Sorrento Therapeutics (NASDAQ:SRNE) is a medical research company that has yet to come up with a stable product that produces enough cash flow. As a result, Sorrento is stuck in a rut where it constantly needs to raise capital that eventually dilutes SRNE stock owners.
This is because the additional shares that it has to issue make the stock fall in value on a per-share basis. It seems to be turning into a sort of spiral activity at Sorrento.
Financial Issues and Stock Dilution
For example, this past quarter ending Sept. 30, Sorrento burnt through $42.6 million in cash flow from operations (CFFO). But it had only $24.4 million in cash at the end of Q2.
As a result, Sorrento raised $63.8 million in equity and received $55 million from exercised stock options. This covered the cash burn in Q3 and left $75.2 million in cash as of Sept 30.
But the problem is that the company will soon find itself in a similar situation as it was at the end of Q2. This is because it simply does not make enough to cover its quarterly cash burn.
For example, in the first nine months of 2020, Sorrento generated CFFO of negative $118.67 million. This can be seen on page 8 of its Q3 quarterly 10-Q filing. On top of that, it wasted another $28 million on capex, licenses, and other items that it couldn’t afford. That works out to an average of almost $49 million in cash burn each quarter.
As a result, so far this year it raised a net $186 million in equity, options, and debt financing. The bottom line is that its shares outstanding rose 56%, from 167.8 million shares outstanding to 261.7 million.
Therefore, the $75 million it has in the bank won’t last much more than one or two more quarters. Pretty soon it is going to have to raise more capital, further diluting existing shareholders of SRNE stock.
This is no way to run a company for the long run. You can’t keep diluting shareholders every three quarters and expect the stock to rise.
What To Do With SRNE Stock
It’s hard to tell if the many irons in the fire that Sorrento Therapeutics has will ever pay off. For example, recently the U.S. Patent Office gave the company patents for certain antibodies and bridging conjugates. But it is difficult to see how these will lead to higher revenue and cash flow for the company.
I suspect that it might be enough good news to allow the company to raise more capital. But that may be it. Until the company comes up with a blockbuster, so to speak, it won’t generate enough cash flow. It will have to keep on raising cash at prices that will lead to massive dilution of SRNE stock over the next year.
I am not the only one sounding the alarm on this stock. As I wrote in my last article, Hindenburg Research also has been quite negative on Sorrento’s value and its business model. However, since its first piece on Sorrento, Hindenburg doesn’t seem to have followed up.
I suspect that the company will be stuck in a rut, or spiral if you will. That will lead to lower and lower prices as the amount of capital it raises further dilutes the value of the company. Moreover, the company will need to find a blockbuster product just to make the excessive number of shares it is issuing worthwhile.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
