However Sorrento Therapeutics (NASDAQ: SRNE) has a roster of coronavirus testing and therapeutic programs, it also carries a whopping $ 141.79 million in net debt, which is a heavy burden compared to its 12-month follow-up revenue of $ 35.54 million and its $ 24.39 million in cash. The company’s current ratio is 0.6, which implies that it may have problems meeting its obligations in the short term. These figures are expensive enough to let some investors run for the hills, but those who look closer will find that there is more to the story of this company that is focused on developing anti-cancer treatments .
Given the heavy debt burden, why and how did the company announce the full repayment of $ 120 million in deferred term loans in June? Should shareholders dump this stock soon, or is there a buying opportunity in the works? Let’s take a look at the company’s balance sheet to get some answers.
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Sorrento could be in danger of going bankrupt
Sorrento’s financial situation is precarious. Thanks to $ 196.94 million raised through the issuance of common shares over the last 12 months and its June payment of $ 120 million in June, the company was able to raise a whopping $ 133.27 million in the first and second quarters in debt. Effectively, Sorrento traded its newly issued share for direct debt, a move that is sure to attract raised eyebrows from investors who want to have their stake. Importantly, only $ 19.15 million of Sorrento’s liabilities are due by the end of the year, an amount it can easily pay in cash. Furthermore, its $ 147.02 million long-term debt does not seem so unreasonable compared to its 12-month rising revenue, which grew by 39.1% year-over-year in the second quarter.
So, is Sorrento dangerously low current ratio misleading? In other words, is the ratio of the company’s current assets to its current liabilities misleading due to an accounting nuance?
In neutral, no: Sorrento’s debts are more than its cash reserves and also its immediate payments. The company reported operating expenses of $ 214.38 million in 2019, meaning its cash reserves are nowhere near enough for its continuing needs. The present value of the assets is only $ 55 million, while the present liabilities are $ 91.34 million as a result of current expenses incurred and outgoing expenses. This means that even if Sorrento can pay off its current debt without any problems, it will need the cash to repay its suppliers and licensors. That it will either have to issue more shares or take over new debt. Unfortunately, adding debt will make the balance sheet even worse, and shareholders may have the opportunity for more deepening of equity.
The second quarter profit report does not elicit votes: “As a result of our recurring losses from operations, recurring negative cash flows from operations and substantial cumulative losses, there is uncertainty about our ability to maintain liquidity sufficiently to keep our business effective. operating, which raises substantial doubts about our ability to continue as a going concern, ”management said.
The market is kicking up Sorrento’s increased liabilities
Even though Sorrento’s management acknowledges that neither profitability nor a lighter debt tax is in sight anywhere, its share price has gone up this year despite the disappearance. It is impossible to attribute this phenomenon to one cause, but there are at least two explanations worth considering.
First, estimates of consensus on Sorrento’s profits, as formulated by Wall Street analysts, have been steadily rising over the past year, even though the company has missed every target and is still losing money. For trend-setting investors, consistently increasing revenue for estimates is a positive sign, and that may be some people’s looking beyond the actual performance of the company. At present, these benefits come from Sorrento’s cell therapeutic production collaborations with private biotechs such as Celularity. However, Sorrento does not have its own products on the market, although it has a Phase 3 immunotherapy program for non-small cell lung cancer, but it also hopes to use it to treat critically ill patients with COVID-19.
Second, the biopharmaceutical company – which previously worked mostly on developing cancer therapies – has thrown substantial resources into seven different coronavirus programs, drawing the attention of speculators seeking quick profits. Sorrento’s COVID-19 programs include a diagnostic test, an antibody test to detect past infections, various therapies, and a vaccine candidate, T-VIVA-19. If it can fund its development of the coronavirus program with outside collaborations or subsidies from the government, the company could simply have a shot at delivering a blockbuster that can repay its debts without breaking a sweat. Sorrento has not yet won government aid, so it can be difficult to move forward without collaborating with larger collaborators.
In my view, liabilities of Sorrento’s share make it too risky to buy now. On the other hand, if it achieves favorable clinical trial results of the early stage with its coronavirus programs and also manages to tackle some of its long-term debt, I think it will be worth re-evaluating. In the meantime, I encourage potential investors to be aware of rapidly rising stock prices if the underlying company is at risk of bankruptcy.
