UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-36150
SORRENTO THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
|
33-0344842 |
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification Number) |
4955 Directors Place
San Diego, California 92121
(Address of Principal Executive Offices)
(858) 203-4100
(Registrant’s Telephone Number, Including Area Code)
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class: |
|
Trading Symbol (s) |
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Name of each exchange on which registered: |
Common Stock, $0.0001 par value |
|
SRNE |
|
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
☐ |
|
|
|
|
|
|
|
Emerging growth company |
|
☐ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of November 4, 2022 was 471,880,267.
Sorrento Therapeutics, Inc.
Form 10-Q for the Quarter Ended September 30, 2022
Table of Contents
3 |
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3 |
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Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021 |
3 |
|
4 |
|
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5 |
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6 |
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8 |
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|
9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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32 |
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32 |
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34 |
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34 |
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34 |
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40 |
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41 |
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41 |
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41 |
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41 |
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44 |
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts; unaudited)
ASSETS |
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
70,686 |
|
|
$ |
36,665 |
|
Marketable investments |
|
|
47,175 |
|
|
|
90,217 |
|
Accounts receivables, net |
|
|
24,190 |
|
|
|
18,715 |
|
Inventory |
|
|
17,961 |
|
|
|
8,106 |
|
Prepaid expenses |
|
|
7,937 |
|
|
|
11,804 |
|
Other current assets |
|
|
9,008 |
|
|
|
7,482 |
|
Total current assets |
|
|
176,957 |
|
|
|
172,989 |
|
Property and equipment, net |
|
|
43,634 |
|
|
|
41,325 |
|
Operating lease right-of-use assets |
|
|
85,261 |
|
|
|
85,173 |
|
Intangibles, net |
|
|
171,440 |
|
|
|
259,705 |
|
Goodwill |
|
|
80,199 |
|
|
|
79,525 |
|
Equity investments |
|
|
55,605 |
|
|
|
51,271 |
|
Other assets, net |
|
|
2,518 |
|
|
|
4,830 |
|
Total assets |
|
$ |
615,614 |
|
|
$ |
694,818 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
38,391 |
|
|
$ |
27,414 |
|
Accrued payroll and related benefits |
|
|
29,197 |
|
|
|
21,503 |
|
Accrued expenses |
|
|
59,764 |
|
|
|
37,975 |
|
Current portion of deferred revenue |
|
|
281 |
|
|
|
1,108 |
|
Current portion of operating lease liabilities |
|
|
13,373 |
|
|
|
11,539 |
|
Current portion of contingent consideration |
|
|
397 |
|
|
|
397 |
|
Acquisition consideration |
|
|
7,670 |
|
|
|
7,537 |
|
Current portion of debt |
|
|
52,907 |
|
|
|
31,980 |
|
Total current liabilities |
|
|
201,980 |
|
|
|
139,453 |
|
Long-term debt, net of discount |
|
|
17,800 |
|
|
|
110,627 |
|
Deferred tax liabilities, net |
|
|
1,744 |
|
|
|
2,426 |
|
Deferred revenue |
|
|
117,224 |
|
|
|
118,942 |
|
Derivative liabilities |
|
|
— |
|
|
|
35,700 |
|
Operating lease liabilities |
|
|
84,133 |
|
|
|
83,431 |
|
Contingent consideration |
|
|
57,249 |
|
|
|
124,349 |
|
Other long-term liabilities |
|
|
5,278 |
|
|
|
1,761 |
|
Total liabilities |
|
$ |
485,408 |
|
|
$ |
616,689 |
|
|
|
|
|
|
|
|||
Equity: |
|
|
|
|
|
|
||
Sorrento Therapeutics, Inc. equity |
|
|
|
|
|
|
||
Common stock, $0.0001 par value 750,000,000 shares authorized and 468,290,927 and 314,573,225 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively |
|
|
47 |
|
|
|
32 |
|
Additional paid-in capital |
|
|
1,916,794 |
|
|
|
1,513,758 |
|
Accumulated other comprehensive income |
|
|
226 |
|
|
|
1,026 |
|
Accumulated deficit |
|
|
(1,735,755 |
) |
|
|
(1,386,604 |
) |
Treasury stock, 7,568,182 shares at cost at September 30, 2022, and December 31, 2021 |
|
|
(49,464 |
) |
|
|
(49,464 |
) |
Total Sorrento Therapeutics, Inc. stockholders’ equity |
|
|
131,848 |
|
|
|
78,748 |
|
Noncontrolling interests |
|
|
(1,642 |
) |
|
|
(619 |
) |
Total equity |
|
|
130,206 |
|
|
|
78,129 |
|
Total liabilities and stockholders’ equity |
|
$ |
615,614 |
|
|
$ |
694,818 |
|
See accompanying notes to unaudited consolidated financial statements
3
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts; unaudited)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net product revenues |
|
$ |
13,649 |
|
|
$ |
7,562 |
|
|
$ |
32,231 |
|
|
$ |
22,439 |
|
Service revenues |
|
|
3,751 |
|
|
|
4,500 |
|
|
|
15,014 |
|
|
|
17,389 |
|
Total revenues |
|
|
17,400 |
|
|
|
12,062 |
|
|
|
47,245 |
|
|
|
39,828 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of products sold |
|
|
7,283 |
|
|
|
1,172 |
|
|
|
15,638 |
|
|
|
2,549 |
|
Cost of services |
|
|
985 |
|
|
|
2,215 |
|
|
|
4,092 |
|
|
|
7,345 |
|
Research and development |
|
|
67,989 |
|
|
|
49,448 |
|
|
|
180,182 |
|
|
|
147,787 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
11,125 |
|
|
|
12,272 |
|
|
|
23,608 |
|
Selling, general and administrative |
|
|
50,159 |
|
|
|
48,489 |
|
|
|
142,873 |
|
|
|
142,176 |
|
Intangible amortization |
|
|
1,127 |
|
|
|
1,000 |
|
|
|
3,196 |
|
|
|
3,105 |
|
(Decrease) increase on contingent consideration |
|
|
(700 |
) |
|
|
— |
|
|
|
(67,100 |
) |
|
|
100 |
|
Loss on impairment of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
90,780 |
|
|
|
— |
|
Total operating costs and expenses |
|
|
126,843 |
|
|
|
113,449 |
|
|
|
381,933 |
|
|
|
326,670 |
|
Loss from operations |
|
|
(109,443 |
) |
|
|
(101,387 |
) |
|
|
(334,688 |
) |
|
|
(286,842 |
) |
Gain (loss) on derivative liabilities |
|
|
500 |
|
|
|
(1,800 |
) |
|
|
5,300 |
|
|
|
100 |
|
(Loss) gain on marketable investments |
|
|
(16,084 |
) |
|
|
(13,483 |
) |
|
|
(43,042 |
) |
|
|
17,047 |
|
Gain (loss) on debt extinguishment |
|
|
33,433 |
|
|
|
— |
|
|
|
27,701 |
|
|
|
(6,695 |
) |
Gain (loss) on foreign currency exchange |
|
|
610 |
|
|
|
(300 |
) |
|
|
445 |
|
|
|
(841 |
) |
Interest expense, net |
|
|
(792 |
) |
|
|
(2,900 |
) |
|
|
(6,355 |
) |
|
|
(7,282 |
) |
Other income (loss) |
|
|
74 |
|
|
|
97 |
|
|
|
(609 |
) |
|
|
53 |
|
Loss before income tax |
|
|
(91,702 |
) |
|
|
(119,773 |
) |
|
|
(351,248 |
) |
|
|
(284,460 |
) |
Income tax (expense) benefit |
|
|
(1,015 |
) |
|
|
386 |
|
|
|
(602 |
) |
|
|
(461 |
) |
Gain (loss) on equity method investments |
|
|
62 |
|
|
|
164 |
|
|
|
3 |
|
|
|
(277 |
) |
Net loss |
|
|
(90,625 |
) |
|
|
(119,995 |
) |
|
|
(350,643 |
) |
|
|
(284,276 |
) |
Net loss attributable to noncontrolling interests |
|
|
(1,049 |
) |
|
|
(192 |
) |
|
|
(1,492 |
) |
|
|
(368 |
) |
Net loss attributable to Sorrento |
|
$ |
(89,576 |
) |
|
$ |
(119,803 |
) |
|
$ |
(349,151 |
) |
|
$ |
(283,908 |
) |
Net loss per share - basic per share attributable to Sorrento |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
$ |
(0.88 |
) |
|
$ |
(0.98 |
) |
Net loss per share - diluted per share attributable to Sorrento |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
$ |
(0.88 |
) |
|
$ |
(0.98 |
) |
Weighted-average shares used during period - basic shares attributable to Sorrento |
|
|
451,621 |
|
|
|
299,276 |
|
|
|
397,601 |
|
|
|
290,029 |
|
Weighted-average shares used during period - diluted shares attributable to Sorrento |
|
|
451,621 |
|
|
|
299,276 |
|
|
|
397,601 |
|
|
|
290,029 |
|
See accompanying notes to unaudited consolidated financial statements
4
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands; unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net loss |
|
$ |
(90,625 |
) |
|
$ |
(119,995 |
) |
|
$ |
(350,643 |
) |
|
$ |
(284,276 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
|
(611 |
) |
|
|
22 |
|
|
|
(800 |
) |
|
|
635 |
|
Total other comprehensive (loss) income |
|
|
(611 |
) |
|
|
22 |
|
|
|
(800 |
) |
|
|
635 |
|
Comprehensive loss |
|
|
(91,236 |
) |
|
|
(119,973 |
) |
|
|
(351,443 |
) |
|
|
(283,641 |
) |
Comprehensive loss attributable to noncontrolling interests |
|
|
(1,049 |
) |
|
|
(192 |
) |
|
|
(1,492 |
) |
|
|
(368 |
) |
Comprehensive loss attributable to Sorrento |
|
$ |
(90,187 |
) |
|
$ |
(119,781 |
) |
|
$ |
(349,951 |
) |
|
$ |
(283,273 |
) |
See accompanying notes to unaudited consolidated financial statements
5
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands; unaudited)
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||||||||||||||||||||||||||
|
|
Common Stock |
|
|
Treasury Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional |
|
|
Other |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||
Balance, December 31, 2021 |
|
|
314,573 |
|
|
$ |
32 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,513,758 |
|
|
$ |
1,026 |
|
|
$ |
(1,386,604 |
) |
|
$ |
(619 |
) |
|
$ |
78,129 |
|
Issuance of common stock under equity compensation plans |
|
|
438 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
Issuance of common stock for equity offerings |
|
|
58,875 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
164,431 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
164,437 |
|
Acquisitions consideration paid in equity |
|
|
1,282 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,435 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,435 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,854 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,854 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,249 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,249 |
) |
Net (loss) income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40,815 |
) |
|
|
275 |
|
|
|
(40,540 |
) |
Balance, March 31, 2022 |
|
|
375,168 |
|
|
$ |
38 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,703,610 |
|
|
$ |
(223 |
) |
|
$ |
(1,427,419 |
) |
|
$ |
(344 |
) |
|
$ |
226,198 |
|
Issuance of common stock under equity compensation plans |
|
|
544 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
668 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
668 |
|
Issuance of common stock for equity offerings |
|
|
60,707 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
104,163 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
104,169 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,369 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,369 |
|
Changes to noncontrolling interests |
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,802 |
|
|
|
4,776 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,060 |
|
|
|
— |
|
|
|
— |
|
|
|
1,060 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(218,760 |
) |
|
|
(718 |
) |
|
|
(219,478 |
) |
Balance, June 30, 2022 |
|
|
436,419 |
|
|
$ |
18 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,826,810 |
|
|
$ |
837 |
|
|
$ |
(1,646,179 |
) |
|
$ |
3,740 |
|
|
$ |
135,762 |
|
Issuance of common stock under equity compensation plans |
|
|
305 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
Issuance of common stock for equity offerings |
|
|
31,567 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
71,426 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
71,429 |
|
Other acquisitions, license agreements and investments paid in equity |
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,533 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,533 |
|
Changes to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,333 |
) |
|
|
(4,333 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(611 |
) |
|
|
— |
|
|
|
— |
|
|
|
(611 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(89,576 |
) |
|
|
(1,049 |
) |
|
|
(90,625 |
) |
Balance, September 30, 2022 |
|
|
468,291 |
|
|
$ |
47 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,916,794 |
|
|
$ |
226 |
|
|
$ |
(1,735,755 |
) |
|
$ |
(1,642 |
) |
|
$ |
130,206 |
|
6
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||||||||||||||||||||||||||
|
|
Common Stock |
|
|
Treasury Stock |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional |
|
|
Other |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||
Balance, December 31, 2020 |
|
|
275,286 |
|
|
$ |
28 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,172,346 |
|
|
$ |
520 |
|
|
$ |
(958,279 |
) |
|
$ |
(24,420 |
) |
|
$ |
140,731 |
|
Issuance of common stock under equity compensation plans |
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,394 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,394 |
|
Issuance of common stock upon exercise of warrants |
|
|
2,550 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,050 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,050 |
|
Issuance of common stock for equity offerings |
|
|
3,901 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
42,208 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,209 |
|
Other acquisitions, license agreements and investments paid in equity |
|
|
851 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,500 |
|
Changes to noncontrolling interests from increased ownership in Scilex Holding |
|
|
2,567 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,963 |
) |
|
|
— |
|
|
|
— |
|
|
|
23,963 |
|
|
|
— |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,660 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,660 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75 |
) |
|
|
— |
|
|
|
— |
|
|
|
(75 |
) |
Net income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,510 |
|
|
|
(92 |
) |
|
|
2,418 |
|
Balance, March 31, 2021 |
|
|
285,655 |
|
|
$ |
29 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,236,195 |
|
|
$ |
445 |
|
|
$ |
(955,769 |
) |
|
$ |
(549 |
) |
|
$ |
230,887 |
|
Issuance of common stock under equity compensation plans |
|
|
300 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,377 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,377 |
|
Issuance of common stock for equity offerings |
|
|
5,886 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
50,751 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50,752 |
|
Equity issued for the acquisition of ACEA Therapeutics, Inc. |
|
|
5,519 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,168 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
42,168 |
|
Other acquisitions, license agreements and investments paid in equity |
|
|
615 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,378 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,378 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,984 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,984 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
688 |
|
|
|
— |
|
|
|
— |
|
|
|
688 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(166,615 |
) |
|
|
(84 |
) |
|
|
(166,699 |
) |
Balance, June 30, 2021 |
|
|
297,975 |
|
|
$ |
30 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,356,853 |
|
|
$ |
1,133 |
|
|
$ |
(1,122,384 |
) |
|
$ |
(633 |
) |
|
$ |
185,535 |
|
Issuance of common stock under equity compensation plans |
|
|
337 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,281 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,281 |
|
Issuance of common stock for equity offerings |
|
|
5,056 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
41,917 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
41,918 |
|
Other acquisitions, license agreements and investments paid in equity |
|
|
99 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
812 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
812 |
|
Other changes to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
651 |
|
|
|
651 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,103 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,103 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(119,803 |
) |
|
|
(192 |
) |
|
|
(119,995 |
) |
Balance, September 30, 2021 |
|
|
303,467 |
|
|
$ |
31 |
|
|
|
7,568 |
|
|
$ |
(49,464 |
) |
|
$ |
1,421,966 |
|
|
$ |
1,155 |
|
|
$ |
(1,242,187 |
) |
|
$ |
(174 |
) |
|
$ |
131,327 |
|
See accompanying notes to unaudited consolidated financial statements
7
SORRENTO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
|
|
Nine Months Ended September 30, |
|
|||||
Operating activities |
|
2022 |
|
|
2021 |
|
||
Net loss |
|
$ |
(350,643 |
) |
|
$ |
(284,276 |
) |
Adjustments to reconcile net loss to net cash used for operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
9,892 |
|
|
|
9,603 |
|
Non-cash operating lease cost |
|
|
2,997 |
|
|
|
3,057 |
|
Non-cash interest expense and amortization of debt issuance costs |
|
|
5,382 |
|
|
|
5,899 |
|
Payment on notes attributed to accreted interest related to the debt discounts |
|
|
(22,057 |
) |
|
|
(11,791 |
) |
Acquired in-process research and development |
|
|
12,271 |
|
|
|
23,608 |
|
Stock-based compensation |
|
|
57,617 |
|
|
|
67,509 |
|
(Gain) loss on debt extinguishment |
|
|
(27,701 |
) |
|
|
6,695 |
|
(Gain) on derivative liabilities |
|
|
(5,300 |
) |
|
|
(100 |
) |
Loss (gain) on marketable investments |
|
|
43,042 |
|
|
|
(17,047 |
) |
(Gain) loss on equity method investments |
|
|
(3 |
) |
|
|
277 |
|
(Gain) loss on contingent consideration |
|
|
(67,100 |
) |
|
|
100 |
|
Loss on impairment of intangible assets |
|
|
90,780 |
|
|
|
— |
|
Deferred income taxes |
|
|
(682 |
) |
|
|
(1,834 |
) |
Changes in operating assets and liabilities, excluding effect of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(5,402 |
) |
|
|
(697 |
) |
Inventory |
|
|
(4,496 |
) |
|
|
(5,427 |
) |
Accrued payroll |
|
|
7,833 |
|
|
|
(4,941 |
) |
Prepaid expenses, deposits and other assets |
|
|
4,654 |
|
|
|
(631 |
) |
Accounts payable |
|
|
5,710 |
|
|
|
(3,549 |
) |
Accrued expenses and other liabilities |
|
|
20,780 |
|
|
|
35,589 |
|
Deferred revenue |
|
|
(2,544 |
) |
|
|
417 |
|
Right-of-use assets, operating leases |
|
|
(549 |
) |
|
|
(32,509 |
) |
Other |
|
|
— |
|
|
|
364 |
|
Net cash used for operating activities |
|
|
(225,519 |
) |
|
|
(209,684 |
) |
Investing activities |
|
|
|
|
|
|
||
Proceeds from sale of marketable investment |
|
|
— |
|
|
|
124,113 |
|
Purchases of property and equipment |
|
|
(9,133 |
) |
|
|
(6,662 |
) |
ACEA acquisition consideration paid in cash, net of cash acquired |
|
|
— |
|
|
|
(754 |
) |
Virex Health acquisition consideration paid in cash, net of cash acquired |
|
|
(6,544 |
) |
|
|
— |
|
Other acquisitions and investments considerations paid in cash, net of cash acquired |
|
|
(7,807 |
) |
|
|
(34,645 |
) |
Net cash (used for) provided by investing activities |
|
|
(23,484 |
) |
|
|
82,052 |
|
Financing activities |
|
|
|
|
|
|
||
Proceeds from equity offerings, net of issuance costs |
|
|
340,036 |
|
|
|
134,878 |
|
Proceeds from short-term debt, net of issuance costs |
|
|
98,560 |
|
|
|
35,053 |
|
Proceeds from exercises of stock options and warrants |
|
|
825 |
|
|
|
13,255 |
|
Repayments of debt and other obligations |
|
|
(152,783 |
) |
|
|
(72,711 |
) |
Net cash provided by financing activities |
|
|
286,638 |
|
|
|
110,475 |
|
Net change in cash, cash equivalents and restricted cash |
|
|
37,635 |
|
|
|
(17,157 |
) |
Net effect of exchange rate changes on cash |
|
|
(3,614 |
) |
|
|
428 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
36,665 |
|
|
|
56,464 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
70,686 |
|
|
$ |
39,735 |
|
Supplemental disclosures: |
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest |
|
|
665 |
|
|
|
86 |
|
Income Taxes |
|
|
29 |
|
|
|
1,200 |
|
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Changes to noncontrolling interests from increased ownership in Scilex Holding |
|
|
— |
|
|
|
23,963 |
|
ACEA acquisition consideration paid in equity |
|
|
— |
|
|
|
42,168 |
|
Virex Health acquisition consideration paid in equity |
|
|
4,435 |
|
|
|
— |
|
Deferred consideration for intangible asset acquisition |
|
|
3,650 |
|
|
|
— |
|
Other acquisitions, license agreements and investments paid in equity |
|
|
— |
|
|
|
13,689 |
|
Property and equipment costs incurred but not paid |
|
|
753 |
|
|
|
1,162 |
|
Short-term debt |
|
|
— |
|
|
|
7,304 |
|
See accompanying notes to unaudited consolidated financial statements
8
SORRENTO THERAPEUTICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the subsidiaries of Sorrento Therapeutics, Inc. (the “Company”). For consolidated entities where the Company owns or is exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current period presentation.
These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2022. Operating results for interim periods are not expected to be indicative of operating results for the Company’s 2022 fiscal year, or any subsequent period. The unaudited interim financial statements included herein reflect all normal and recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented.
Use of Estimates
To prepare consolidated financial statements in conformity with accounting principles generally accepted in the U.S., management must make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
During the nine months ended September 30, 2022, there have been no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.
Revenue Recognition
The following table shows revenue disaggregated by product and service type for the three and nine months ended September 30, 2022 and 2021 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Scilex Pharmaceuticals Inc. product sales |
|
$ |
11,377 |
|
|
$ |
7,525 |
|
|
$ |
26,115 |
|
|
$ |
22,313 |
|
Sorrento Therapeutics, Inc. product revenues |
|
|
2,272 |
|
|
|
37 |
|
|
|
6,116 |
|
|
|
126 |
|
Net product revenues |
|
$ |
13,649 |
|
|
$ |
7,562 |
|
|
$ |
32,231 |
|
|
$ |
22,439 |
|
Concortis Biosystems Corporation |
|
$ |
1,818 |
|
|
$ |
3,164 |
|
|
$ |
8,435 |
|
|
$ |
12,094 |
|
Bioserv Corporation |
|
|
540 |
|
|
|
968 |
|
|
|
2,007 |
|
|
|
3,549 |
|
Other service revenues |
|
|
1,393 |
|
|
|
368 |
|
|
|
4,572 |
|
|
|
1,746 |
|
Service revenues |
|
$ |
3,751 |
|
|
$ |
4,500 |
|
|
$ |
15,014 |
|
|
$ |
17,389 |
|
The Company recorded $1.8 million in other service revenues associated with Celularity Inc. (“Celularity”) for the nine months ended September 30, 2022. The Company held an ownership interest of approximately 14.1% of Celularity on a non-diluted basis at September 30, 2022. See Note 4 for details.
Inventory
The Company had $12.5 million in finished goods and $5.5 million in raw materials and other inventory at September 30, 2022. The Company had $4.7 million in finished goods and $3.3 million in raw materials and other inventory at December 31, 2021.
9
2. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure.
The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating, debt servicing and capital requirements for the next 12 months. The Company’s plans include continuing to fund its and its subsidiaries' operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are issued.
If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates. The Company may also seek collaborators for one or more of its current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available. The consolidated financial statements do not reflect any adjustments that might be necessary if the Company is unable to continue as a going concern.
If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.
3. Fair Value Measurements
The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
Fair Value Measurements at September 30, 2022 |
|
|||||||||||||
|
|
Balance |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketable investments |
|
$ |
47,175 |
|
|
$ |
47,175 |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets |
|
$ |
47,175 |
|
|
$ |
47,175 |
|
|
$ |
— |
|
|
$ |
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current portion of contingent consideration |
|
$ |
397 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
397 |
|
Contingent consideration - non-current |
|
|
57,249 |
|
|
|
— |
|
|
|
— |
|
|
|
57,249 |
|
Total liabilities |
|
$ |
57,646 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
57,646 |
|
10
|
|
Fair Value Measurements at December 31, 2021 |
|
|||||||||||||
|
|
Balance |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketable investments |
|
$ |
90,217 |
|
|
$ |
2,560 |
|
|
$ |
— |
|
|
$ |
87,657 |
|
Total assets |
|
$ |
90,217 |
|
|
$ |
2,560 |
|
|
$ |
— |
|
|
$ |
87,657 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liabilities - non-current |
|
$ |
35,700 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
35,700 |
|
Current portion of contingent consideration |
|
|
397 |
|
|
|
— |
|
|
|
— |
|
|
|
397 |
|
Contingent consideration - non-current |
|
|
124,349 |
|
|
|
— |
|
|
|
— |
|
|
|
124,349 |
|
Total liabilities |
|
$ |
160,446 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
160,446 |
|
Marketable Investments
As disclosed in Note 4, the Company holds 20,422,124 shares of Class A Common Stock of Celularity, of which 19,922,124 shares were subject to certain transfer restrictions as of December 31, 2021. The transfer restrictions lapsed on July 16, 2022. The shares held by the Company are measured at fair value at each reporting period based on the closing price of Celularity’s common stock on the last trading day of each reporting period. Prior to July 16, 2022, the shares subject to transfer restrictions were adjusted for a discount for lack of marketability. As of July 16, 2022, the shares previously subject to transfer restrictions were transferred to Level 1 due to the use of the quoted market price to measure fair value.
Changes in fair value of the Company’s investment in Celularity since December 31, 2021 are as follows (Level 3):
(in thousands) |
|
Fair Value |
|
|
Beginning Balance at December 31, 2021 |
|
$ |
87,657 |
|
Change in fair value measurement of Restricted Shares |
|
|
(26,098 |
) |
Transfer from Level 3 to Level 1 |
|
|
(61,559 |
) |
Ending Balance at September 30, 2022 |
|
$ |
— |
|
Contingent Consideration
During the three and nine months ended September 30, 2022, the Company recorded a gain of $0.7 million and $67.1 million, respectively, which related to the change in fair value of the contingent consideration associated with its acquisition of ACEA Therapeutics, Inc. (“ACEA”) (See Note 6 for details). The Company assesses the fair value of contingent consideration using a discounted cash flow method combined with a Monte Carlo simulation model. Significant Level 3 assumptions used in the measurement included revenue projections, a discount rate of 23.0% as of September 30, 2022, and estimated probabilities of successful commercialization.
Changes in estimated fair value of contingent consideration liabilities since December 31, 2021 are as follows (Level 3):
(in thousands) |
|
Fair Value |
|
|
Beginning Balance at December 31, 2021 |
|
$ |
124,746 |
|
Change in fair value measurement |
|
|
(67,100 |
) |
Ending Balance at September 30, 2022 |
|
$ |
57,646 |
|
Derivative liabilities
The Company recorded a gain on derivative liability of $0.5 million and $5.3 million for the three and nine months ended September 30, 2022, respectively, which related to the derivative liability associated with the Scilex Notes (as defined in Note 7). The fair value of the derivative liability associated with the Scilex Notes decreased by $30.4 million immediately after the entry into the Indenture Amendment (as defined in Note 7) associated with the Scilex Notes on June 2, 2022 (see Note 7 for additional details). The Indenture Amendment was accounted for as troubled debt restructuring; therefore, the carrying amount of the Scilex Notes, net, was adjusted to reflect the aforementioned change in fair value of the derivative liability. The fair value of the derivative liability
11
associated with the Scilex Notes was estimated using the discounted cash flow method combined with a Monte Carlo simulation model including consideration of the terms of the Indenture Amendment. Significant Level 3 assumptions used in the measurement included a 6.1% risk adjusted net sales forecast and an effective debt yield of 21.5% as of June 30, 2022. The Scilex Notes were fully extinguished in September 2022 (see Note 7 for additional details) and, as such, there were no remaining derivative liabilities as of September 30, 2022.
The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2022:
(in thousands) |
|
Fair Value |
|
|
Beginning Balance at December 31, 2021 |
|
$ |
35,700 |
|
Change in fair value measurement |
|
|
(35,700 |
) |
Ending Balance at September 30, 2022 |
|
$ |
— |
|
4. Investments
As of September 30, 2022, the Company’s equity method investments include an ownership interest in Immunotherapy NANTibody, LLC (“NANTibody”), NantCancerStemCell, LLC (“NantStem”), Deverra Therapeutics, Inc. (“Deverra”) and ImmuneOncia Therapeutics, LLC, among others. The Company’s equity investments without readily determinable fair value include an ownership interest in NantBioScience, Inc., Aardvark Therapeutics, Inc. (“Aardvark”) and Elsie Biotechnologies, Inc. (“Elsie”), among others. The Company’s equity investments with readily determinable fair value include an ownership interest in Celularity.
Celularity
As of September 30, 2022, the Company owned 20,422,124 shares of Class A Common Stock of Celularity. During the three and nine months ended September 30, 2022, the Company recorded unrealized losses on marketable investments of $16.1 million and $43.0 million, respectively, in connection with the changes in fair value of its shares of Celularity Class A Common Stock. The Company’s investment in Celularity is included within marketable investments under current assets within its consolidated balance sheets.
Aardvark
In 2021, the Company paid $10.0 million in cash for an aggregate of 7,777,864 shares of Series B Preferred Stock of Aardvark. The Company accounts for its investment in Aardvark as an equity investment without a readily determinable fair value and carries its investment in Aardvark at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The Company’s investment in Aardvark was $10.0 million as of each of September 30, 2022 and December 31, 2021. Tien Lee, MD, a member of the board of directors of Scilex Holding Company (“Scilex Holding”), a majority owned subsidiary of the Company, is the founder and chief executive officer of Aardvark. Kim D. Janda, Ph.D., a member of the Board of Directors of the Company, is a member of the advisory board of Aardvark.
Elsie
In 2021, the Company paid $10.0 million in cash for an aggregate of 10,000,000 shares of Series A Preferred Stock of Elsie Biotechnologies, Inc. (“Elsie”). The Company accounts for its investment in Elsie as an equity investment without a readily determinable fair value and carries its investment in Elsie at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The Company’s investment in Elsie was $10.0 million as of each of September 30, 2022 and December 31, 2021. In connection with the Company's purchase of Series A Preferred Stock of Elsie, Dr. Henry Ji, the Company’s Chairman of the Board of Directors, Chief Executive Officer and President, was appointed to the board of directors of Elsie.
NANTibody
As of September 30, 2022, the Company’s investment in NANTibody had a carrying value of zero due to the Company’s share of cumulative losses. NANTibody recorded a net loss of $0.8 million for the three months ended June 30, 2022. As of June 30, 2022, NANTibody had $2.4 million in current assets, $10.9 million in current liabilities, $0.1 million in noncurrent assets and no noncurrent liabilities.
12
The financial statements of NANTibody are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a one quarter lag.
NantStem
As of September 30, 2022, the carrying value of the Company’s investment in NantStem was approximately $18.8 million. NantStem recorded net income of $0.7 million for the three months ended June 30, 2022. As of June 30, 2022, NantStem had $84.5 million in current assets, no current liabilities, $0.5 million in noncurrent assets and no noncurrent liabilities.
The financial statements of NantStem are not received sufficiently timely for the Company to record its portion of earnings or loss in the current financial statements and therefore the Company reports its portion of earnings or loss on a one quarter lag.
5. Goodwill and Intangible Assets
Goodwill totaled $80.2 million as of September 30, 2022. Goodwill for the Sorrento Therapeutics segment and the Scilex segment was $73.5 million and $6.7 million, respectively, as of September 30, 2022. As of September 30, 2022, intangible assets with indefinite useful lives totaling $127.7 million are included in acquired in-process research and development (“IPR&D”) in the table below.
Goodwill and intangible assets are assessed annually for impairment on October 1 and more frequently whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the full carrying amount of an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. In June 2022, the Company decided to pause for future evaluation the development of Abivertinib, which was acquired from ACEA in 2021 (see Note 6 for details), for the treatment of hospitalized COVID-19 patients. This event led to an assessment to determine if an impairment occurred for the associated IPR&D assets in the second quarter of 2022. Based on a quantitative analysis for impairment performed at June 30, 2022, the Company determined that approximately $90.8 million associated with the IPR&D assets, which are in the Sorrento Therapeutics segment, had been impaired and recorded within the loss on impairment of intangible assets in the consolidated statement of operations during the second quarter of 2022. The quantitative analysis is considered a Level 3 non-recurring fair value measurement and is based on the discounted cash flow method that estimates the present value of risk adjusted projected cash flow derived from the IPR&D assets using a discount rate of 16% at June 30, 2022. As of September 30, 2022, the Abivertinib development program associated with COVID-19 treatment remained paused and under evaluation, and the Company did not identify any indicators of additional impairment as of September 30, 2022. The Company performed an evaluation of goodwill, including a qualitative analysis considering the overall market capitalization of the Company in comparison to the carrying value of the Company's reporting units at September 30, 2022, and it determined that it was not more likely than not that an impairment of goodwill existed at either of the reporting units at September 30, 2022.
A summary of the Company’s identifiable intangible assets as of September 30, 2022 and December 31, 2021 is as follows (in thousands, except for years):
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
|||||||||||||||||||
September 30, 2022 |
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Intangibles, |
|
|
Gross |
|
|
Accumulated |
|
|
Intangibles, |
|
|||||||
Customer relationships |
|
|
2 |
|
|
$ |
1,585 |
|
|
$ |
1,472 |
|
|
$ |
113 |
|
|
$ |
1,585 |
|
|
$ |
1,453 |
|
|
$ |
132 |
|
Acquired technology |
|
|
19 |
|
|
|
3,410 |
|
|
|
1,544 |
|
|
|
1,866 |
|
|
|
3,410 |
|
|
|
1,412 |
|
|
|
1,998 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
127,650 |
|
|
|
— |
|
|
|
127,650 |
|
|
|
218,430 |
|
|
|
— |
|
|
|
218,430 |
|
Technology placed in service |
|
|
15 |
|
|
|
21,940 |
|
|
|
5,851 |
|
|
|
16,089 |
|
|
|
21,940 |
|
|
|
4,754 |
|
|
|
17,186 |
|
Patent rights |
|
|
15 |
|
|
|
32,720 |
|
|
|
12,918 |
|
|
|
19,802 |
|
|
|
32,720 |
|
|
|
11,283 |
|
|
|
21,437 |
|
Assembled workforce |
|
|
5 |
|
|
|
605 |
|
|
|
434 |
|
|
|
171 |
|
|
|
605 |
|
|
|
343 |
|
|
|
262 |
|
Internally developed software |
|
|
2 |
|
|
|
520 |
|
|
|
390 |
|
|
|
130 |
|
|
|
520 |
|
|
|
260 |
|
|
|
260 |
|
Acquired licenses |
|
|
15 |
|
|
|
5,711 |
|
|
|
92 |
|
|
|
5,619 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total intangible assets |
|
|
|
|
$ |
194,141 |
|
|
$ |
22,701 |
|
|
$ |
171,440 |
|
|
$ |
279,210 |
|
|
$ |
19,505 |
|
|
$ |
259,705 |
|
|
13
Aggregate amortization expense was $1.1 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. Aggregate amortization expense was $3.2 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively. Estimated future amortization expense related to intangible assets, excluding indefinite-lived intangible assets, at September 30, 2022 is as follows (in thousands):
Years Ending December 31, |
|
Amount |
|
|
2022 (Remaining three months) |
|
$ |
1,127 |
|
2023 |
|
|
4,416 |
|
2024 |
|
|
4,239 |
|
2025 |
|
|
4,214 |
|
2026 |
|
|
4,214 |
|
Thereafter |
|
|
25,580 |
|
Total expected future amortization |
|
$ |
43,790 |
|
6. Significant Agreements and Contracts
2022 Acquisitions
Romeg License Agreement
On June 14, 2022, the Company's majority-owned subsidiary, Scilex Holding, entered into a License Agreement (the “License Agreement”) with RxOmeg Therapeutics, LLC (a/k/a Romeg Therapeutics, Inc.) (“Romeg”). Pursuant to the License Agreement, among other things, Romeg granted Scilex Holding (a) a transferable license, with the right to sublicense, under the patents and know-how specified therein (with such license to know-how being exclusive for the limited purposes specified therein) to (i) commercialize the pharmaceutical product comprising liquid formulations of colchicine for the prophylactic treatment of gout in adult humans (the “Initial Licensed Product”) in the United States of America (including its territories) (the “Territory”), (ii) develop other products comprising the Initial Licensed Product as an active pharmaceutical ingredient (the “Licensed Products”) and commercialize any such products and (iii) manufacture Licensed Products anywhere in the world, solely for commercialization in the Territory; and (b) an exclusive, transferable license, with right to sublicense, to use the trademark GLOPERBA and logos, designs, translations, and modifications thereof in connection with the commercialization of the Initial Licensed Product solely in the Territory.
As consideration for the license under the License Agreement, Scilex Holding paid Romeg an up-front license fee of $2.0 million, and has agreed to pay Romeg (a) upon Scilex Holding's achievement of certain net sales milestones, certain milestone payments in the aggregate amount of up to $13.0 million, (b) certain royalties in the mid-single digit to low-double digit percentages based on annual net sales of the Licensed Product by Scilex Holding during the applicable royalty term under the License Agreement, and (c) a minimum quarterly royalty payment commencing on the first year anniversary of the effective date of the License Agreement and ending on the later of (i) expiration of the last to expire of the licensed patents covering the Licensed Products in the Territory or (ii) the tenth anniversary of the effective date of the License Agreement.
The transaction was accounted for as an asset acquisition since the Initial Licensed Product was approved and made available in the United States in 2020 and substantially all the value of the gross assets was concentrated in a single asset, which is the Initial Licensed Product. In connection with the License Agreement, Scilex Holding recorded an intangible asset for the acquired license of $5.7 million, which is comprised of the upfront license fee of $2.0 million and a deferred consideration of $3.7 million that is the present value of the future minimum royalty payments and immaterial transaction costs. The contingent sales milestones and sale volume-based future royalties were determined to meet a scope exception for derivatives under Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and not to be probable at either June 30 or September 30, 2022; therefore, they were not recognized as a liability or included in the fair value of the asset as of each of June 30 and September 30, 2022. The Company determined the useful life of the intangible asset to be 15 years, which approximates the life of the licensed patents covering the Initial Licensed Product.
Zhengzhou Fortune Bioscience Co., Ltd.
In May 2022, the Company completed an acquisition of 51% of the equity interests of Zhengzhou Fortune Bioscience Co., Ltd (“ZFB”) for $5.0 million in cash under a joint venture agreement and equity subscription agreement, as amended (collectively, the “ZFB Agreements”). ZFB is a manufacturer in China of lateral flow diagnostic tests, including COVISTIX, the Company’s COVID-19 virus rapid antigen detection test kit currently being sold in Mexico. Under the ZFB Agreements, the Company has the option to acquire from the minority equity holder the remaining 49% of the aggregate equity interests of ZFB for $50.0 million before
14
December 31, 2022 (the “Subsequent Transaction”). If the Subsequent Transaction does not occur, the Company or ZFB may terminate the ZFB Agreements, and the Company’s 51% of equity interest in ZFB will be redeemed by ZFB for $5.0 million. In September 2022, the Company entered an amendment (the “Amendment”) to the ZFB Agreements, pursuant to which, among other things, the Company’s equity interest in ZFB was reduced from 51% to 49% through a transfer of 2% of the Company’s equity interest in ZFB to the other shareholder of ZFB for a payment of $0.2 million and the Company’s representation on ZFB’s board of directors was reduced from three out of five total directors to two out of five total directors. The transfer of the 2% of the equity interest of ZFB was completed, and the Company received $0.2 million from the other shareholder of ZFB in September 2022.
In May 2022, the Company determined that it holds a variable interest in ZFB at completion of the acquisition of 51% of the equity interest in ZFB, which is determined to be a variable interest entity (“VIE”). The Company further determined that it was the primary beneficiary of the VIE because the Company had control over ZFB through its control over ZFB’s board of directors, had ownership of a majority of voting equity interests and had other sole decision-making rights under the ZFB Agreements to direct the most important activities of ZFB. The Company accounted for the transaction as a business combination and applied the acquisition method of accounting. The initial purchase price of $0.2 million represented $5.0 million cash consideration, net of $4.8 million in pre-acquisition inter-company payables to ZFB that were preliminarily deemed settled upon acquisition. The preliminary allocation of the purchase price consisted of $10.4 million of fair value of assets acquired including $1.9 million of goodwill and intangibles and $5.5 million of liabilities assumed. The fair value of non-controlling interest of $4.8 million at acquisition date was derived from the $5.0 million consideration paid for the 51% equity interest in ZFB, which was deemed to approximate the fair value.
Upon execution of the Amendment and completion of the 2% equity interest transfer in September 2022, the Company determined that it is no longer the primary beneficiary of ZFB as a VIE because it lost control over ZFB. As a result of this assessment, the Company derecognized all of ZFB's assets and liabilities from the Company’s consolidated financial statements, recorded the Company’s 49% retained equity interest at its fair value of $4.8 million at September 30, 2022 and recorded a gain from the deconsolidation of $0.3 million in the three and nine month periods ended September 30, 2022. Upon deconsolidation, the Company also recorded a payable to ZFB of $5.3 million that was previously considered an intercompany payable at the time of the consolidation. Subsequent to the deconsolidation, the Company determined it has significant influence over ZFB’s operating and financial policies and recorded its 49% equity interest as an equity method investment at September 30, 2022.
Acquisition of Virex
On February 1, 2022, the Company completed the acquisition of Virex Health, Inc. (“Virex”), a developer of at-home diagnostic platforms based in Boston, Massachusetts. In accordance with Accounting Standards Codification Topic 805, the Company recorded consideration transferred totaling $11.4 million, including $6.8 million in cash, $0.1 million in transaction costs paid in cash and 1,281,662 shares of the Company's common stock, or $4.5 million of consideration based on the Company's closing share price on February 1, 2022. In connection with the acquisition of Virex, the Company may pay up to $10.0 million in contingent consideration in a combination of cash and stock subject to the achievement of certain regulatory milestones.
The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. No contingent consideration was recorded as of September 30, 2022. The Company fully expensed an amount of $11.7 million, representing the consideration transferred, net of short-term liabilities assumed, to acquired IPR&D.
2021 Acquisitions
Acquisition of ACEA
On June 1, 2021, the Company completed the acquisition of ACEA, which is developing multiple clinical and preclinical-stage new chemical entity compounds, including the late clinical drug candidate, Abivertinib. The final purchase price allocation was calculated based on an upfront consideration of $44.1 million, which was based on the Company’s closing share price on June 1, 2021, and resulted in separate and distinct intangible assets comprised of acquired IPR&D of $190.8 million, of which $90.8 million associated with Abivertinib for the treatment of hospitalized COVID-19 patients was deemed impaired and written off during the second quarter of 2022 (see Note 5 for details), goodwill of $36.0 million, fair value of debt assumed of approximately $32.1 million, deferred tax liabilities of $31.4 million and other net assets of approximately $2.9 million. Pursuant to the terms of the merger agreement entered into with ACEA, a portion of the upfront consideration equal to $38.1 million was used to repay certain existing indebtedness of ACEA, which amount was paid to the holders thereof in the form of shares of common stock of the Company and an aggregate of 5.5 million shares (“Indebtedness Shares”) of the Company’s common stock were issued in respect thereof based on a price per share equal to $6.8955. The Indebtedness Shares are subject to a true-up, as set forth in the merger agreement entered into with ACEA, if the price at which such shares were issued is greater than the closing price of the Company’s common stock on the date
15
that is six months after June 1, 2021. The Company recorded $7.5 million associated with the true-up as a current liability at September 30, 2022.
In addition to the Closing Consideration, the Company may pay the ACEA equityholders contingent consideration of (i) up to $450.0 million in additional payments, subject to the receipt of certain regulatory approvals and achievement of certain net sales targets with respect to the assets acquired from ACEA and (ii) five to ten percent of the annual net sales on specified royalty-bearing products. See Note 3 for details.
7. Debt
2018 Purchase Agreements and Indenture for Scilex Pharmaceuticals Inc. (“Scilex Pharma”)
On September 7, 2018, Scilex Pharma entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and the Company. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex Pharma issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of $224.0 million (the “Scilex Notes”) for an aggregate purchase price of $140.0 million (the “Scilex Notes Offering”). In connection with the Scilex Notes Offering, Scilex Pharma also entered into an Indenture (the “Indenture”) governing the Scilex Notes with U.S. Bank National Association, a national banking association, as trustee and collateral agent, and the Company. Pursuant to the Indenture, the Company agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex Pharma under the Indenture.
Actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 did not equal or exceed 95% of a predetermined target sales threshold for such period, which resulted in a $28.0 million increase in the principal amount of the Scilex Notes, effective February 15, 2022. As a result, the Company recorded the increase of $28.0 million in principal and non-operating expense at December 31, 2021. Pursuant to the Indenture, if actual cumulative net sales of ZTlido for the period from October 1, 2022 through September 30, 2023 do not equal or exceed 80% of a predetermined target sales threshold for such period, the aggregate principal amount shall also be increased on November 15, 2023 by an amount equal to an amount to be determined by reference to the amount of such deficiency. In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounted for this feature as an embedded derivative (the “Scilex Notes Derivative”) that is required to be bifurcated from the Scilex Notes and measured at fair value in each reporting period (see Note 3 for details).
Effective February 14, 2022, Scilex Pharma issued to the Company a draw notice under the irrevocable standby letter of credit issued by the Company to Scilex Pharma as required under the terms of the Indenture because actual cumulative net sales of ZTlido from the issue date of the Scilex Notes through December 31, 2021 were less than a specified sales threshold for such period. As a result of the draw notice being issued, the Company paid to Scilex Pharma $35.0 million in a single lump-sum amount as a subordinated loan. In February 2022, Scilex Pharma repurchased Scilex Notes from the holders thereof on a pro rata basis in an aggregate amount equal to $20.0 million.
On June 2, 2022, the Company and Scilex Pharma entered into a Consent Under and Amendment No. 4 to Indenture (the “Indenture Amendment”) with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association) and the Scilex Note Purchasers. Pursuant to the Indenture Amendment, (1) on June 3, 2022, Scilex Pharma repurchased approximately $41.4 million of the aggregate principal amount of the outstanding Scilex Notes at 100% of the principal amount thereof, (2) the Scilex Note Purchasers agreed that Scilex Pharma can repurchase the remaining principal amount of the Scilex Notes at any time on or before September 30, 2022 for $41.4 million (subject to reduction for any quarterly royalty payments) and upon such repurchase the Scilex Note Purchasers will forgive and discharge $28.0 million of the aggregate principal amount of the Scilex Notes (the “Early Paydown Provision”), (3) the minimum cash requirement under the Indenture was reduced to $5.0 million in aggregate unrestricted cash equivalents at the end of each calendar month, and (4) the maximum aggregate principal amount of that certain Intercompany Promissory Note issued by Scilex Pharma to the Company on October 5, 2018 was increased from up to $25.0 million to up to $50.0 million. The Company concluded that the Indenture Amendment was a troubled debt restructuring for accounting purposes. The future undiscounted cash flows of the Scilex Notes were higher than the carrying value of the Scilex Notes at the time of the entry into the Indenture Amendment, and accordingly, no gain was recognized in the quarter ended June 30, 2022. Due to a decrease of $30.4 million in the fair value of the Scilex Notes Derivative caused by the Indenture Amendment, the carrying value of the Scilex Notes was increased by $30.4 million, totaling $74.9 million at June 30, 2022.
In September 2022, Scilex Pharma exercised the Early Paydown Provision to fully extinguish the Scilex Notes. In August and September 2022, the Company made principal payments towards the outstanding Scilex Notes totaling $1.7 million and $39.7 million, respectively. Pursuant to the Indenture Amendment, $28.0 million of principal amount on the Scilex Notes was forgiven by the Scilex Note Purchasers and the Scilex Notes were fully extinguished in September 2022. The Company recorded a gain on debt
16
extinguishment of $33.4 million during the three months ended September 30, 2022. There are no derivative liabilities as of September 30, 2022.
Borrowings of the Scilex Notes consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
Principal |
|
$ |
— |
|
|
$ |
133,998 |
|
Unamortized debt discount |
|
|
— |
|
|
|
(30,601 |
) |
Unamortized debt issuance costs |
|
|
— |
|
|
|
(2,235 |
) |
Carrying value |
|
$ |
— |
|
|
$ |
101,162 |
|
Estimated fair value |
|
$ |
— |
|
|
$ |
115,400 |
|
The Company made principal payments of $106.0 million and $44.2 million during the nine months ended September 30, 2022 and 2021, respectively. The amount of debt discount and debt issuance costs included in interest expense for the three months ended September 30, 2022 and 2021 was approximately $0.1 million and $1.9 million, respectively. The amount of debt discount and debt issuance costs included in interest expense for the nine months ended September 30, 2022 and 2021 was approximately $3.1 million and $5.9 million, respectively. The Company recorded a gain on debt extinguishment of $28.6 million and a loss on debt extinguishment of $14.0 million in connection with its repayments of principal made during the nine months ended September 30, 2022 and 2021, respectively.
Bridge Loan Agreements
On September 30, 2022, the Company entered into a Bridge Loan Agreement (the “September Bridge Loan Agreement”) pursuant to which the Company borrowed $41.6 million in the form of a bridge loan (the “September Bridge Loan”), which bears interest at 6% per annum and will mature on January 31, 2023. Upon the occurrence and during the continuance of an “Event of Default” under the September Loan Agreement includes, among other things, the Company’s failure to pay any principal of, or interest on, the September Bridge Loan when such principal or interest becomes due and payable or to otherwise perform or observe the terms of the September Bridge Loan Agreement (subject to cure periods), a material inaccuracy of the Company’s representations and warranties under the September Bridge Loan Agreement, a failure by the Company to generally pay its debts as they become due or a bankruptcy, insolvency or similar event involving the Company. The Company received proceeds of $41.2 million net of transaction fees of $0.4 million and paid approximately $1.3 million in advisory fees. The Company recorded a $1.7 million debt discount as of September 30, 2022. The Company repaid $10.0 million of the September Bridge Loan in October 2022.
On February 16, 2022, the Company entered into a Bridge Loan Agreement pursuant to which the Company borrowed $45.0 million in the form of a bridge loan (the “February Bridge Loan”), which bore no interest and matured on June 16, 2022. The amount of debt discount and debt issuance costs included in interest expense for the nine months ended September 30, 2022 was $0.9 million. The Company recorded a loss on debt extinguishment of $0.9 million in connection with its repayments of principal made during the nine months ended September 30, 2022. The Company fully repaid the February Bridge Loan during the nine months ended September 30, 2022.
ACEA Significant Debt Arrangements
Borrowings under significant debt arrangements assumed in connection with the Company’s acquisition of ACEA consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
Principal |
|
$ |
25,942 |
|
|
$ |
29,048 |
|
Unamortized debt discount |
|
|
(8,142 |
) |
|
|
(10,642 |
) |
Carrying value |
|
$ |
17,800 |
|
|
$ |
18,406 |
|
Estimated fair value |
|
$ |
13,400 |
|
|
$ |
17,100 |
|
17
At-the-Market Sales Agreement
On December 3, 2021, the Company entered into an amended and restated sales agreement, which was amended on December 22, 2021 (as amended, the “ATM Sales Agreement”), pursuant to which the Company may issue and sell shares of its common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, through Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC, as sales agents. During the nine months ended September 30, 2022, the Company sold an aggregate of 151,148,373 shares of its common stock pursuant to the ATM Sales Agreement for aggregate net proceeds to the Company of approximately $340.0 million. Subsequent to September 30, 2022 and through November 4, 2022, the Company sold an aggregate of 3,589,340 shares of its common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to the Company of approximately $5.5 million.
9. Stock Based Compensation
2019 Stock Incentive Plan (“2019 Plan”)
Total stock-based compensation expense under the 2019 Plan was $6.9 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively, and $20.7 million and $21.7 million for the nine months ended September 30, 2022 and 2021, respectively. The total unrecognized compensation expense related to unvested stock option grants as of September 30, 2022 was $40.0 million, with a weighted average remaining vesting period of 2.3 years. Total unrecognized compensation expense related to unvested restricted stock unit (“RSU”) grants as of September 30, 2022 was $25.9 million, with a weighted average remaining vesting period of 3.5 years.
A summary of stock option activity under the 2019 Plan for the nine months ended September 30, 2022 is as follows:
|
|
Options |
|
|
Weighted- |
|
|
Aggregate |
|
|||
Outstanding at December 31, 2021 |
|
|
22,515,513 |
|
|
$ |
6.19 |
|
|
$ |
— |
|
Options Granted |
|
|
550,000 |
|
|
|
1.61 |
|
|
|
|
|
Options Canceled |
|
|
(1,757,233 |
) |
|
|
6.36 |
|
|
|
|
|
Options Exercised |
|
|
(24,332 |
) |
|
|
2.32 |
|
|
|
|
|
Outstanding at September 30, 2022 |
|
|
21,283,948 |
|
|
$ |
6.06 |
|
|
$ |
27 |
|
A summary of RSU activity under the 2019 Plan for the nine months ended September 30, 2022 is as follows:
|
|
Number of Shares |
|
|
Weighted- |
|
||
Outstanding at December 31, 2021 |
|
|
3,433,896 |
|
|
$ |
9.50 |
|
RSUs Granted |
|
|
4,855,500 |
|
|
|
1.72 |
|
RSUs Released |
|
|
(768,531 |
) |
|
|
9.53 |
|
RSUs Canceled |
|
|
(593,337 |
) |
|
|
8.45 |
|
Outstanding at September 30, 2022 |
|
|
6,927,528 |
|
|
$ |
4.13 |
|
Scilex Holding Company
Under the Scilex Holding Company 2019 Stock Option Plan, total stock-based compensation expense was $1.2 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively, and $4.0 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively. The total unrecognized compensation expense related to unvested stock option grants as of September 30, 2022 was $3.9 million, with a weighted average vesting period of 1.4 years.
Employee Stock Purchase Plan
Total stock-based compensation recorded as operating expense for the Company’s 2020 Employee Stock Purchase Plan was $0.1 million and $0.3 million for the three and nine months ended September 30, 2022, respectively.
18
CEO Performance Award
Total stock-based compensation recorded as operating expense for the 10-year CEO performance award that was granted to the Company’s chief executive officer in 2020 and tied solely to the Company achieving market capitalization milestones (the “CEO Performance Award”) was $10.3 million and $32.7 million during the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, the Company had approximately $55.0 million of total unrecognized stock-based compensation expense remaining under the CEO Performance Award.
10. Commitments and Contingencies
Litigation
In the normal course of business, the Company may be named as a defendant in one or more lawsuits. Other than as set forth below, the Company is not a party to any outstanding material litigation and management is currently not aware of any legal proceedings that, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.
On April 3, 2019, the Company filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from the Company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. Specifically, the Company has filed:
19
On May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-00966-AJB-DEB, against the Company, Dr. Ji, and its SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D. The action alleges that the Company, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public by publicly issuing false and/or misleading statements regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection and that such statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The suit seeks to recover damages caused by the alleged violations of federal securities laws, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On June 11, 2020, Jeannette Calvo filed a second putative federal securities class action in the U.S. District Court for the Southern District of California, Case No. 3:20-cv-01066-JAH-WVG, against the same defendants alleging the same claims and seeking the same relief. On February 12, 2021, the U.S. District Court for the Southern District of California issued an order consolidating the cases and appointing a lead plaintiff, Andrew Zenoff (“Plaintiff”), and lead counsel. On April 5, 2021, Plaintiff filed a consolidated amended complaint in accordance with the U.S. District Court for the Southern District of California’s scheduling order. Pursuant to that scheduling order, the defendants filed a motion to dismiss on May 20, 2021 and Plaintiff filed its opposition to the motion on July 2, 2021. The defendants’ reply was filed on August 4, 2021. On or about November 18, 2021, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to amend. On November 30, 2021, Plaintiff filed a first amended consolidated complaint. On December 30, 2021, the defendants filed a motion to dismiss the first amended consolidated complaint. Pursuant to a stipulated scheduling order, Plaintiff filed its opposition to the motion on February 7, 2022, and the defendants filed their reply on February 28, 2022. On April 11, 2022, the U.S. District Court for the Southern District of California issued an order granting the motion to dismiss with leave to file an amended complaint by April 22, 2022. Plaintiff did not file an amended complaint by April 22, 2022. On June 2, 2022, the U.S. District Court for the Southern District of California directed the clerk of the court to enter judgment in favor of defendants and close the case. On June 3, 2022, judgment was entered in favor of defendants, and the case was closed. On June 30, 2022, Plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit (Case No. 22-55641). On October 3, 2022, Plaintiff/Appellant filed an opening brief. The defendants/appellees’ answering brief is due on December 2, 2022. Appellant may also file an optional reply brief within 21 days of appellees’ answering brief. The Company is defending these matters vigorously.
On July 26, 2021, Sachin Chaudhari filed a verified stockholder derivative complaint in the U.S. District Court for the Southern District of California, Case No. 0723211, against Dr. Ji, Dr. Brunswick, and the Company’s Board of Directors as defendants, and
20
against the Company as a nominal defendant. The action alleges, among other things, that defendants breached their fiduciary duties, violated Section 20(a) of the Securities Exchange Act of 1934, as amended, engaged in waste and were unjustly enriched in connection with the alleged false and misleading statements referenced above. The suit seeks to recover on behalf of the Company those damages caused by the alleged breaches of duty and related claims, along with the plaintiffs’ reasonable costs and expenses incurred in the lawsuit, including counsel fees and expert fees. On July 27, 2021, Michael Sabatina filed a verified stockholder derivative complaint in the Delaware Chancery Court, Case No. 2021-0654 against Dr. Ji and Dr. Brunswick as defendants and against the Company as a nominal defendant alleging the same general claims and seeking the same general relief. Both of these derivative cases have been stayed by their respective courts pending resolution of the motion to dismiss the federal securities class action described above. The Company is defending these matters vigorously.
Operating Leases
Supplemental quantitative information related to leases includes the following ($ in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash outflows from operating leases |
|
$ |
3,615 |
|
|
$ |
3,208 |
|
|
$ |
9,761 |
|
|
$ |
8,081 |
|
ROU assets obtained in exchange for new and amended operating lease liabilities |
|
$ |
1,505 |
|
|
$ |
39,967 |
|
|
$ |
3,567 |
|
|
$ |
40,141 |
|
Weighted average remaining lease term in years |
|
14.2 |
|
|
15.5 |
|
|
14.2 |
|
|
15.5 |
|
||||
Weighted average discount rate |
|
|
12.8 |
% |
|
|
12.8 |
% |
|
|
12.8 |
% |
|
|
12.8 |
% |
Maturities of lease liabilities were as follows (in thousands):
Years ending December 31, |
|
Operating |
|
|
2022 (Remaining three months) |
|
$ |
3,673 |
|
2023 |
|
|
14,871 |
|
2024 |
|
|
14,851 |
|
2025 |
|
|
13,904 |
|
2026 |
|
|
13,574 |
|
2027 |
|
|
13,788 |
|
Thereafter |
|
|
152,715 |
|
Total lease payments |
|
|
227,376 |
|
Less imputed interest |
|
|
(129,870 |
) |
Total lease liabilities as of September 30, 2022 |
|
$ |
97,506 |
|
11. Income Taxes
The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, research credits and temporary differences. In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain a valuation allowance against the Company’s U.S. federal and state deferred tax assets, with the exception of an amount equal to schedulable deferred tax liabilities.
The Company’s income tax benefit of $0.6 million and $0.5 million reflect an effective tax rate of 0.2% in both periods for the nine months ended September 30, 2022 and 2021, respectively. The Company’s income tax benefit of $1.0 million and income tax expense of $0.4 million reflect effective tax rates of 1.1% and 0.3% for the three months ended September 30, 2022 and 2021, respectively.
21
The difference between the expected statutory federal tax rate of 21% and the 0.2% effective tax rate for the nine months ended September 30, 2022 was primarily attributable to income tax expense associated with return to provision adjustments and shortfalls on stock-based compensation, offset by income tax benefits associated with changes in valuation allowance.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2007 and later are subject to examination by the U.S. and state tax authorities due to the existence of the net operating loss and research credit carryforwards.
For the three and nine months ended September 30, 2022 and 2021, basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.
The following table sets forth the reconciliation of basic and diluted loss per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss attributable to the Company |
|
$ |
(89,576 |
) |
|
$ |
(119,803 |
) |
|
$ |
(349,151 |
) |
|
$ |
(283,908 |
) |
Net loss used for diluted earnings per share |
|
$ |
(89,576 |
) |
|
$ |
(119,803 |
) |
|
$ |
(349,151 |
) |
|
$ |
(283,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator for loss income per share |
|
|
451,621 |
|
|
|
299,276 |
|
|
|
397,601 |
|
|
|
290,029 |
|
Denominator for diluted loss per share |
|
|
451,621 |
|
|
|
299,276 |
|
|
|
397,601 |
|
|
|
290,029 |
|
Basic loss per share |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
$ |
(0.88 |
) |
|
$ |
(0.98 |
) |
Diluted loss per share |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
$ |
(0.88 |
) |
|
$ |
(0.98 |
) |
Shares of common stock issuable pursuant to stock options and warrants that were excluded because the effect is anti-dilutive consisted of the following (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Anti-dilutive shares for outstanding options and RSUs |
|
|
22,145 |
|
|
|
4,736 |
|
|
|
22,719 |
|
|
|
2,892 |
|
13. Segment Information
The Company operates in two operating and reportable segments, Sorrento Therapeutics and Scilex. With the exception of unrestricted cash balances, the Company’s Chief Operating Decision Maker does not regularly review asset information by reportable segment and, therefore, it does not report asset information by reportable segment. The majority of long-lived assets for both segments are located in the United States.
The following table presents information about the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021 (in thousands):
|
|
Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
Sorrento |
|
|
Scilex |
|
|
Total |
|
|
Sorrento |
|
|
Scilex |
|
|
Total |
|
||||||
External revenues |
|
$ |
6,023 |
|
|
$ |
11,377 |
|
|
$ |
17,400 |
|
|
$ |
4,537 |
|
|
$ |
7,525 |
|
|
$ |
12,062 |
|
Operating expenses |
|
|
104,849 |
|
|
|
21,994 |
|
|
|
126,843 |
|
|
|
97,766 |
|
|
|
15,683 |
|
|
|
113,449 |
|
Operating loss |
|
|
(98,826 |
) |
|
|
(10,617 |
) |
|
|
(109,443 |
) |
|
|
(93,229 |
) |
|
|
(8,158 |
) |
|
|
(101,387 |
) |
Unrestricted cash |
|
|
68,152 |
|
|
|
2,534 |
|
|
|
70,686 |
|
|
|
35,380 |
|
|
|
4,355 |
|
|
|
39,735 |
|
22
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
(in thousands) |
|
Sorrento |
|
|
Scilex |
|
|
Total |
|
|
Sorrento |
|
|
Scilex |
|
|
Total |
|
||||||
External revenues |
|
$ |
21,130 |
|
|
$ |
26,115 |
|
|
$ |
47,245 |
|
|
$ |
17,515 |
|
|
$ |
22,313 |
|
|
$ |
39,828 |
|
Operating expenses |
|
|
324,208 |
|
|
|
57,725 |
|
|
|
381,933 |
|
|
|
278,195 |
|
|
|
48,475 |
|
|
|
326,670 |
|
Operating loss |
|
|
(303,078 |
) |
|
|
(31,610 |
) |
|
|
(334,688 |
) |
|
|
(260,680 |
) |
|
|
(26,162 |
) |
|
|
(286,842 |
) |
Unrestricted cash |
|
|
68,152 |
|
|
|
2,534 |
|
|
|
70,686 |
|
|
|
35,380 |
|
|
|
4,355 |
|
|
|
39,735 |
|
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “assumes,” “plans,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the “SEC”). Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
Sorrento Therapeutics, Inc. (collectively, “Sorrento,” the “Company,” “we,” “us,” and “our”) is a clinical and commercial stage biopharmaceutical company developing next generation treatments for three major therapeutic areas: cancer, infectious disease and pain.
Cancer. Our best-in-category strategy is enabled by combining our fully human G-MAB™ antibody library with our ability to rapidly screen for highly potent and targeted treatments and to enhance the target product profile for these antibodies by leveraging our extensive proprietary immuno-oncology platforms such as immuno-cellular therapies (“DAR-T™”), antibody-drug conjugates (“ADCs”), oncolytic virus (“Seprehvec™”) and lymphatic drug delivery (“Sofusa™”).
Infectious Disease. We have applied our antibody capability in the fight against COVID-19. We are developing highly sensitive and rapid diagnostics, and multi-model treatments for the SARS-CoV-2 virus and its variants. Our diagnostics platforms include the COVIMARK™ lateral flow antigen test (launched as COVISTIX™ in Mexico and Brazil), COVITRACK, a LAMP-based pathogen nucleic acid detection assay, and the VIREX™ platform, which leverages existing worldwide manufacturing infrastructure for glucometers and glucose strip tests to provide affordable and highly scalable, next-generation diagnostic solutions for infectious diseases, liver cancer and other biomarkers. We are also focused on bringing forward effective therapeutic solutions, including a next generation protease inhibitor antiviral pill, COVISHIELD™ IN (neutralizing antibody nasal drops) and variant agnostic rescue therapies, FUJOVEE ™ (Abivertinib) and OQORY™ (mesynstromal stem cells).
Pain. We are focusing our efforts on non-opioid and non-addictive pain treatments. The flagship product of our pain programs, ZTlido®, is being marketed by Scilex Pharmaceuticals Inc. (“Scilex Pharma”), our majority-owned subsidiary. ZTlido was launched in October of 2018 as a prescription lidocaine topical product and has demonstrated superior adhesion and bioavailability compared to current lidocaine patches. Scilex Pharma has now built a full commercial organization, which includes sales, marketing, market access and medical affairs, and will leverage capability for the potential launch of next-generation products that are currently in development. The first of these product candidates, SEMDEXA™, is an injectable viscous gel formulation of a widely used corticosteroid designed to address the limitations associated with off label corticosteroid epidural injections. We announced positive final results for the Phase 3 trial for SEMDEXA™ in March 2022.
We are also developing Resiniferatoxin (“RTX”), a naturally occurring and ultra-potent transient receptor potential vanilloid-1 agonist. When injected peripherally, a sustained desensitization occurs, resulting in reduction of noxious chronic pain symptoms that can last for months. RTX has the potential to be a multi-indication franchise asset and is nearing pivotal studies in intractable pain associated with cancer and moderate to severe knee osteoarthritis pain.
Significant Developments in the Quarter Ended September 30, 2022
24
Impact of COVID-19 on Our Business
We are closely monitoring the COVID-19 pandemic and its potential impact on our business. In an effort to protect the health of our employees we continue to enforce standard safety protocols at our facilities and have implemented employee travel policies. For further information, refer to Part, II, Item 1A of this Quarterly Report on Form 10-Q and “Part I –Item 1A - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.
Results of Operations
Comparison of the three and nine months ended September 30, 2022 and 2021
Revenues.
Dollars in thousands |
|
Three Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Sorrento Therapeutics segment |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Product revenues |
|
$ |
2,273 |
|
|
$ |
37 |
|
|
$ |
2,236 |
|
|
6043% |
Service revenues |
|
|
3,750 |
|
|
|
4,500 |
|
|
|
(750 |
) |
|
(17%) |
Total revenues |
|
$ |
6,023 |
|
|
$ |
4,537 |
|
|
$ |
1,486 |
|
|
33% |
Scilex segment |
|
|
|
|
|
|
|
|
|
|
|
|||
Product revenues |
|
$ |
11,377 |
|
|
$ |
7,525 |
|
|
$ |
3,852 |
|
|
51% |
Total revenues |
|
$ |
17,400 |
|
|
$ |
12,062 |
|
|
$ |
5,338 |
|
|
44% |
Dollars in thousands |
|
Nine Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Sorrento Therapeutics segment |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Product revenues |
|
$ |
6,116 |
|
|
$ |
126 |
|
|
$ |
5,990 |
|
|
4754% |
Service revenues |
|
|
15,014 |
|
|
|
17,389 |
|
|
|
(2,375 |
) |
|
(14%) |
Total revenues |
|
$ |
21,130 |
|
|
$ |
17,515 |
|
|
$ |
3,615 |
|
|
21% |
Scilex segment |
|
|
|
|
|
|
|
|
|
|
|
|||
Product revenues |
|
$ |
26,115 |
|
|
$ |
22,313 |
|
|
$ |
3,802 |
|
|
17% |
Total revenues |
|
$ |
47,245 |
|
|
$ |
39,828 |
|
|
$ |
7,417 |
|
|
19% |
The increase in revenues in our Sorrento Therapeutics segment (“Sorrento segment”) during the three months ended September 30, 2022 was attributed to $0.7 million in COVISTIX™ product sales, $1.5 million in other product sales and $1.0 million in other service revenues. Contract manufacturing service revenues were $1.8 million lower compared to the same period of the prior year.
The increase in revenues in our Sorrento segment during the nine months ended September 30, 2022 was attributed to $3.9 million in COVISTIX™ product sales, $2.1 million in other product sales, $1.8 million in other service revenues associated with Celularity Inc. (“Celularity”) and $1.0 million in other service revenues. Contract manufacturing service revenues were $5.2 million lower compared to the same period of the prior year.
For the three and nine months ended September 30, 2022, the increase in revenues in our Scilex segment were driven by higher sales volumes of ZTlido compared to the same periods in the prior year.
25
Cost of Revenues.
|
|
Three Months Ended September 30, |
|
|
Increase |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
4,658 |
|
|
$ |
2,215 |
|
|
|
2,443 |
|
|
110% |
Scilex segment |
|
|
3,611 |
|
|
|
1,172 |
|
|
|
2,439 |
|
|
208% |
Total cost of revenues |
|
$ |
8,269 |
|
|
$ |
3,387 |
|
|
$ |
4,882 |
|
|
144% |
|
|
Nine Months Ended September 30, |
|
|
Increase |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
13,447 |
|
|
$ |
7,345 |
|
|
$ |
6,102 |
|
|
83% |
Scilex segment |
|
|
6,284 |
|
|
|
2,549 |
|
|
|
3,735 |
|
|
147% |
Total cost of revenues |
|
$ |
19,731 |
|
|
$ |
9,894 |
|
|
$ |
9,837 |
|
|
99% |
Cost of revenues relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.
For the three months ended September 30, 2022, the increase in cost of revenues in our Sorrento segment was driven by approximately $2.6 million in inventory reserve associated with COVISTIX™ product as compared to the same period of the prior year.
For the nine months ended September 30, 2022, the increase in cost of revenues in our Sorrento segment was driven by a higher share of product sales and approximately $3.7 million in inventory reserve associated with COVISTIX™ product as compared to the same period of the prior year.
For the three and nine months ended September 30, 2022, the increases in cost of revenues in our Scilex segment were driven by higher sales volumes of ZTlido and royalties to our ZTlido manufacturer as compared to the same period of the prior year.
Research and Development (“R&D”) Expenses.
|
|
Three Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
66,752 |
|
|
$ |
47,554 |
|
|
$ |
19,198 |
|
|
40% |
Scilex segment |
|
|
1,237 |
|
|
|
1,894 |
|
|
|
(657 |
) |
|
(35%) |
Total research and development expenses |
|
$ |
67,989 |
|
|
$ |
49,448 |
|
|
$ |
18,541 |
|
|
37% |
|
|
Nine Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
173,724 |
|
|
$ |
140,756 |
|
|
$ |
32,968 |
|
|
23% |
Scilex segment |
|
|
6,458 |
|
|
|
7,031 |
|
|
|
(573 |
) |
|
(8%) |
Total research and development expenses |
|
$ |
180,182 |
|
|
$ |
147,787 |
|
|
$ |
32,395 |
|
|
22% |
R&D expenses include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our COVID-19, SP-102, SP-103, RTX, oncolytic virus, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses. We track external development costs by program; however, we do not allocate laboratory supplies, R&D materials, personnel costs, share-based payments, facilities costs or other internal costs to specific development programs.
The following table summarizes our research and development expenses for the three months ended September 30, 2022 and 2021:
26
|
|
Three months ended September 30, |
|
|
Increase (decrease) |
|
||||||||||
Type of expense |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Third party clinical and pre-clinical R&D expenses by program |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Abivertinib |
|
$ |
4,387 |
|
|
$ |
1,250 |
|
|
$ |
3,137 |
|
|
|
251 |
% |
Resiniferatoxin (“RTX”) |
|
|
5,744 |
|
|
|
2,463 |
|
|
|
3,281 |
|
|
|
133 |
% |
COVID-19 therapies and diagnostics, excluding Abivertinib |
|
|
5,307 |
|
|
|
6,553 |
|
|
|
(1,246 |
) |
|
|
-19 |
% |
Immuno-oncology and other programs |
|
|
12,925 |
|
|
|
6,159 |
|
|
|
6,766 |
|
|
|
110 |
% |
Total third party clinical and pre-clinical R&D expenses by program |
|
|
28,363 |
|
|
|
16,425 |
|
|
|
11,938 |
|
|
|
73 |
% |
Laboratory supplies and R&D materials expenses |
|
|
7,047 |
|
|
|
4,765 |
|
|
|
2,282 |
|
|
|
48 |
% |
Salary, consulting and other personnel costs |
|
|
17,127 |
|
|
|
13,833 |
|
|
|
3,294 |
|
|
|
24 |
% |
Non-cash share-based compensation expenses |
|
|
3,014 |
|
|
|
3,663 |
|
|
|
(649 |
) |
|
|
-18 |
% |
Facility, depreciation and other expenses |
|
|
11,201 |
|
|
|
8,868 |
|
|
|
2,333 |
|
|
|
26 |
% |
Total research and development expenses - Sorrento segment |
|
|
66,752 |
|
|
|
47,554 |
|
|
|
19,198 |
|
|
|
40 |
% |
Total research and development expenses - Scilex segment |
|
|
1,237 |
|
|
|
1,894 |
|
|
|
(657 |
) |
|
|
-35 |
% |
Total research and development expenses |
|
$ |
67,989 |
|
|
$ |
49,448 |
|
|
$ |
18,541 |
|
|
|
37 |
% |
The following table summarizes our research and development expenses, for the nine months ended September 30, 2022 and 2021:
|
|
Nine months ended September 30, |
|
|
Increase (decrease) |
|
||||||||||
Type of expense |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Third party clinical and pre-clinical R&D expenses by program |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Abivertinib |
|
$ |
8,769 |
|
|
$ |
1,682 |
|
|
$ |
7,087 |
|
|
|
421 |
% |
Resiniferatoxin (“RTX”) |
|
|
7,876 |
|
|
|
6,802 |
|
|
|
1,074 |
|
|
|
16 |
% |
COVID-19 therapies and diagnostics, excluding Abivertinib |
|
|
19,348 |
|
|
|
30,673 |
|
|
|
(11,325 |
) |
|
|
-37 |
% |
Immuno-oncology and other programs |
|
|
27,500 |
|
|
|
18,255 |
|
|
|
9,245 |
|
|
|
51 |
% |
Total third party clinical and pre-clinical R&D expenses by program |
|
|
63,493 |
|
|
|
57,412 |
|
|
|
6,081 |
|
|
|
11 |
% |
Laboratory supplies and R&D materials expenses |
|
|
19,327 |
|
|
|
14,766 |
|
|
|
4,561 |
|
|
|
31 |
% |
Salary, consulting and other personnel costs |
|
|
47,948 |
|
|
|
32,725 |
|
|
|
15,223 |
|
|
|
47 |
% |
Non-cash share-based compensation expenses |
|
|
9,150 |
|
|
|
11,549 |
|
|
|
(2,399 |
) |
|
|
-21 |
% |
Facility, depreciation and other expenses |
|
|
33,806 |
|
|
|
24,304 |
|
|
|
9,502 |
|
|
|
39 |
% |
Total research and development expenses - Sorrento segment |
|
|
173,724 |
|
|
|
140,756 |
|
|
|
32,968 |
|
|
|
23 |
% |
Total research and development expenses - Scilex segment |
|
|
6,458 |
|
|
|
7,031 |
|
|
|
(573 |
) |
|
|
-8 |
% |
Total research and development expenses |
|
$ |
180,182 |
|
|
$ |
147,787 |
|
|
$ |
32,395 |
|
|
|
22 |
% |
Third party clinical and pre-clinical R&D expenses for our Sorrento segment largely fluctuated as a result of the timing of clinical trial spend and the timing of our acquisition of ACEA Therapeutics, Inc. (“ACEA”) (Abivertinib), which occurred in June 2021. Salaries, personnel costs and facilities expenses increased as compared to the same periods in the prior year as we continue expanding our R&D personnel headcount and infrastructure to support our R&D programs.
Acquired In-process Research and Development (“IPR&D”) Expenses. Acquired IPR&D expenses during the three months ended September 30, 2021 totaled $11.1 million, of which $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period and $0.9 million related to investments in various licensing arrangements entered into during the period.
Acquired IPR&D expenses during the nine months ended September 30, 2022 totaled $12.6 million, which included $11.7 million related to our acquisition of Virex.
Acquired IPR&D expenses during the nine months ended September 30, 2021 totaled $23.6 million and related to an asset purchase agreement entered into with Aardvark Therapeutics, Inc. (“Aardvark”) whereby we acquired Aardvark’s Delayed Burst Release Low Dose Naltrexone (DBR-LDN) asset and intellectual property rights during the period and the entry into an exclusive license agreement with Icahn School of Medicine at Mount Sinai (“Mount Sinai”) whereby we acquired a worldwide, exclusive, sublicensable license to certain of Mount Sinai’s patents and monoclonal antibodies as well as certain related technical information during the period. Additionally, $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period and $0.9 million related to investments in various licensing arrangements entered into during the period.
27
Selling, General and Administrative (“SG&A”) Expenses.
|
|
Three Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
34,039 |
|
|
$ |
36,806 |
|
|
$ |
(2,767 |
) |
|
(8%) |
Scilex segment |
|
|
16,120 |
|
|
|
11,683 |
|
|
|
4,437 |
|
|
38% |
Total sales, general and administrative expenses |
|
$ |
50,159 |
|
|
$ |
48,489 |
|
|
$ |
1,670 |
|
|
3% |
|
|
Nine Months Ended September 30, |
|
|
Increase (decrease) |
|||||||||
Dollars in thousands |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|||
Sorrento segment |
|
$ |
100,786 |
|
|
$ |
106,184 |
|
|
$ |
(5,398 |
) |
|
(5%) |
Scilex segment |
|
|
42,087 |
|
|
|
36,092 |
|
|
|
5,995 |
|
|
17% |
Total sales, general and administrative expenses |
|
$ |
142,873 |
|
|
$ |
142,276 |
|
|
$ |
597 |
|
|
0% |
SG&A expenses relate to salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.
The decrease in SG&A expenses in our Sorrento segment during the three months ended September 30, 2022 was attributed to lower professional fees, including a decrease in legal and consulting costs by approximately $5.3 million and lower stock-based compensation expenses of $1.8 million. Personnel costs and infrastructure-related expenses increased by $3.1 million and $1.2 million, respectively, compared to the same period of the prior year.
The decrease in SG&A expenses in our Sorrento segment during the nine months ended September 30, 2022 was attributed to lower professional fees, including a decrease in legal and consulting costs, by approximately $10.2 million and lower stock-based compensation expenses of $7.5 million. Personnel costs and infrastructure-related expenses increased by $10.0 million and $2.2 million, respectively, compared to the same period of the prior year.
For the three and nine months ended September 30, 2022, the increases in SG&A expenses in our Scilex segment were attributed to increases in legal expenses compared to the same periods of the prior year.
Increase (decrease) on contingent consideration. Gain on contingent consideration for the three months ended September 30, 2022 was $0.7 million and was attributed to the decrease in fair value of the contingent consideration associated with our acquisition of ACEA.
Gain on contingent consideration for the nine months ended September 30, 2022 was $67.1 million and was attributed to the decrease in fair value of the contingent consideration associated with our acquisition of ACEA as further described in Note 6 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Loss on impairment of intangible assets. Loss on impairment of assets for the nine months ended September 30, 2022 was $90.8 million and was attributed to the impairment of IPR&D assets acquired from ACEA in 2021, as further described in Note 6 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Gain (loss) on Derivative Liabilities. Gain on derivative liabilities for the three months ended September 30, 2022 was $0.5 million compared to a loss on derivative liabilities of $1.8 million for the three months ended September 30, 2021 and was attributed to the change in fair value of the derivatives ascribed to those certain senior secured notes due 2026 issued by Scilex Pharma in September 2018 (the “Scilex Notes”) as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Gain on derivative liabilities for the nine months ended September 30, 2022 was $5.3 million compared to $0.1 million for the nine months ended September 30, 2021 and was also attributed to the change in fair value of the derivatives ascribed to the Scilex Notes as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Loss on Marketable Investments. Loss on marketable investments for the three and nine months ended September 30, 2022 was $16.1 million and $43.0 million, respectively, and reflects unrealized losses related to the change in fair value of our shares of Celularity.
28
During the three months ended September 30, 2021, we recorded $6.4 million of realized losses from the sale of our shares of ImmunityBio, Inc. and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity. We also recorded approximately $0.7 million in unrealized gains related to other investments during the period.
During the nine months ended September 30, 2021, we recorded $24.1 million of realized gains from the sale of our shares of ImmunityBio., Inc. during the period and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity. We also recorded approximately $0.7 million in unrealized gains related to other investments during the period.
Gain (loss) on debt extinguishment, net. During the three months ended September 30, 2022, we recorded a gain on debt extinguishment of $33.4 million related to the repayment of the outstanding principal on the Scilex Notes as described below.
During the nine months ended September 30, 2022, we recorded a net gain on debt extinguishment of $27.7 million, which was attributed to $28.6 million related to repurchases of the aggregate principal amount of the Scilex Notes as described below and a loss of debt extinguishment of $0.9 million attributed to repayments made on the Bridge Loan during the nine months ended September 30, 2022.
Loss on debt extinguishment during the nine months ended September 30, 2021 was $6.7 million and was primarily attributed to the repurchases of the outstanding principal on the Scilex Notes, and was partially offset by short-term debt forgiveness.
Interest Expense, net. Interest expense, net for the three months ended September 30, 2022 and 2021 was $0.8 million and $2.0 million, respectively. The decrease resulted from the Scilex Notes as a result of the repurchases of aggregate principal as further described in Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Interest expense, net for the nine months ended September 30, 2022 and 2021 was $6.4 million and $7.3 million, respectively. The decrease in interest expense was attributed to the Scilex Notes as a result of the repurchases of aggregate principal. We recorded an increase in interest expense related to the ACEA significant debt arrangements and the Bridge Loan as discussed below.
Income Tax Expense/Benefit. Income tax benefit for the three months ended September 30, 2022 was $1.0 million as compared to income tax expense of $0.4 million for the three months ended September 30, 2021. The decrease in income tax expense was primarily attributable to a one-time income tax payment in the prior year, offset by the impact of our valuation allowance on earnings in the current period.
Income Tax Expense / Benefit. Income tax benefit for the nine months ended September 30, 2022 was $0.6 million as compared to $0.5 million for the nine months ended September 30, 2021. The increase in income tax benefit was primarily attributable to the impact of our valuation allowance against current net loss and a decrease in shortfalls on stock-based compensation benefits, offset by a one-time payment in the prior year.
Net Loss. Net loss for the three months ended September 30, 2022 and 2021 was $90.6 million and $120.0 million, respectively. Net loss for the nine months ended September 30, 2022 and 2021 was $350.6 million and $284.3 million, respectively.
Liquidity and Capital Resources
As of September 30, 2022, we had $70.7 million in cash and cash equivalents. We have principally financed our operations through the liquidation of our short-term investments, underwritten public offerings, at-the-market facilities and private debt and equity financings, as we have not generated any significant product related revenue from our principal operations to date. We will need to raise additional capital before we exhaust our current cash resources in order to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally.
We will seek to raise additional funds through various potential sources, such as the liquidation of our marketable investments, equity and debt financings or through corporate collaboration, grant agreements and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.
We cannot be certain that additional funding will be available on acceptable terms, or at all. If we issue additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights,
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preferences or privileges senior to those of existing holders of common stock. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. We may also seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available.
We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance our product pipeline and other product candidates into clinical trials, (ii) continue our development of, and seek regulatory approvals for, our product candidates in clinical trials, (iii) expand our corporate infrastructure, (iv) incur our share of joint venture and collaboration costs, and (v) expand our business through the acquisition of new businesses, technologies and license agreements.
Marketable Investments
As of September 30, 2022, we owned 20,422,124 shares of Class A Common Stock of Celularity (Nasdaq: CELU).
Equity Offerings
In December 2021, we amended the amended and restated sales agreement (as amended, the “ATM Sales Agreement”) whereby we may issue and sell shares of our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, through Cantor Fitzgerald & Co., B. Riley Securities, Inc. and H.C. Wainwright & Co., LLC, as sales agents, to increase the amount of shares of our common stock that we may sell thereunder by an additional $5.0 billion in shares of our common stock. During the nine months ended September 30, 2022, we sold an aggregate of 151,148,373 shares of our common stock pursuant to the ATM Sales Agreement for aggregate net proceeds to us of approximately $340.0 million. Subsequent to September 30, 2022 and through November 4, 2022, we sold an aggregate of 3,589,340 shares of our common stock pursuant to the Amended Sales Agreement for aggregate net proceeds to us of approximately $5.5 million.
Scilex Notes
On June 2, 2022, we and Scilex Pharma entered into a Consent Under and Amendment No. 4 to Indenture (the “Indenture Amendment”) with U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee (the “Trustee”) and collateral agent (the “Agent”), and the beneficial owners of those certain senior secured notes due 2026 issued by Scilex Pharma in September 2018 (the “Scilex Notes”) listed on the signature pages thereto (the “Holders”), which amended that certain Indenture, dated September 7, 2018, by and among Scilex Pharma, us, the Trustee and the Agent, as amended (the “Indenture”).
Pursuant to the Indenture Amendment, (1) on June 3, 2022, Scilex Pharma repurchased approximately $41.4 million of the aggregate principal amount of the outstanding Scilex Notes at 100% of the principal amount thereof, (2) the Holders agreed that Scilex Pharma can repurchase the remaining principal amount of the Scilex Notes at any time on or before September 30, 2022 for $41.4 million (subject to reduction for any quarterly royalty payments) and upon such repurchase the Holders will forgive and discharge $28.0 million of the aggregate principal amount of the Scilex Notes, (3) the minimum cash requirement under the Indenture was reduced to $5.0 million in aggregate unrestricted cash equivalents at the end of each calendar month, and (4) the maximum aggregate principal amount of that certain Intercompany Promissory Note issued by Scilex Pharma to us on October 5, 2018 was increased from up to $25.0 million to up to $50.0 million.
In August 2022, we made principal payments towards the outstanding Scilex Notes totaling $1.8 million. On September 28, 2022, Scilex Pharma repurchased (the “Repurchase”) all of the outstanding aggregate principal amount of the Scilex Notes. As of immediately prior to the Repurchase, the aggregate principal amount of the Scilex Notes was approximately $67.7 million, and Scilex Pharma repurchased the Scilex Notes for an aggregate cash payment of approximately $39.7 million as the holders of the Scilex Notes forgave and discharged an aggregate of $28.0 million of principal amount of the Scilex Notes in connection with the Repurchase.
Bridge Loans
On September 30, 2022, we entered into a bridge loan pursuant to which we borrowed $41.6 million (the “September Bridge Loan”). The September Bridge Loan bears interest at 6% per annum and will mature on January 31, 2023. Upon the occurrence, and during the continuance, of an “Event of Default”, the September Bridge Loan shall bear interest at the rate of 15% per annum. The Company repaid $10.0 million of the September Bridge Loan in October 2022.
On February 16, 2022, we entered into a bridge loan pursuant to which we had borrowed $45.0 million. As of September 30, 2022, the Bridge Loan has been fully repaid.
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ACEA Significant Debt Arrangements
The outstanding principal amount under ACEA significant debt arrangements assumed in connection with our 2021 acquisition of ACEA was $25.9 million as of September 30, 2022. The ACEA significant debt arrangements are comprised of a series of loans with maturity dates that range from August 15, 2023 to August 15, 2028. Each loan is interest free for the first five years, after which time the interest rate is 5.39% per annum.
Contingent Consideration
We have contingent consideration obligations in connection with certain acquisition and licensing transactions that are contingent upon achieving certain specified milestones or the occurrence of certain events. Upon the achievement of such milestones or the occurrence of such events, we will be obligated to make certain cash or stock payments in accordance with the terms of such acquisition and license agreements.
Cash Flow Summary
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September 30, |
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September 30, |
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(in thousands) |
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Net cash provided by (used by) |
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Operating activities |
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$ |
(225,519 |
) |
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$ |
(209,684 |
) |
Investing activities |
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(23,484 |
) |
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82,052 |
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Financing activities |
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286,638 |
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110,475 |
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Use of Cash
Cash Flows from Operating Activities. Net cash used reflects the cash spent on our research activities and cash spent to support the commercial launch of our products.
We expect to continue to incur substantial and increasing losses and negative net cash flows from operating activities as we seek to expand and support our clinical and preclinical development and research activities, support the commercial launch of our products and fund our joint ventures, collaborations and other third-party agreements.
Cash Flows from Investing Activities. Net cash used by investing activities was $23.5 million, of which $6.5 million was related to our acquisition of Virex consideration paid in cash, approximately $9.1 million was primarily attributed to expenditures on laboratory equipment, and $7.8 million related to other acquisitions and investments.
Cash Flows from Financing Activities. During the nine months ended September 30, 2022, we received $340.0 million from sales of shares of our common stock pursuant to the ATM Sales Agreement, proceeds from short-term debt of $98.6 million and proceeds of $0.8 million from common stock option exercises. We repaid an aggregate of $106.0 million of the principal of the Scilex Notes, of which $84.8 million was attributed to principal included within financing activities and $21.2 million was attributed to effective interest included in operating activities. We also repaid $68.0 million in other short-term debt.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to debt, derivative liabilities, revenue recognition, leases, contingent liabilities and acquisition consideration payable, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022, and there have been no material changes during the three months ended September 30, 2022.
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Material Cash Requirements
As of September 30, 2022, there were no material changes outside of the ordinary course of business, in our outstanding material contractual obligations from those disclosed under the heading “Material Cash Requirements” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.
New Accounting Pronouncements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the three months ended September 30, 2022 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022, other than as described below.
Concentration Risk. During the fiscal years ended December 31, 2021, 2020 and 2019 and the three months ended March 31, 2022, Cardinal Health 105, LLC (“Cardinal Health”), which was the third-party logistics distribution provider for Scilex Pharma, was the sole customer of Scilex Pharma and sales to Cardinal Health represented 100% of the net revenue of Scilex Pharma. We obtain our commercial supply of ZTlido and our clinical supply of SP-103 exclusively from Oishi Koseido Co., Ltd. and ITOCHU CHEMICAL FRONTIER Corporation in Japan. This exposes us to concentration of customer and supplier risk. We monitor the financial condition of our customers, limit our credit exposure by setting credit limits, and have not experienced any credit losses for the years ended December 31, 2021, 2020 and 2019 or the three or nine months ended September 30, 2022. As we continue to expand the commercialization of ZTlido, we are not limited to the current customer and have elected to expand our distribution network. On April 2, 2022, Scilex Holding announced the expansion of its direct distribution network to national and regional wholesalers and pharmacies. Cardinal Health will continue to provide traditional third-party logistics functions for Scilex Pharma but was no longer the sole customer of Scilex Pharma during the three or nine months ended September 30, 2022.
Beginning on April 1, 2022, Scilex Pharma began selling ZTlido directly to three large distributors, McKesson Corporation, Cardinal Health, and AmerisourceBergen Corporation, as well as to numerous pharmacies. If we are unable to maintain a favorable relationship with Cardinal Health (or with any of its other two distributors), we expect that our revenue would decline and our business would be harmed as a result. We may be unable to control the timing of the delivery of ZTlido to distributors, and any financial uncertainty or loss of key logistic employees of Cardinal Health, as our only third-party logistics provider, may negatively impact our sales.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such terms are defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance. As a result, management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, management has concluded that as of September 30, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level. However, we believe the consolidated financial statements included in this Form 10-Q for the three and nine months ended September 30, 2022 present, in all material respects, our financial position, results of operations, comprehensive loss and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
As described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022, as a result of our former Chief Financial Officer`s passing in early 2022 as well as other considerations, management concluded that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, we identified certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities and leases did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represents a material weakness in our internal control over financial reporting as of December 31, 2021.
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To remediate the material weakness described above and to prevent similar deficiencies in the future, we have been implementing additional controls and procedures including:
• engaging additional independent third-party technical consultants to assist in performing the accounting analysis of complex transactions in the above mentioned accounting areas;
• recruiting and employing personnel with appropriate experience and technical expertise to enhance management’s review significant activities in the above-mentioned accounting areas; and
• conducting additional training for staff involved in the transactions in the above-mentioned accounting areas.
Our management will continue to improve the respective process and controls over the accounting areas affected by the identified material weakness. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q. Except for the implementation of additional controls and procedures as described above, there has been no change to our internal control over financial reporting during our most recent fiscal quarter that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information under the caption “Litigation” set forth in Note 10 in the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022, in Part I –Item 1A, Risk Factors, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report on Form 10-Q or presented elsewhere by management from time to time. Except as set forth below, there have been no material changes in our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.
Risks Related to Our Financial Position and Capital Requirements
We have incurred significant losses since inception and anticipate that we will incur continued losses for the foreseeable future.
As of September 30, 2022 and December 31, 2021, we had an accumulated deficit of $1,735.8 million and $1,386.6 million, respectively. We continue to incur significant research and development and other expenses related to our ongoing operations. We have incurred operating losses since our inception, expect to continue to incur significant operating losses for the foreseeable future, and we expect these losses to increase as we: (i) advance RTX, STI-6129 (anti-CD38 ADC), STI-1492 (anti-CD38 DAR-T), STI-6643 (anti-CD47 antibody), SP-103, SEMDEXATM and our other product candidates, including our COVID-19 related product candidates, STI-2099 (COVIDROPS), STI-9167 (COVISHIELD), STI-8282 (COVI-MSC) and STI-5656 (Abivertinib), into further clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) conduct further studies for our preclinical COVID-19 related product candidates to advance to clinical trials and seek regulatory approval; (iii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iv) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (v) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, (vi) invest in our joint ventures, collaborations or other third party agreements, (vii) incur expenses in conjunction with defending and enforcing our rights in various litigation matters, (viii) expand our corporate, development and manufacturing infrastructure, and (ix) support our subsidiaries, including Bioserv Corporation, Levena Biopharma US Inc., Scilex Holding Company (“Scilex Holding”) and SmartPharm Therapeutics, Inc., in their clinical trial, development and commercialization efforts. As such, we are subject to all risks incidental to the development of new biopharmaceutical products and related companion diagnostics, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
Risks Related to our Business and Industry
We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.
We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. For example, on April 3, 2019, we filed two legal actions against, among others, Patrick Soon-Shiong and entities controlled by him, asserting claims for, among other things, fraud and breach of contract, arising out of Dr. Soon-Shiong’s purchase of the drug Cynviloq™ from our company in May 2015. The actions allege that Dr. Soon-Shiong and the other defendants, among other things, acquired the drug Cynviloq™ for the purpose of halting its progression to the market. As an additional example, on May 26, 2020, Wasa Medical Holdings filed a putative federal securities class action against us, our President, Chief Executive Officer and Chairman of the Board of Directors, Henry Ji, Ph.D., and our SVP of Regulatory Affairs, Mark R. Brunswick, Ph.D., alleging that we, Dr. Ji and Dr. Brunswick made materially false and/or misleading statements to the investing public regarding STI-1499 and its ability to inhibit the SARS-CoV-2 virus infection. A second putative federal securities class action was filed in the U.S. District Court for the Southern District of California against the same defendants alleging the same claims and seeking the same relief. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. While we intend to pursue any claims made by us, or defend against any claims brought against us, vigorously,
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we cannot predict the outcomes of such claims. Any failure to prevail in any claims made by us or any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.
Price controls may be imposed, which may adversely affect our future profitability.
In some countries, including member states of the European Union (the “EU”), the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take a significant amount of time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices, and in certain instances render commercialization in certain markets infeasible or disadvantageous from a financial perspective. In some countries, we or our collaborators may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product and/or our product candidates to other available products in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third party payors or government authorities may lead to further pressure on the prices or reimbursement levels. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, the commercial launch of our product and/or product candidates could be delayed, possibly for lengthy periods of time, we or our collaborators may not launch at all in a particular country, we may not be able to recoup our investment in one or more product candidates, and there could be a material adverse effect on our business.
Recently, there has been considerable public and government scrutiny in the United States of pharmaceutical pricing and proposals to address the perceived high cost of pharmaceuticals. There have also been several recent state legislative efforts to address drug costs, which generally have focused on increasing transparency around drug costs or limiting drug prices or price increases. Adoption of new legislation at the federal or state level could affect demand for, or pricing of, our product candidates, if approved, and could diminish our ability to establish what we believe is a fair price for our products, ultimately diminishing our revenue for our products if they are approved.
In addition, on August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, includes policies that are designed to have a direct impact on drug prices and reduce drug spending by the federal government, which shall take effect in 2023. Under the Inflation Reduction Act of 2022, Congress authorized Medicare beginning in 2026 to negotiate lower prices for certain costly single-source drug and biologic products that do not have competing generics or biosimilars. This provision is limited in terms of the number of pharmaceuticals whose prices can be negotiated in any given year and it only applies to drug products that have been approved for at least 9 years and biologics that have been licensed for 13 years. Drugs and biologics that have been approved for a single rare disease or condition are categorically excluded from price negotiation. Further, the new legislation provides that if pharmaceutical companies raise prices in Medicare faster than the rate of inflation, they must pay rebates back to the government for the difference. The new law also caps Medicare out-of-pocket drug costs at an estimated $4,000 a year in 2024 and, thereafter beginning in 2025, at $2,000 a year.
Our plan to complete the transaction contemplated by the business combination agreement between Scilex Holding Company and Vickers Vantage Corp. I is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all and may not achieve the intended benefits, and will involve significant time, expense and management attention, any of which could negatively impact our businesses, financial condition and results of operations.
While we have previously announced that our majority owned subsidiary, Scilex Holding Company, entered into an agreement and plan of merger (the “Business Combination Agreement”) with Vickers Vantage Corp. I, a Cayman Islands exempted company (“Vickers”) and Vantage Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Vickers, there is no assurance that the transaction will be consummated. If the transactions contemplated by the Business Combination Agreement are not completed on favorable terms or at all, or during the prescribed time period set forth in the Business Combination Agreement, we may experience negative reactions from the financial markets and from our stockholders. Moreover, even if the business combination is ultimately completed, there is no assurance that we will realize the intended benefits from such transaction. Further, we will be required to devote significant management and employee attention and resources to matters relating to the business combination. These matters have the potential to disrupt us from conducting business operations or pursuing other business strategies and could adversely affect our business, financial condition, results of operations and cash flows.
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Impairment charges pertaining to goodwill, identifiable intangible assets or other long-lived assets from our mergers and acquisitions could have an adverse impact on our financial condition and results of operations.
The total purchase price pertaining to our acquisitions in recent years have been allocated to net tangible assets, identifiable intangible assets, in-process research and development and goodwill. We evaluate goodwill and indefinite-lived intangible assets for impairment annually in our fiscal fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. We evaluate finite-lived intangible assets and long-lived assets for impairment if events or changes in circumstances indicate that the carrying value of the long-lived asset may not be recoverable. The assessment of impairment involves significant judgment and projections about future performance.
Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire balance of our goodwill based on the quantitative assessment performed.
Moreover, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets become impaired, we will be required to incur material charges relating to the impairment. For example, in June 2022, we decided to put on hold for future evaluation the development of Abivertinib, which was acquired from ACEA Therapeutics, Inc. in 2021, for the treatment of hospitalized COVID-19 patients, which resulted in us determining that approximately $90.8 million associated with the acquired in-process research and development assets had been impaired and recorded within the loss on impairment of intangible assets in our consolidated statement of operations for the three months ended June 30, 2022. See Note 6 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. Any other impairment charges could have a material adverse impact on our results of operations and the market value of our common stock.
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Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors, employees, regulators and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (“ESG”) factors. Some investors and investor advocacy groups may use these factors to guide investment strategies and, in some cases, investors may choose not to invest in our company if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance, and a variety of organizations currently measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. Investors, particularly institutional investors, use these ratings to benchmark companies against their peers and if we are perceived as lagging with respect to ESG initiatives, certain investors may engage with us to improve ESG disclosures or performance and may also make voting decisions, or take other actions, to hold us and our board of directors accountable. In addition, the criteria by which our corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. In addition, the SEC has announced proposed rules that, among other matters, will establish a framework for reporting of climate-related risks. To the extent the proposed rules impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient.
We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, stockholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, share price, financial condition, or results of operations, including the sustainability of our business over time.
The market opportunity for our products and product candidates or any we develop may be smaller than we estimate.
The potential market opportunity for our products and product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for our products and product candidates include several key assumptions of the current market size and current pricing for commercially available products and are based on industry and market data obtained from industry publications, studies conducted by us, our industry knowledge, third-party research reports and other surveys. While we believe our estimates are reasonable and reliable, they may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of diseases and disorders. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for any product or product candidate we develop may be limited or may not be amenable to treatment with such product candidate, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.
Unstable market and economic conditions, including any that may be created by the conflict between Russia and Ukraine, may have serious adverse consequences on our business and financial condition.
Our business, financial condition and results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. For example, the COVID-19 pandemic resulted in businesses suspending or terminating global operations and travel, self-imposed or government-mandated quarantines, and an overall slowdown of economic activity in many areas. In addition, U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine, and the adoption of comprehensive sanctions in response thereto by, among others, the EU, the U.S., and the UK, which sanctions restrict a wide range of trade and financial dealings with Russia and Russian persons, as well as certain regions in Ukraine. A severe or prolonged economic downturn could result in a variety of risks to our business, including our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, service providers, manufacturers or other partners and there is a risk that one or more would not survive or be able to meet their commitments to us under such circumstances. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
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Previously enacted state laws in California seek to impose gender and diversity quotas for boards of directors of public companies headquartered in California.
In September 2018, California enacted Senate Bill 826 (“SB 826”), which generally required public companies with principal executive offices in California to have at least two female directors on its board of directors if the company has at least five directors, and at least three female directors on its board of directors if the company has at least six directors. On May 13, 2022, the Los Angeles Superior Court declared SB 826 unconstitutional and, although the California Secretary of State has directed counsel to file an appeal of decision, the State of California is currently precluded from enforcing SB 826.
Additionally, on September 30, 2020, California enacted Assembly Bill 979 (“AB 979”), which generally required public companies with principal executive offices in California to include specified numbers of directors from “underrepresented communities”. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. By December 31, 2021, each public company with principal executive offices in California was required to have at least one director from an underrepresented community. By December 31, 2022, a public company with more than four but fewer than nine directors would be required to have a minimum of two directors from underrepresented communities, and a public company with nine or more directors would need to have a minimum of three directors from underrepresented communities. On April 1, 2022, the Los Angeles Superior Court declared AB 979 unconstitutional and, although the California Secretary of State has filed a notice of appeal in the case, the State of California is currently precluded from enforcing AB 979.
If the State of California successfully appeals the court decisions regarding SB 826 or AB 979, we cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender or diversity quotas as previously required by SB 826 or AB 979, and our board of directors does not currently satisfy the quota previously required under SB 826 and, as currently constituted, would not satisfy the quota previously required under AB 979 by December 31, 2022. A failure to comply with any such quota requirement could result in fines from the California Secretary of State, and our reputation may be adversely affected.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may fluctuate significantly, and investors in our common stock may lose all or a part of their investment.
38
The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. For example, from January 3, 2022 to October 31, 2022, our closing stock price ranged from $1.24 to $4.90 per share. The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:
• actual or anticipated adverse results or delays in our clinical trials;
• our failure to commercialize our product candidates, if approved;
• unanticipated serious safety concerns related to the use of any of our product candidates;
• adverse regulatory decisions;
• changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals;
• legal disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our product candidates, government investigations and the results of any proceedings or lawsuits, including, but not limited to, patent or stockholder litigation;
• our decision to initiate a clinical trial, not initiate a clinical trial or to terminate an existing clinical trial;
• our dependence on third parties, including CROs;
• announcements of the introduction of new products by our competitors;
• market conditions in the pharmaceutical and biotechnology sectors;
• announcements concerning product development results or intellectual property rights of others;
• future issuances of common stock or other securities;
• the addition or departure of key personnel;
• failure to meet or exceed any financial guidance or expectations regarding development milestones that we may provide to the public;
• actual or anticipated variations in quarterly operating results;
• our failure to meet or exceed the estimates and projections of the investment community;
• overall performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies;
• conditions or trends in the biotechnology and biopharmaceutical industries;
• introduction of new products offered by us or our competitors;
• announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
• issuances of debt or equity securities;
• sales of our common stock by us or our stockholders in the future;
• trading volume of our common stock;
• ineffectiveness of our internal controls;
• publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;
• failure to effectively integrate the acquired companies’ operations;
• general political and economic conditions;
• effects of natural or man-made catastrophic events;
• effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic; and
39
• other events or factors, many of which are beyond our control.
Further, the equity markets in general have recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility of our common stock might worsen if the trading volume of our common stock is low. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common stock.
Our investors could experience substantial dilution of their investments as a result of subsequent exercises of our outstanding options, including the CEO Performance Award, or the grant of future equity awards by us.
As of September 30, 2022, 75.2 million shares of our common stock were reserved for issuance under our equity incentive plans, of which 21.3 million shares of our common stock were subject to options outstanding at such date at a weighted-average exercise price of $6.06 per share, 6.9 million shares of our common stock were subject to outstanding restricted stock units, 38.9 million shares of our common stock were reserved for issuance pursuant to our 2019 Stock Incentive Plan and 6.7 million shares of our common stock were reserved for issuance pursuant to our 2020 Employee Stock Purchase Plan. In addition, 24,935,882 shares of our common stock are subject to the 10-year CEO performance award granted to Dr. Ji that is tied solely to achieving market capitalization milestones and has an exercise price of $17.30 per share. To the extent outstanding options are exercised, our existing stockholders may incur dilution.
We rely on equity awards to motivate current employees and to attract new employees. The grant of future equity awards by us to our employees and other service providers may further dilute our stockholders.
We have identified a material weakness in our internal control over financial reporting, and our financial controls and procedures may not in the future be sufficient to ensure timely and reliable reporting of financial information, which could, if not remediated, result in a material misstatement in our financial statements and could adversely affect our future results of operations, our stock price, and our ability to raise capital.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As previously disclosed on our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2022, our former Chief Financial Officer passed away unexpectedly on January 6, 2022. Due in large part to the unexpected passing of our former Chief Financial Officer, our management has identified that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities and leases did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represented a material weakness in our internal control over financial reporting as of December 31, 2021. The material weakness did not result in a restatement of previously issued annual consolidated financial statements or condensed interim consolidated financial statements.
As a result of the material weakness, we are in the process of implementing remediation measures including, but not limited to, (1) engaging additional independent third-party technical consultants to assist in performing the accounting analysis of complex transactions in the above mentioned accounting areas; (2) recruiting and employing personnel with appropriate experience and technical expertise to enhance management’s review significant activities in the above-mentioned accounting areas; and (3) conducting additional training for staff involved in the transactions in the above-mentioned accounting areas. We believe that our remediation measures, if effectively implemented, will provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). We cannot assure you that the measures we have taken to date or any measures we may take in response to the material weakness in the future will be sufficient to remediate such material weakness or to avoid potential future material weaknesses. Any failure to implement these improvements to our internal control over financial reporting would result in a continued material weakness in our internal control and could impact our ability to produce reliable financial reports, effectively manage the company or prevent fraud, and could potentially harm our business and our performance. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. If we experience future material weaknesses or deficiencies in internal controls and we are unable to correct them in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC, will be adversely affected. Any such failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
40
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No. |
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Description |
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2.1*^ |
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2.2* |
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2.3* |
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3.1 |
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3.2 |
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3.3 |
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4.1 |
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4.2 |
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4.3 |
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4.4 |
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4.5 |
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4.6 |
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4.7 |
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4.8 |
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4.9 |
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4.10 |
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4.11 |
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4.12 |
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4.13 |
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4.14 |
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4.15 |
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10.1* |
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10.2 |
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10.3 |
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10.4† |
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31.1 |
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31.2 |
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32.1† |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
42
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
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Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL) (embedded within the Inline XBRL document) |
* Non-material schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.
+ Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.
^ Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) information that the Registrant treats as private or confidential. The Registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC.
# Management contract or compensatory plan.
† Furnished herewith.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Sorrento Therapeutics, Inc. |
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Date: |
November 8, 2022 |
By: |
/s/ Henry Ji, Ph.D. |
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Henry Ji, Ph.D. |
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Chairman of the Board of Directors, Chief Executive Officer, President |
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(Principal Executive Officer) |
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Date: |
November 8, 2022 |
By: |
/s/ Elizabeth Czerepak |
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Elizabeth Czerepak |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial Officer) |
44
Exhibit 10.4
BRIDGE LOAN AGREEMENT
Dated as of September 30, 2022
Sorrento Therapeutics, Inc., a Delaware corporation (the “Borrower”), and B. Riley Commercial Capital, LLC (the “Lender”) agree as follows:
AMOUNTS AND TERMS OF THE ADVANCES
The Lender agrees, on the terms and conditions hereinafter set forth, to make an advance (the “Advance”) to the Borrower, into the account of the Borrower at the Lender, on the date hereof in an amount not to exceed $41,670,000.00 (the “Commitment”).
The Borrower agrees to pay to the Lender commitment fee of 1.0% of the aggregate amount of the Advance specified in the Advance Notice (the “Commitment Fee”), which Commitment Fee shall be earned and payable upon the Lender making the Advance to the Borrower, and which Commitment Fee the Borrower hereby directs the Lender to deduct from the amount of the Advance provided to the Borrower pursuant to Section 1.02(a).
The Borrower shall repay the aggregate unpaid principal amount of the Advance in accordance with a promissory note of the Borrower, in substantially the form of Exhibit A hereto (the “Note”), evidencing the indebtedness resulting from the Advance and delivered to the Lender pursuant to Article II.
2
The Borrower shall pay interest on the unpaid principal amount of the Advance from the date of such Advance until such principal amount shall be paid in full, at a rate equal at all times to 6.0% per annum; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate equal at all times to 15% per annum. In addition, upon the occurrence and during the continuance of an Event of Default (defined below), the Advance shall bear interest at the rate equal at all times to 15% per annum.
The Borrower shall have the right prior to the Maturity Date to prepay, plus any accrued but unpaid interest thereon, any principal amount of the Advance.
CONDITIONS OF LENDING
The obligation of the Lender to make the Advance is subject to the condition precedent that the Lender shall have received on or before the day of such Advance the following, each dated such day, in form and substance reasonably satisfactory to the Lender:
3
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
4
COVENANTS OF THE BORROWER
So long as the Note shall remain unpaid or the Lender shall have any Commitment hereunder, the Borrower will, unless the Lender shall otherwise consent in writing:
5
So long as the Note shall remain unpaid or the Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Lender:
6
7
8
EVENTS OF DEFAULT
If any of the following events (“Events of Default”) shall occur and be continuing:
then, and in any such event, the Lender (i) may, by notice to the Borrower, declare its obligation to make the Advance to be terminated, whereupon the same shall forthwith terminate, and (ii) may, by notice to the Borrower, declare the Note, all interest thereon and all other amounts payable
9
under this Agreement to be forthwith due and payable, whereupon the Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any of its subsidiaries under the Federal Bankruptcy Code, (a) the obligation of the Lender to make Advances shall automatically be terminated and (b) the Advances, the Note, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.
MISCELLANEOUS
No amendment or waiver of any provision of this Agreement or the Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
All notices and other communications required or permitted to be given by any party to any other party pursuant to the terms of this Agreement shall be in writing, unless otherwise specified, and shall be delivered: if to the Borrower, at its address at 4955 Directors Place, San Diego, CA 92121, Attention: Henry Ji, Ph.D.; and if to the Lender, at its address at 11100 Santa Monica Blvd, Ste 800, Los Angeles, CA 90025, Attention: General Counsel; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. Each such notice or other communication shall be deemed given (i) when delivered personally, by email or by verifiable facsimile transmission (with an original to follow) on or before 4:30 p.m., New York City time, on a Business Day or, if such day is not a Business Day, on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to a nationally-recognized overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid).
No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
The Borrower agrees to pay promptly after demand all reasonable and documented costs and expenses in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Note and the other documents to be delivered hereunder,
10
including, without limitation, plus disbursements for searches, recordings and similar expenses for counsel for the Lender with respect to the negotiation and delivery of this Agreement and the Note, in all cases in an amount not to exceed $25,000. The Borrower further agrees to pay promptly after demand all reasonable and documented costs and expenses, if any (including reasonable outside counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Note and the other documents to be delivered hereunder, including, without limitation, reasonable outside counsel fees and expenses in connection with the enforcement of rights under this Section 6.04. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement, the Note and the other documents to be delivered hereunder, and agrees to save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes.
Upon the occurrence and during the continuance of any Event of Default the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, but excluding balances held or assets in respect of payroll accounts, employee benefit accounts, trust accounts, withholding accounts and other similar fiduciary accounts to the extent such funds are necessary to pay payroll, employee benefits and other similar payments accrued and/or payable in the ordinary course of business) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Note, whether or not the Lender shall have made any demand under this Agreement or the Note and although such obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have.
This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender. This Agreement and the Note may not be assigned or transferred by the Lender to any person other than (a) an affiliate of the Lender or (b) so long as no Event of Default is then continuing, any other person (other than a natural person) in the business of making loans and other extensions of credit with the prior written consent of the Borrower. The Lender may pledge this Agreement and the Note and grant security interests herein and therein to any financing source of the Lender.
This Agreement and the Note shall be governed by, and construed in accordance with, the laws of the State of New York.
11
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
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SORRENTO THERAPEUTICS, INC. |
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By: |
/s/ Henry Ji, Ph.D. |
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Name: |
Henry Ji, Ph.D. |
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Title: |
President & CEO |
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B. Riley COMMERCIAL CAPITAL, LLC |
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By: |
/s/ Phillip J. Ahn |
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Name: |
Phillip J. Ahn |
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Title: |
CFO |
[Signature Page to Bridge Loan Agreement]
EXHIBIT A
PROMISSORY NOTE
$41,670,000 |
Dated: September 30, 2022 |
FOR VALUE RECEIVED, the undersigned, SORRENTO THERAPEUTICS, INC., a Delaware corporation (the “Borrower”), HEREBY PROMISES TO PAY to B. Riley COMMERCIAL CAPITAL, LLC (the “Lender”) the principal amount of FORTY-ONE MILLION SIX HUNDRED SEVENTY THOUSAND DOLLARS ($41,670,000) or, if less, the aggregate principal amount of the Advance made by the Lender to the Borrower pursuant to the Loan Agreement (as hereinafter defined) outstanding on the Maturity Date (as defined in the Loan Agreement).
The Borrower promises to pay interest on the principal amount of the Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Loan Agreement referred to below.
Principal, interest fees and expenses hereunder and under the Loan Agreement are payable in lawful money of the United States of America to the Lender at 11100 Santa Monica Blvd, Ste 800, Los Angeles, CA 90025, in same day funds.
This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Bridge Loan Agreement dated as of September 30, 2022 (as may be amended or restated from time to time, the “Loan Agreement”), between the Borrower and the Lender. The Loan Agreement, among other things, (i) provides for the making of an advance (the “Advance”) by the Lender to the Borrower in an aggregate principal amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from such Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified.
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SORRENTO THERAPEUTICS, INC. |
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By: |
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Name: Henry Ji, Ph.D. |
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Title: President & CEO |
-1-
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Henry Ji, Ph.D., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sorrento Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Henry Ji, Ph.D. |
Henry Ji, Ph.D. Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) |
Dated: November 8, 2022
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Elizabeth Czerepak, certify that:
Dated: November 8, 2022
/s/ Elizabeth Czerepak |
Elizabeth Czerepak Chief Financial Officer |
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATIONS OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Henry Ji, principal executive officer of Sorrento Therapeutics, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
Date: |
November 8, 2022 |
By: |
/s/ Henry Ji, Ph.D. |
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Henry Ji, Ph.D. |
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Chairman of the Board of Directors, Chief Executive Officer and President |
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(Principal Executive Officer) |
I, Elizabeth Czerepak, principal financial officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:
Date: |
November 8, 2022 |
By: |
/s/ Elizabeth Czerepak |
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Elizabeth Czerepak |
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Chief Financial Officer |
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(Principal Financial Officer) |
A signed original of these certifications has been provided to Sorrento Therapeutics, Inc. and will be retained by Sorrento Therapeutics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Sorrento Therapeutics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.