

 

$         27

 

$         2,543

 

 

1.05

%

 

 

98.95

%

3 Tranches

 

 

 

$         88

 

$         4,543

 

 

1.95

%

 

 

98.05

%

4 Tranches

 

 

 

$         215

 

$         7,543

 

 

2.85

%

 

 

97.15

%

5 Tranches

 

 

 

$         389

 

$         10,543

 

 

3.69

%

 

 

96.31

%

6 Tranches

 

 

 

$         613

 

$         13,543

 

 

4.52

%

 

 

95.48

%

7 Tranches

 

 

 

$         941

 

$         17,543

 

 

5.36

%

 

 

94.64

%

8 Tranches

 

 

 

$         1,333

 

$         21,543

 

 

6.19

%

 

 

93.81

%

9 Tranches

 

 

 

$         1,790

 

$         25,543

 

 

7.01

%

 

 

92.99

%

10 Tranches

 

 

 

$         2,393

 

$         30,543

 

 

7.83

%

 

 

92.17

%

(1)

Values are calculated as of August 7, 2020, the date of grant of the CEO Performance Award, and assume a current stock price of $14.42 per share and future shares outstanding of approximately 309,057,932. The assumed future dilution is detailed below under the heading “Potential Ownership of Securities As a Result of the CEO Performance Award”.

(2)

Due to the exercise price of $17.30 per share, which was a 20% premium to the closing sales price of the Sorrento common stock on August 7, 2020, the date of grant of the CEO Performance Award, Dr. Ji would not realize any estimated value upon the achievement of the first Market Capitalization Milestone ($5,000,000,000) at the time it would be achieved.

Potential Ownership of Securities As a Result of the CEO Performance Award

As of August 6, 2020, Dr. Ji beneficially owned 6,659,750 shares of Sorrento’s common stock, comprised of (i) 2,045,807 shares held directly, (ii) 2,271,693 shares held in family trusts, of which Dr. Ji is a co-trustee with his wife Vivian Q. Zhang, (iii) 40,000 shares held directly by Dr. Ji’s wife, and (iv) 2,302,250 shares issuable pursuant to stock options exercisable within 60 days after August 6, 2020.  Based on 249,358,822 shares of Sorrento’s common stock outstanding at August 6, 2020, and assuming that all shares of common stock subject to options held by Dr. Ji that were exercisable within 60 days of August 6, 2020 were outstanding as of such date, Dr. Ji beneficially owned 2.6% of the outstanding shares of Sorrento common stock as of August 6, 2020.

For illustration purposes only, if (i) all 24,935,882 shares of common stock subject to the CEO Performance Award were to become fully vested, outstanding and held by Dr. Ji; (ii) all shares of common stock subject to the other options held by Dr. Ji that are currently vested and exercisable were outstanding, (iii) estimated dilution as a result of potential exercises from the existing employee equity pool and the outstanding warrants were to be considered; and (iv) there were no other dilutive events of any kind, Dr. Ji would beneficially own 10.22% of the outstanding shares of Sorrento common stock, calculated as follows:

A = Shares Beneficially Held Directly by Dr. Ji as of August 6, 2020

6,659,750

B = Shares Outstanding as of August 6, 2020

249,358,822

C = Shares Subject to CEO Performance Award

24,935,882

D = Shares Subject to Outstanding Warrants as of August 6, 2020

28,003,028

E = Shares Subject to Outstanding Options as of August 6, 2020

5,271,000

F = Shares Available for Future Issuance Under 2019 Plan as of August 6, 2020(1)

1,489,200

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G = Estimated Shares to be Outstanding (B+C+D+E+F)(2)

309,057,932

Dr. Ji’s Estimated Beneficial Ownership Percentage ((A+C)/G)

10.22%

(1) Does not give effect to the proposed increase in the number of shares authorized for issuance under the 2019 Plan by 12,500,000 shares as contemplated in Proposal 4.

(2) Does not give effect to any shares that may be issued pursuant to the ESPP contemplated in Proposal 3.

However, except as indicated above, this calculation does not account for any future dilutive events over the next ten years, such as the issuance of additional equity as compensation to employees, which may include Dr. Ji, as well as to non-employee directors and consultants; the issuance of shares pursuant to the ESPP contemplated in Proposal 3; the proposed increase to the number of shares issuable pursuant to the 2019 Plan as contemplated in Proposal 4 (and any other similar increases or new equity plans that may be adopted); as consideration for mergers and acquisitions; or for capital-raising activities, which would have the effect of diluting Dr. Ji’s ownership of Sorrento common stock, nor does it account for any sales of Sorrento common stock that Dr. Ji will likely have to make in order to pay required taxes upon the exercise of stock options.  Therefore, it is not possible to provide the exact percentage of Dr. Ji’s future total ownership of Sorrento common stock upon the vesting of one or more tranches of the CEO Performance Award.  Given that some amount of dilution and/or stock sales to cover required tax payments will occur, we believe that Dr. Ji’s future potential ownership of Sorrento common stock will be less than 10.22% if  the CEO Performance Award were to become fully vested.

Accounting and Tax Considerations

Accounting Consequences. We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 718, Compensation-Stock Compensation (“ASC Topic 718”) for our stock-based compensation awards.  ASC Topic 718 requires companies to measure the compensation expense for all stock-based compensation awards made to employees and directors based on the grant date “fair value” of these awards.  Pursuant to ASC Topic 718, this calculation cannot be made for the CEO Performance Award prior to the date on which it is approved by our stockholders, which will be the “grant date” for accounting purposes.  ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.  Accordingly, the CEO Performance Award would result in the recognition of additional stock-based compensation expense over the derived requisite service period pursuant to ASC Topic 718.

For illustrative purposes only, and using the $14.42 closing market price of Sorrento common stock on August 7, 2020, the grant date of the CEO Performance Award, the Company expects that the aggregate grant date fair value of the full CEO Performance Award will be approximately $246.5 million across all ten tranches. Recognition of expense of all of the tranches will commence on the grant date as the probability of meeting the ten Market Capitalization Milestones is not considered in determining the timing of expense recognition. This expense will be recognized ratably over the expected vesting period of each respective tranche, which is a weighted average of approximately 2.27 years, and the estimated expense to be recognized for fiscal year 2020 is $30.7 million. The foregoing discussion contains estimates solely for illustrative purposes and, because the grant date of the CEO Performance Award for accounting purposes will be the date of stockholder approval of the CEO Performance Award, the actual grant date fair value of the CEO Performance Award and related compensation expense will not be determined unless and until the CEO Performance Award is approved by our stockholders, and the actual amounts may ultimately differ significantly from the foregoing estimates.

Federal Income Tax Consequences. The following discussion is a brief summary of the principal United States federal income tax consequences of the CEO Performance Award under the Code, as in effect on the date of this proxy statement.  The following summary assumes that Dr. Ji remains a U.S. taxpayer.  The Code and its regulations are subject to change.  This summary is not intended to be exhaustive and does not describe, among other things, state, local or non-U.S. income and other tax consequences.  The specific tax consequences to Dr. Ji will depend upon his future individual circumstances.

Tax Effects for Dr. Ji. Dr. Ji did not have taxable income from the grant of the CEO Performance Award nor will he have taxable income from stockholder approval of the CEO Performance Award, if such approval occurs.  If and when Dr. Ji exercises any portion of the CEO Performance Award, he will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares of Sorrento common stock purchased over the exercise price of the option.  Any taxable income recognized in connection with the exercise of the CEO Performance Award by Dr. Ji will be subject to tax withholding by us. Any additional gain or loss recognized upon any later disposition of the shares of common stock will be capital gain or loss.

Tax Effects for Sorrento. We will not be entitled to a material tax deduction in connection with the CEO Performance Award.  In most cases, companies are entitled to a tax deduction in an amount equal to the ordinary income realized by a participant when the participant exercises a nonstatutory stock option and recognizes such income.  However, Section 162(m) of the Code limits the deductibility of compensation paid to our Chief Executive Officer and other “covered employees” as defined in Section 162(m) of the Code.  No tax deduction is allowed for compensation paid to any covered employee to the extent that the total compensation for that executive exceeds $1,000,000 in any taxable year.  Under Section 162(m) of the Code, as most recently amended in

44

 


 

December 2017, we expect that Dr. Ji will always be a covered employee for purposes of Section 162(m) of the Code.  Therefore, in any given year in which Dr. Ji exercises all or part of the CEO Performance Award, we will be able to take a tax deduction of only $1,000,000 or less, regardless of the amount of compensation recognized by Dr. Ji from the exercise of the CEO Performance Award.

New Plan Benefits

The following table sets forth the aggregate number of shares of Sorrento common stock subject to options granted under the CEO Performance Award to our named executive officers, to all of our current executive officers, as a group, to all directors who are not executive officers, as a group, and to all employees who are not executive officers, as a group.

Name of Individual or Group and Position

 

Number of

Shares

Subject to

Options

 

 

Estimated

Fair

Value

 

Dr. Henry Ji, Director, Chief Executive Officer and

   President and Chairman of the Board

 

 

24,935,882

 

 

$246,549,562(1)

 

Jiong Shao, Former Executive Vice President and Chief

   Financial Officer(2)

 

 

 

 

 

 

All current executive officers, as a group (2 persons)

 

 

24,935,882

 

 

$246,549,562

 

All current directors who are not executive officers, as

   a group (7 persons)

 

 

 

 

 

 

All employees who are not executive officers, as a group

 

 

 

 

 

 

(1)

Calculated for illustrative purposes only, and using the closing market price of Sorrento common stock on August 7, 2020, the date of grant of the CEO Performance Award. See “—“Accounting and Tax Considerations-- Accounting Consequences” above for a discussion of the calculation.

(2)

Mr. Shao’s employment with the Company terminated in August 2020.

Registration with the Securities and Exchange Commission

If the CEO Performance Award is approved by our stockholders, we expect to file after the Annual Meeting a Registration Statement on Form S-8 with the SEC to register the shares of common stock subject to the CEO Performance Award.

Vote Required; Recommendation of the Board of Directors

The affirmative vote of: (1) a majority of the votes cast at the Annual Meeting, and (2) a majority of the votes cast at the Annual Meeting by holders of shares of common stock that are not beneficially owned, directly or indirectly, by Dr. Ji will be required to approve the CEO Performance Award. Abstentions will be counted towards a quorum, but will not be counted for any purpose in determining whether Proposal 5 has been approved as abstentions are not considered votes cast under Delaware law. Broker non-votes are not considered under Delaware law to be votes cast at the Annual Meeting, and will also not be counted for any purpose in determining whether Proposal 5 has been approved. Therefore, abstentions and broker non-votes will have no effect on Proposal 5, other than having the practical effect of reducing the number of affirmative votes required to achieve a majority for each vote required for this proposal by reducing the total number of shares from which the majority in each case is calculated.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE TO APPROVE THE CEO PERFORMANCE AWARD FOR HENRY JI, PH.D. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE ON YOUR PROXY CARD.


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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of July 31, 2020 with respect to the beneficial ownership of shares of our common stock by:

 

each person or group known to us to be the beneficial owner of more than five percent of our common stock;

 

each of our directors;

 

each of our named executive officers; and

 

all of our current directors and executive officers as a group.

This table is based upon information supplied by officers, directors and principal stockholders and a review of Schedules 13D and 13G, if any, filed with the SEC. Other than as set forth below, we are not aware of any other beneficial owner of more than five percent of our common stock as of July 31, 2020. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

Applicable percentage ownership is based on 242,026,582 shares of common stock outstanding as of July 31, 2020, adjusted as required by rules promulgated by the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options that are either immediately exercisable or exercisable on or before September 29, 2020, which is 60 days after July 31, 2020. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Sorrento Therapeutics, Inc., 4955 Directors Place, San Diego, California 92121.

 

 

Beneficial Ownership of

Common Stock

 

Name of Beneficial Owner

 

Number of

Shares

 

 

 

 

 

Percentage

of Class

 

Named Executive Officers and Directors:

 

 

 

 

 

 

 

 

 

 

 

Dr. Henry Ji, Chairman of the Board, President and Chief Executive Officer

 

 

6,659,750

 

 

(1)

 

 

 

2.7

%

Najjam Asghar, Chief Financial Officer

 

 

 

 

 

 

 

Jiong Shao, Former Executive Vice President and Chief Financial Officer(2)

 

 

241,666

 

 

(3)

 

 

*

 

Dorman Followwill, Lead Independent Director

 

 

167,130

 

 

(4)

 

 

*

 

Dr. Kim Janda, Director

 

 

292,400

 

 

(5)

 

 

*

 

Edgar Lee, Director

 

 

81,250

 

 

(2)

 

 

*

 

David Lemus, Director

 

 

165,000

 

 

(2)

 

 

*

 

Jaisim Shah, Director

 

 

582,633

 

 

(6)

 

 

 

 

 

Dr. Robin L. Smith, Director

 

 

141,250

 

 

(7)

 

 

*

 

Dr. Yue Alexander Wu, Director

 

 

205,000

 

 

(8)

 

 

*

 

All Current Executive Officers and Directors as a Group

   (9 Persons)

 

8,294,413

 

 

(9)

 

 

3.4%

 

5% Stockholders:

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific MedTech (BVI) Limited

 

 

15,317,632

 

 

(10)

 

 

 

6.3

%

*

Less than 1%.

(1)

Comprised of (i) 2,045,807 shares of common stock held directly, (ii) 2,271,693 shares of common stock held in family trusts, of which Dr. Ji is a co-trustee with his wife Vivian Q. Zhang, (iii) 40,000 shares of common stock held directly by Dr. Ji’s wife, and (iv) 2,302,250 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020. Each of Dr. Ji and Vivian Q. Zhang, while acting as co-trustees, have the power to act alone and have those actions binding on both trustees’ and the trusts’ assets, including voting and dispositive power over the shares of common stock held by the family trusts.

(2)

Mr. Shao’s employment with the Company terminated in August 2020.

(3)

Comprised solely of shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

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(4)

Comprised of (i) 2,130 shares of common stock held directly, and (ii) 165,000 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

 

(5)

Comprised of (i) 3,000 shares of common stock held directly, and (ii) 289,400 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

 

(6)

Comprised of (i) 112,633 shares of common stock held directly, and (ii) 470,000 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

 

(7)

Comprised of (i) 60,000 shares of common stock held directly, and (ii) 81,250 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

 

(8)

Comprised of (i) 5,000 shares of common stock held directly, and (ii) 200,000 shares of common stock issuable pursuant to stock options exercisable within 60 days after July 31, 2020.

 

(9)

Comprised of shares included under “Named Executive Officers and Directors”, other than those shares included for Mr. Shao.

 

(10)

The indicated ownership is based on a Schedule 13G/A filed with the SEC by Asia Pacific MedTech (BVI) Limited (“Asia Pacific”) on February 10, 2020. According to the Schedule 13G/A, as of December 31, 2019, the Asia Pacific holds directly 14,604,620 shares of common stock and warrants to purchase an aggregate of 713,012 shares of common stock. Nana Gu is the sole director and sole shareholder of Asia Pacific and may be deemed to have voting and dispositive power over the shares, the warrants and the convertible promissory note held by Asia Pacific. The principal business address of Asia Pacific and Miss Gu is c/o Offshore Incorporations Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

 

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EXECUTIVE COMPENSATION

Our Executive Officers

The names of our executive officers and their ages as of September 1, 2020, positions, and biographies are set forth below. Dr. Ji’s background is discussed under the section “Board of Directors.”

 

Name

 

Age

 

 

Position(s)

Henry Ji, Ph.D.

 

 

56

 

 

Chairman of the Board, President and Chief Executive Officer

Najjam Asghar

 

 

39

 

 

Chief Financial Officer

 

Najjam Asghar. Najjam Asghar has been our Chief Financial Officer since August 2020. Prior to serving as our Chief Financial Officer, Mr. Asghar served as our Chief Accounting Officer since 2019. Prior to joining us, he served NuVasive, Inc. in various capacities from October 2015 to June 2019, including Leader of Accounting & Finance from April 2018 to June 2019, leading its accounting and finance functions of Revenue Recognition, International Accounting, Consolidation, SEC Reporting and Technical Accounting (US GAAP), and Senior Director, Accounting and Director between October 2015 and April 2018. Prior to NuVasive, Inc., Mr. Asghar worked at PricewaterhouseCoopers, LLP. from June 2003 to September 2015 in various roles, from an associate to senior manager, where he served various S&P 100 and S&P 500 clients in North America and Asia in the audit and assurance practice. He holds a Bachelors of Arts degree, majoring in economics, statistics and journalism, from University of the Punjab, Pakistan.

Family Relationships

There are no family relationships between or among any of our executive officers or directors.

Code of Ethics

We have adopted the Sorrento Therapeutics, Inc. Code of Business Conduct and Ethics that applies to all of our employees, executive officers and directors. The Code of Business Conduct and Ethics is available to stockholders on our website at http://investors.sorrentotherapeutics.com/corporate-governance/governance-overview.

If we make any substantive amendments to our Code of Business Conduct and Ethics or grant any waiver from a provision of our Code of Business Conduct and Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website at http://investors.sorrentotherapeutics.com/corporate-governance/governance-overview and/or in our public filings with the SEC.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the SEC’s rules and regulations with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

Compensation Committee

Dr. Yue Alexander Wu

Mr. Dorman Followwill

The foregoing Compensation Committee Report shall not be deemed to be “soliciting material,” deemed “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act. Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act or the Exchange Act that might incorporate by reference future filings, including this proxy statement, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into any such filings.

Compensation Discussion and Analysis

Compensation Philosophy

The primary goals of our Board with respect to executive compensation are to attract and retain talented and dedicated executives, to tie annual and long-term cash and stock incentives to achievement of specified performance objectives, and to create incentives resulting in increased stockholder value. To achieve these goals, our Compensation Committee recommends to our Board executive compensation packages, generally comprising a mix of salary, discretionary bonus and equity awards. Although we have not adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation, we have implemented and maintain compensation plans that tie a substantial portion of our executives’ overall compensation to achievement of corporate goals.

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Role of Compensation Consultant

The Compensation Committee has the power to engage independent advisors to assist it in carrying out its responsibilities. In 2019, the Compensation Committee engaged Compensia, a national compensation consulting firm, to review and advise on our compensation practices. The Compensation Committee assessed the independence of Compensia pursuant to SEC rules and concluded that the work of Compensia has not raised any conflict of interest.

In 2019, Compensia undertook the following projects for the Compensation Committee:

 

January 2019 - Evaluated the compensation arrangements for the Company’s Chief Executive Officer against a comparable group of similar life sciences companies and its own proprietary data;

 

 

January 2019 - Evaluated the compensation arrangements for the members of the Board against a comparable group of similar life sciences companies and its own proprietary data; and

 

 

November 2019 - Evaluated practices with respect to employee stock purchase plans among a comparator group of similar life science companies and its own proprietary data.

With respect to the equity awards granted to our Chief Executive Officer and Chief Financial Officer in April 2019, the comparable group of life sciences companies consisted of the following companies, which were the same companies included in the comparable group of life sciences companies in our peer group in 2018, determined to: (i) generally have similar revenues as us; (ii) generally have similar market capitalization as us, (iii) generally have similar operating income as us, and (iv) generally have the same number of employees as us:

 

Agenus Inc.

 

MacroGenics, Inc.

Akebia Therapeutics, Inc.

 

Momenta Pharmaceuticals, Inc.

ChemoCentryx, Inc.

 

Omeros Corporation

CytomX Therapeutics, Inc.

 

PTC Therapeutics, Inc.

Eagle Pharmaceuticals, Inc.

 

Recro Pharma, Inc.

Inovio Pharmaceuticals, Inc.

 

Retrophin, Inc.

Keryx Biopharmaceuticals, Inc.

 

Vanda Pharmaceuticals Inc.

Lexicon Pharmaceuticals, Inc.

 

Vericel Corporation

 

In 2019, Compensia reviewed and advised the Compensation Committee on the matters described above.

In setting 2019 compensation, the Compensation Committee reviewed the competitive market analyses provided by Compensia in 2019 and 2018 and compared each named executive officer’s base salary, target annual performance bonus and equity compensation value, separately and in the aggregate, to amounts paid to similarly-situated executives at our peer companies. The Compensation Committee believes that targeting compensation towards similarly situated executives at our peer companies helps achieve the compensation objectives described above. However, compensation for each named executive officer may vary from this range depending on other factors the Compensation Committee considers relevant, such as internal pay equity among our named executive officers or levels of authority, responsibility and experience of our named executive officers that exceed the norms for individuals holding comparably-titled positions at other companies.

With respect to the option awards granted to our Chief Executive Officer and Chief Financial Officer by Scilex Holding Company (“Scilex Holding”) in June 2019, the decision to grant such options was approved by the disinterested members of the Board of Directors of Scilex Holding upon the recommendation of the Compensation Committee of the Board of Directors of Scilex Holding, which is comprised solely of independent directors that are also not on our Board or officers or employees of our company. Dr. Ji’s option to purchase 3,016,652 shares of common stock of Scilex Holding was approved by our stockholders at our annual meeting of stockholders held on September 20, 2019.

Elements of Compensation

We evaluate individual executive performance with a goal of setting compensation at levels our Board or any applicable committee thereof believes are comparable with executives in other companies of similar size and stage of development while taking into account our relative performance and our own strategic goals. The compensation received by our named executive officers consists of the following elements:

Base Salary

Base salaries for our executives are established based on the scope of their responsibilities and individual experience, taking into account competitive market compensation paid by other companies for similar positions within our industry.

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The Compensation Committee considers compensation data from the peer companies to the extent the executive positions at these companies are considered comparable to our positions and informative of the competitive environment. Compensation data for our peer group were collected from available proxy-disclosed data. This information was gathered and analyzed for the 25th, 50th and 75th percentiles for annual base salary, short-term incentive pay elements and long-term incentive pay elements.

The amended and restated employment agreement between us and Dr. Ji, dated May 9, 2017, provides for an annual base salary for Dr. Ji of $600,000, as may be adjusted from time to time. Based on a review of Dr. Ji’s individual performance since joining us in 2006 and the competitive market base pay data for chief executive officers included in our peer group in the May 2018 Report, effective May 29, 2018, the Compensation Committee increased Dr. Ji’s annual base salary from $600,000 to $670,000 with retroactive effect to January 1, 2018. Dr. Ji’s salary was not adjusted, and remained $670,000, during 2019. Dr. Ji’s salary for 2019 in the Summary Compensation Table includes $111,400 of salary payable by Scilex Holding for Dr. Ji’s role as its Executive Chairperson. This compensation payable to Dr. Ji by Scilex Holding was approved by our stockholders at our annual meeting of stockholders held on September 20, 2019.

The offer letter between us and Mr. Shao, our Executive Vice President and Chief Financial Officer, dated March 15, 2018, provided for an annual base salary for Mr. Shao of $450,000, as could be adjusted from time to time. Mr. Shao’s salary was not adjusted, and remained $450,000, during 2019.

Variable Pay

We design our variable pay programs to be both affordable and competitive in relation to the market. We monitor the market and adjust our variable pay programs as needed. Our variable pay programs, such as our bonus program, are designed to motivate employees to achieve overall goals. Our programs are designed to avoid entitlements, to align actual payouts with the actual results achieved and to be easy to understand and administer.

 

2019 Bonuses

Under the terms of our amended and restated employment agreement with Dr. Ji, Dr. Ji’s target annual bonus is equal to 55% of his annual salary, which was increased to 65% in 2018. Our offer letter with Mr. Shao provided that Mr. Shao’s annual target bonus was equal to 35% of his annual salary. Neither Dr. Ji nor Mr. Shao received any annual bonuses for 2018.

As of the date of the filing of this proxy statement, the Compensation Committee has not yet determined the annual bonus amounts, if any, that will be awarded to Dr. Ji for 2019. Mr. Shao will not receive an annual bonus for 2019 as his employment terminated in August 2020. In the event the Compensation Committee determines to award an annual bonus to Dr. Ji for fiscal 2019, we will, in accordance with SEC rules and regulations, file a Current Report on Form 8-K or otherwise disclose the 2019 annual bonus amount within four business days after the Compensation Committee has assessed 2019 performance and determined the 2019 annual bonus awards for Dr. Ji.

Equity-Based Incentives

Salaries and bonuses are intended to compensate our executive officers for short-term performance. We also have adopted an equity incentive program intended to reward longer-term performance and to help align the interests of our named executive officers with those of our stockholders. We believe that long-term performance is achieved through an ownership culture that rewards performance by our named executive officers through the use of equity incentives. Our equity incentive plan has been established to provide our employees, including our named executive officers, with incentives to help align those employees’ interests with the interests of our stockholders.

When making equity-award decisions, the Compensation Committee considers market data, the grant size, the forms of long-term equity compensation available to it under our existing plans and the status of previously granted awards. The amount of equity incentive compensation granted reflects the executives’ expected contributions to our future success. Existing ownership levels are not a factor in award determination, as the Compensation Committee does not want to discourage executives from holding significant amounts of our stock.

Future equity awards that we make to our named executive officers will be driven by our sustained performance over time, our named executive officers’ ability to impact our results that drive stockholder value, their level of responsibility, their potential to fill roles of increasing responsibility, and competitive equity award levels for similar positions in comparable companies. Equity forms a key part of the overall compensation for each executive officer and is evaluated each year as part of the annual performance review process and incentive payout calculation.

The amounts awarded to the named executive officers are based on the Compensation Committee’s subjective determination of what is appropriate to incentivize the executives. Generally, the grants to named executive officers vest over: (i) a four-year period with 25% vesting on each anniversary of the grant date, or (ii) a four-year period with 1/4 of the shares vesting on the first anniversary of the applicable vesting commencement date, and 1/48 of the shares vesting thereafter on a monthly basis. All equity awards to our employees, including named executive officers, and to directors have been granted and reflected in our financial statements, based upon the applicable accounting guidance, with the exercise price equal to the fair market value of one

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share of common stock on the grant date. In April 2019, the Compensation Committee granted to Dr. Ji and Mr. Shao a long-term equity based incentive in the form of options to purchase 1,500,000 and 200,000 shares of our common stock, respectively. The Compensation Committee considered the competitive market analyses provided by Compensia in 2018 and 2019 and other data, including the fact that no annual bonuses were awarded to Dr. Ji or Mr. Shao for 2018, in determining the number of options granted to our named executive officers in April 2019. It is our view that option based awards best align with the interest of our stockholders. In addition, in June 2019, Scilex Holding granted to Dr. Ji and Mr. Shao options to purchase 3,016,652 and 200,000 shares of its common stock, respectively. Dr. Ji’s option to purchase shares of Scilex Holding provided that Dr. Ji would forego and relinquish his right to receive the option if it was not approved by our stockholders. Our stockholders approved the grant of the option at the annual meeting of stockholders held on September 20, 2019. The equity awards granted by us and Scilex Holding to our named executive officers in 2019 are set forth in the 2019 Summary Compensation Table and Grants of Plan-Based Awards During Fiscal Year 2019 table contained herein. While Dr. Ji’s total compensation for 2019 in the Summary Compensation Table shows a significant increase over his compensation for 2018, such increase is primarily attributable to the option to purchase 1,500,000 shares of common stock at an exercise price per share of $3.78, which we granted to him in April 2019. Additionally, Dr. Ji was granted the option to purchase 3,016,652 shares of Scilex Holding in June 2019 at an exercise price per share of $1.16. The Scilex Holding option grant was specifically approved by our stockholders at our annual meeting of stockholders held on September 20, 2019.

In order to encourage a long-term perspective and to encourage key employees to remain with us, our stock options typically have annual vesting over a four-year period and a term of ten years. Generally, vesting ends upon termination of services and exercise rights of vested options cease three months after termination of services. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

Benefits Programs

We design our benefits programs to be both affordable and competitive in relation to the market while conforming with local laws and practices. We monitor the market and local laws and practices and adjust our benefits programs as needed. We design our benefits programs to provide an element of core benefits and, to the extent possible, offer options for additional benefits, be tax-effective for employees in each country and balance costs and cost sharing between us and our employees.

Timing of Equity Awards

Only the Compensation Committee may approve stock option grants to our executive officers. Stock options are generally granted at meetings of the Compensation Committee. On limited occasions, a grant may be made pursuant to a unanimous written consent of the Compensation Committee, which occurs primarily for the purpose of approving a compensation package for a newly hired or promoted executive. The exercise price of a newly granted option is the closing price of our common stock on the date of grant.

Executive Equity Ownership

We encourage our executives to hold a significant equity interest in our company. However, we do not have specific share retention and ownership guidelines for our executives.

Hedging Policy

Our Insider Trading and Window Period Policy prohibits our directors, officers and employees, and their family members, from engaging in hedging transactions involving our securities.

Consideration of Advisory Votes to Approve the Compensation of our Named Executive Officers

We value the opinions of our stockholders, including as expressed through advisory votes to approve the compensation of our named executive officers (“Say-on-Pay Votes”). In our most recent Say-On-Pay Vote, conducted at our 2018 annual meeting of stockholders, held on August 24, 2018, our stockholders approved the compensation of our named executive officers on an advisory basis, with approximately 90% of the votes cast in favor of the fiscal 2017 compensation of our named executive officers. In setting fiscal 2019 compensation, we considered the outcome of the Say-on-Pay Vote during our 2018 annual meeting of stockholders and will continue to consider the outcome of future Say-on-Pay Votes, as well as stockholder feedback received throughout the year, when making compensation decisions for our executive officers.

Effect of Accounting and Tax Treatment on Compensation Decisions

In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to us and our executives.

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Generally, Section 162(m) of the Code disallows public companies a tax deduction for federal income tax purposes of compensation in excess of $1 million paid to their chief executive officer and certain other specified officers in any taxable year. For tax years ending prior to December 31, 2017, compensation in excess of $1 million could only be deducted if it was “performance-based compensation” within the meaning of Section 162(m) of the Code or qualified for one of the other exemptions from the deduction limit. The exemption from Section 162(m) of the Code’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered officers (which now also includes our Chief Financial Officer) in excess of $1 million will generally not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017. We seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and, therefore, while we are mindful of the benefit of the full deductibility of compensation, our Compensation Committee has not adopted a policy requiring that any or all compensation to be deductible. Our Compensation Committee may authorize compensation payments that are not fully tax deductible if we believe that such payments are appropriate to attract and retain executive talent or meet other business objectives.

Role of Executives in Executive Compensation Decisions

The Board and our Compensation Committee generally seek input from our Chief Executive Officer, Dr. Ji, when discussing the performance of, and compensation levels for, executives other than himself. The Compensation Committee also works with Dr. Ji and our Chief Financial Officer to evaluate the financial, accounting, tax and retention implications of our various compensation programs. Neither Dr. Ji nor any of our other executives participate in deliberations relating to his compensation.

Compensation Risk Management

We have considered the risk associated with our compensation policies and practices for all employees, and we believe we have designed our compensation policies and practices in a manner that does not create incentives that could lead to excessive risk taking that would have a material adverse effect on us for the following reasons:

 

We structure our compensation to consist of base salary, variable pay, equity-based pay and benefits. The base portion of compensation is designed to provide a steady income regardless of our stock price performance so that executives do not feel pressured to focus exclusively on stock price performance to the detriment of other important business measures. Our variable pay and equity-based pay programs are designed to reward both short- and long-term corporate performance. For short-term performance, our variable pay programs are designed to motivate employees to achieve overall goals. For long-term performance, our stock option awards generally vest over four years and are only valuable if our stock price increases over time. We believe that these variable elements of compensation are a sufficient percentage of overall compensation to motivate executives to produce superior short- and long-term corporate results, while the fixed element is also sufficiently high that the executives are not encouraged to take unnecessary or excessive risks in doing so.

 

Our bonus program has been structured around attainment of overall corporate goals for the past several years and we have seen no evidence that it encourages unnecessary or excessive risk taking.

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SUMMARY COMPENSATION TABLE

The following table provides certain summary information concerning compensation awarded to, earned by or paid to each person who served as our principal executive officer at any time during fiscal year 2019 and each person who served as our principal financial officer at any time during fiscal year 2019 (collectively, the “named executive officers”).

 

Name and Principal Position

 

Year

 

Salary

($)

 

 

 

 

Bonus

($)(1)

 

 

Option

Awards

($)(2)

 

 

All Other

Compensation

($)(3)

 

 

Total

($)

 

Henry Ji, Ph.D.

 

2019

 

 

781,400

(4

)

 

 

*

 

 

 

7,320,203

 

 

 

12,790

 

 

 

8,114,393

 

Chairman of the Board, Chief

 

2018

 

 

670,000

 

 

 

 

 

 

 

 

3,832,500

 

 

 

 

 

 

4,502,500

 

Executive Officer and President

 

2017

 

 

600,000

 

 

 

 

 

 

 

 

945,000

 

 

 

 

 

 

1,545,000

 

Jiong Shao

 

2019

 

 

450,000

 

 

 

 

 

 

 

 

776,220

 

 

 

6,174

 

 

 

1,232,394

 

Former Executive Vice President and

 

2018

 

 

356,250

 

 

 

 

 

 

 

 

2,993,000

 

 

 

 

 

 

 

3,349,250

 

Chief Financial Officer(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Does not include for 2019 the amount of any annual bonus that may be awarded to Dr. Ji as the Compensation Committee has not, as of the date of the filing of this proxy statement, yet determined the annual bonus amount, if any, that will be awarded Dr. Ji for 2019. Mr. Shao will not receive an annual bonus for 2019 as his employment terminated in August 2020. See “-Elements of Compensation-Variable Pay-2019 Bonuses” above for a discussion of the target bonus amounts for Dr. Ji for fiscal year 2019. Dr. Ji may also be entitled to receive a bonus from Scilex Holding in connection with his role as its Executive Chairperson; however, the amount of any such bonus has not yet been determined. In the event the Compensation Committee or Scilex Holding determine to award annual bonuses to Dr. Ji for fiscal 2019, we will, in accordance with SEC rules and regulations, file a Current Report on Form 8-K or otherwise disclose the 2019 annual bonus amounts within four business days after the Compensation Committee or Scilex Holding have determined to pay any 2019 annual bonus awards to Dr. Ji.

(2)

These amounts represent the aggregate grant date fair value of awards for grants of options to purchase shares of our common stock and, for 2019, options to purchase shares of Scilex Holding, to each named executive officer in the relevant fiscal year, computed in accordance with FASB ASC Topic 718. The dollar amounts listed do not necessarily reflect the dollar amounts of compensation actually realized or that may be realized by our named executive officers. For a detailed description of the assumptions used for purposes of determining grant date fair value, see Note 11 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. These amounts represent the aggregate grant date fair value of awards for grants of options and warrants to each named executive officer in the relevant fiscal year, computed in accordance with FASB ASC Topic 718.

(3)

Comprised of payments for executive disability benefits.

(4)

Comprised of $670,000 of salary paid by us and $111,400 of salary payable by Scilex Holding for Dr. Ji’s role as its Executive Chairperson. This compensation payable by Scilex Holding was approved by our stockholders at the annual meeting of stockholders held on September 20, 2019.

(5)

Mr. Shao’s employment with the Company commenced in March 2018 and terminated in August 2020.

Pay Ratio Disclosure 

We are a clinical stage and commercial biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to patients and their families to address unmet medical needs. At our core, we are antibody-centric and leverages our proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy, dimeric antigen receptor T-cell therapy, antibody drug conjugates as well as bispecific antibody approaches. We also have programs assessing the use of our technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases. Outside of immuno-oncology programs, as part of our global aim to provide a wide range of therapeutic and diagnostic products to meet underserved markets, we have made investments in non-opioid pain management and are currently conducting preclinical development of multiple therapeutic, vaccine and diagnostic product candidates utilizing its proprietary platforms for the potential treatment, prevention and detection of COVID-19 and SARS-CoV-2. As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median of the annual total compensation of all our employees (other than our CEO) and the annual total compensation of Henry Ji, Ph.D., our CEO. Neither the Compensation Committee nor our management used our CEO pay ratio measure in making compensation decisions.

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CEO Pay Ratio for 2019

 

The median of the annual total compensation of our employees, excluding our CEO, was $103,169*;

 

The annual total compensation of our CEO, as set forth in the 2019 Summary Compensation Table, was $8,114,393*; and

 

The ratio of the annual total compensation of our CEO to the median of the annual total compensation of our employees was 79 to 1. This ratio is a reasonable estimate calculated in a manner consistent with SEC rules.

* As described above in the 2019 “Summary Compensation Table”, our CEO’s 2019 annual total compensation of $8,114,393 as disclosed in this section does not include the amount of any bonus that may be awarded to our CEO for 2019 as the Compensation Committee has not, as of the date of this proxy statement, yet determined the annual bonus amounts, if any, that will be awarded to Dr. Ji for 2019. In the event the Compensation Committee or Scilex Holding determine to award any annual bonus amounts to Dr. Ji for fiscal 2019, we will, in accordance with SEC rules, file a Current Report on Form 8-K or otherwise disclose the 2019 annual bonus amounts and, to the extent that any bonus award paid to Dr. Ji and our other employees for 2019 impacts the pay ratio calculation and disclosure contained herein, we will also provide updated pay ratio disclosure within four business days after the Compensation Committee has determined such 2019 annual bonus awards.

Methodology

During 2019, our last completed fiscal year, there was no change to our employee population or compensation arrangements that we reasonably believe would significantly affect our pay ratio disclosure. Further, there was no change in the circumstances of the employee identified as the median employee in 2018. Accordingly, as permitted by SEC rules, we have used the same median employee, initially identified for 2018, in our pay ratio calculation for 2019.

The methodology used to identify the employee with compensation at the median of the annual total compensation of all our employees was based on the following:

 

In determining our employee population, we considered the individuals, excluding our CEO, who were employed by us and our consolidated subsidiaries as of December 31, 2018, whether employed on a full-time, part-time, seasonal or temporary basis. We did not include any contractors or other non-employee workers in our employee population.

 

To identify our median employee, we chose to use annual base pay as our consistently-applied compensation measure, which we calculated as of December 31, 2018 for the 12-month period from January 1, 2018 through December 31, 2018. For simplicity, we calculated annual base pay using a reasonable estimate of the hours worked during 2018 for hourly employees and actual salary paid for our remaining employees.

 

For employees paid other than in U.S. dollars, we converted their compensation to U.S. dollars using the applicable exchange rates in effect on December 31, 2018. For permanent employees hired during 2018, we annualized their salary or base pay as if they had been employed for the entire measurement period. We did not make any cost-of-living adjustment.

Calculation

Using the aforementioned methodology, the individual identified as the median employee from our 2018 employee population had actual earnings consisting of base pay, a Section 401(k) employer matching contribution and equity compensation of $103,169 for 2019. The 2019 annual total compensation as determined under Item 402 of Regulation S-K for our CEO, as set forth in the 2019 Summary Compensation Table, was $8,114,393.

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GRANTS OF PLAN-BASED AWARDS DURING FISCAL YEAR 2019 

The following table shows for fiscal year 2019, certain information regarding grants of plan-based awards to our named executive officers:

 

Named Executive Officer(1)

 

Grant

D