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. (together with its subsidiaries, “Sorrento,” the “Company,” “we,” “us,” and “our”) is a clinical and commercial stage biopharmaceutical company developing a portfolio of next-generation treatments for three major therapeutic areas: cancer, infectious disease and pain. We are focused on transforming science into Saving Life Medicines™ by advancing innovative product programs into focused commercial entities, like Scilex Holding Company (Nasdaq: SCLX) (“Scilex Holding”).
Cancer. Our proprietary fully human G-MAB™ antibody library and ACEA small molecule library are the engines driving an innovative pipeline of new solutions for cancer. These molecular entities are then enhanced 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 are focused on preventing, detecting and treating in the fight against COVID-19 today, and aim to be positioned to address the pandemic threats of tomorrow. We have applied our antibody and small molecule capability to develop highly sensitive and rapid diagnostics, and multi-modal 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) 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. Therapeutic solutions include a next-generation mRNA Omicron vaccine (STI-1557), a next-generation protease inhibitor antiviral pill (STI-1558) as a stand-alone treatment (not requiring the Ritonavir booster) and a variant agnostic mesenchymal stromal cell therapy for people with “long” COVID. We also continue to evaluate neutralizing antibody approaches effective against emerging variants of concern.
Pain. In November 2022, we announced the Nasdaq debut of Scilex Holding following the completion of its business combination (the “Business Combination”) with Vickers Vantage Corp. I, a special purpose acquisition company. Scilex Holding, with two commercial products and a robust pipeline, is focused on becoming the global pain management leader committed to social, environmental, economic and ethical principles to responsibly develop pharmaceutical products to maximize quality of life. Scilex Holding is an innovative revenue-generating company with its flagship product, ZTlido®, launched in October 2018 as a prescription lidocaine topical product, which has demonstrated superior adhesion and bioavailability compared to current lidocaine patches. In 2022, Scilex Holding also entered into an exclusive agreement with Romeg Therapeutics, LLC to market and distribute U.S. Food and Drug Administration (the “FDA”)-approved Gloperba® in the U.S. for painful gout flares. Scilex Holding has built a commercial organization focused on neurologists and pain specialists and intends to leverage this 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. SEMDEXA™ has completed its pivotal study and Scilex Holding is preparing for its new drug application submission.
We are also developing Resiniferatoxin (“RTX”), a naturally occurring non-opioid 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.
Voluntary Filing Under Chapter 11
As previously reported in our Current Report on Form 8-K filed with the SEC on February 13, 2023, we and our wholly owned direct subsidiary, Scintilla Pharmaceuticals, Inc. (“Scintilla” and together with us, the “Debtors”), commenced voluntary proceedings under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the
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Southern District of Texas (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered by the Bankruptcy Court under the caption In re Sorrento Therapeutics, Inc., et al. (the “Chapter 11 Cases”). We continue to operate our business in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
Prior to commencing the Chapter 11 Cases, we had been engaged in arbitration before the American Arbitration Association against NantPharma, LLC (“NantPharma”) relating to breaches of the May 14, 2015 Stock Sale and Purchase Agreement entered into between us and NantPharma related to the development of the cancer drug Cynviloq™ (the “Cynviloq Arbitration”). In April 2019, we filed an action in the Los Angeles Superior Court (the “Court”) derivatively on behalf of Immunotherapy NANTibody LLC (“NANTibody”) against NantCell, Inc. (“NantCell”) and Patrick Soon-Shiong, among others, related to alleged breaches of the June 11, 2015 Limited Liability Company Agreement for NANTibody entered into between us and NantCell (the “Derivative Action”). The suit alleges breaches of fiduciary duties and seeks, among other things, a declaration that the Assignment Agreement entered into on July 2, 2017, between NantPharma and NANTibody is void and an equitable unwinding of the Assignment Agreement. The suit calls for the restoration of $90.05 million to the NANTibody capital account, thereby restoring our equity method investment in NANTibody to our invested amount as of June 30, 2017 of $40.0 million. The trial is scheduled to begin on July 17, 2023.
Additionally, in 2020, we filed a legal action against Patrick Soon-Shiong in the Court, asserting claims for fraudulent inducement and common law fraud alleging that, among other things, Dr. Soon-Shiong acquired the drug Cynviloq for the purpose of halting its progression to the market. This action is pending.
We had also been engaged in arbitration before the American Arbitration Association against NantCell and NANTibody relating to alleged breaches of the April 21, 2015 Exclusive License Agreement entered into between us and NantCell and the June 11, 2015 Exclusive License Agreement entered into between us and NANTibody (the “NantCell/NANTibody Arbitration”).
On December 2, 2022, the arbitrator in the NantCell/NANTibody Arbitration issued an award granting contractual damages and pre-award interest in the amounts of $156,829,562 to NantCell and $16,681,521 to NANTibody, exclusive of post-award, prejudgment interest, which will accrue at 9% per annum (the “Nant Award”). On December 20, 2022, the arbitrator in the Cynviloq Arbitration issued an award granting contractual damages of $125 million to us, reflecting the value of lost milestone payments for the approval of Cynviloq for the treatment of breast and lung cancers (the “Cynviloq Award”).
On February 7, 2023, the Court confirmed the Nant Award and issued a 70-day stay of enforcement of the judgment beyond $50 million (i.e., the difference between the amount of the Nant Award and amount of the Cynviloq Award).
Following such confirmation, we believed that NantCell and NANTibody, in an attempt to satisfy the unstayed $50 million portion of the Nant Award, would imminently take steps to levy our assets, which would cause significant disruption and harm to our business, including our ability to continue developing life-saving and cutting-edge drugs. To protect our business and maximize its value, on February 13, 2023, we commenced the Chapter 11 Cases.
On March 16, 2023, the Court granted our motion to confirm the award in the Cynviloq Arbitration over NantPharma’s opposition. On April 7, 2023, the Court entered final judgment (“Final Judgment”) upon the confirmed award in our favor in the amount of $127,686,210, which includes arbitration costs and accrued interest on the award since December 20, 2022. The Final Judgment is accruing interest at the rate of 10 percent per annum, from March 16, 2023.
Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court (the “Bankruptcy Docket”), is available online at https://cases.stretto.com/sorrento, a website administered by Stretto, a third-party bankruptcy claims and noticing agent. The information on that website is not incorporated by reference into, and does not constitute part of, this Quarterly Report on Form 10-Q. For a full description of the Chapter 11 Cases and the proceedings therein, you may review the Bankruptcy Docket.
Debtor-in-Possession Financing
As previously disclosed in our Current Report on Form 8-K filed with the SEC on February 22, 2023 (the “February 22 Form 8-K”), on February 19, 2023, the Debtors executed that certain Debtor-In-Possession Term Loan Facility Summary of Terms and Conditions (the “DIP Term Sheet”) with JMB Capital Partners Lending, LLC (“JMB Capital” or the “DIP Lender”), pursuant to which JMB Capital (or its designees or its assignees) provided the Debtors with a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $75,000,000 in term loan commitments (the “DIP Facility”), subject to the terms and conditions set forth in the DIP Term Sheet.
As previously disclosed in the February 22 Form 8-K, at a hearing before the Bankruptcy Court on February 21, 2023, the Bankruptcy Court entered an interim order (the “Interim DIP Order”) approving the DIP Facility on an interim basis and providing the Debtors with the necessary liquidity to continue to operate in Chapter 11. Upon entry of the Interim DIP Order and satisfaction of all applicable conditions precedent, as set forth in the DIP Term Sheet, the Debtors were authorized to make a single, initial draw of $30,000,000 on the DIP Facility (the “Initial Draw”). The Debtors then negotiated definitive financing documentation, including a Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “DIP Credit Agreement”) and other documents evidencing the DIP Facility (collectively with the DIP Credit Agreement, the “DIP Documents”).
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As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 31, 2023, after a hearing before the Bankruptcy Court on March 29, 2023, the Bankruptcy Court entered a final order (the “Final DIP Order”) approving the DIP Facility on a final basis and providing the Debtors with access to the remaining $45,000,000 of the DIP Facility (subject to the terms, conditions, and covenants set forth in the DIP Documents), through additional draws of no less than $5,000,000, each upon five business days’ written notice to the DIP Lender, and the Debtors and DIP Lender proceeded to enter into the DIP Documents on March 30, 2023. Among other terms, the DIP Facility bears interest at a per annum rate equal to 14% payable in cash on the first day of each month in arrears (and a default interest rate that shall accrue at an additional per annum rate of 3% plus the non-default interest, payable in cash on the first day of each month). The Debtors are required to pay to the DIP Lender a commitment fee equal to 2.5% of the total amount of the DIP Commitment (which was paid out of the Initial Draw), a funding fee equal to 2.5% of the amount of each draw and upon repayment or satisfaction of the DIP Loans (in whole or in part), an exit fee equal to 7% of the total amount of the DIP Commitments and other fees and charges as described in the DIP Documents. The DIP Facility is secured by first-priority liens on substantially all of the Debtors’ unencumbered assets, subject to certain enumerated exceptions, and second-priority liens on those assets of the Debtors that are encumbered by certain permitted liens (as set forth in the Final DIP Order).
The DIP Facility matures on the earliest of: (i) July 31, 2023; (ii) the effective date of any chapter 11 plan of reorganization with respect to the Debtors; (iii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iv) the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance with the DIP Documents (each as defined in the DIP Term Sheet); (v) the dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; and (vi) and (vi) forty-five (45) days after the filing of the DIP Motion (or such later date as agreed to by the DIP Lender), unless the Final Order has been entered by the Bankruptcy Court on or prior to such date. The DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a chapter 11 plan.
As of March 31, 2023, the total outstanding principal balance on the DIP Facility was $30.0 million. Upon receipt of the Initial Draw, we recorded certain lender fees as described above of $7.9 million. We also recorded $0.4 million in interest expense relating to the per annum rate equal to 14% payable in cash during the three months ended March 31, 2023. Subsequent to March 31, 2023, we received an additional draw from the DIP Facility of $20.0 million.
Creditor and Equity Holder Committees
On February 28, 2023, the Office of the United States Trustee (the “U.S. Trustee”) appointed an Official Committee of Unsecured Creditors, which was reconstituted on March 28, 2023. The purpose of the Official Committee of Unsecured Creditors is to represent the interests of our unsecured creditors. On April 10, 2023, the U.S. Trustee appointed an Official Committee of Equity Security Holders, which was reconstituted on April 14, 2023. The purpose of the Official Committee of Equity Security Holders is to represent the interests of our equity security holders.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Bankruptcy Petitions automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, amend or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including, where applicable, a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. As of March 31, 2023, no executory contracts or leases were filed with the Bankruptcy Court to assume, amend or reject certain executory contracts and unexpired leases.
Claims Reconciliation
The Debtors are in the process of reviewing, investigating, and reconciling proofs of claims filed against the Debtors with the amounts reflected in their books and records. The Debtors will continue the claims reconciliation process and object, as necessary, to asserted claims, including on the basis that they have been amended or superseded by subsequently filed proofs of claims, are without merit, have already been paid, are overstated or should be adjusted or expunged for other reasons. As a result of this process, the
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Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. As part of its ongoing review, the Company is not aware of any claims that may require a material adjustment to the accounts and balances as reported as of March 31, 2023.
Bid Procedures
As previously disclosed in our Current Report on Form 8-K filed with the SEC on April 20, 2023, on April 14, 2023, the Bankruptcy Court entered an order approving procedures for the Debtors to conduct a dual-track (i) financing process for the potential raising of debt, equity, or hybrid financing or consummation of a restructuring transaction through a chapter 11 plan of reorganization and (ii) marketing process for the sale or disposition of all or any portion of the Debtors’ assets under section 363 of the Bankruptcy Code, including (x) the Debtors’ equity interests in its non-debtor subsidiaries, including, but not limited to, Scilex Holding, and (y) the Debtors’ other assets.
Listing
On February 13, 2023, we received written notice (the “Delisting Notice”) from the staff of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, the staff of Nasdaq had determined that our common stock will be delisted from Nasdaq, effective February 23, 2023. In the Delisting Notice, the staff of Nasdaq referenced the Chapter 11 Cases and associated public concerns raised by them, concerns regarding the residual equity interest of the existing listed securities holders and concerns about our ability to sustain compliance with all requirements for continued listing on Nasdaq. In accordance with the Delisting Notice, trading of our common stock on Nasdaq was suspended at the opening of business on February 23, 2023, and at such time, our common stock commenced trading on the Pink Open Market under the symbol “SRNEQ”.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Increase (decrease) |
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
(in thousands, except percentages) |
Sorrento Therapeutics segment |
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
15 |
|
|
$ |
3,178 |
|
|
$ |
(3,163 |
) |
|
-100% |
Service revenues |
|
|
5,654 |
|
|
|
8,395 |
|
|
|
(2,741 |
) |
|
(33%) |
Total revenues |
|
$ |
5,669 |
|
|
$ |
11,573 |
|
|
$ |
(5,904 |
) |
|
(51%) |
Scilex segment |
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
10,582 |
|
|
$ |
6,812 |
|
|
$ |
3,770 |
|
|
55% |
Total revenues |
|
$ |
16,251 |
|
|
$ |
18,385 |
|
|
$ |
(2,134 |
) |
|
(12%) |
The decrease in revenues in our Sorrento Therapeutics segment was attributed to lower COVISTIX™ product sales, lower contract manufacturing service revenues and lower other service revenues compared to the same period of the prior year.
The increase in revenues in our Scilex segment was driven by an increase in gross product sales of ZTlido® by approximately 49%, offset by an increase in rebates.
Cost of Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended March 31, |
|
|
Increase |
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
(in thousands, except percentages) |
Sorrento Therapeutics segment |
|
$ |
1,595 |
|
|
$ |
4,614 |
|
|
$ |
(3,019 |
) |
|
(65%) |
Scilex segment |
|
|
3,591 |
|
|
|
1,144 |
|
|
|
2,447 |
|
|
214% |
Total cost of revenues |
|
$ |
5,186 |
|
|
$ |
5,758 |
|
|
$ |
(572 |
) |
|
(10%) |
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.
The decrease in cost of revenues in our Sorrento Therapeutics segment was consistent with the decrease in revenues.
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The increase in cost of revenues in our Scilex segment was primarily due to an increase in gross revenue of approximately 49% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 and a royalty expense of $2.1 million in the three months ended March 31, 2023 that started to accrue in the second quarter of 2022.
Research and Development (“R&D”) Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended March 31, |
|
|
Increase (decrease) |
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
(in thousands, except percentages) |
Sorrento Therapeutics segment |
|
$ |
41,069 |
|
|
$ |
61,346 |
|
|
$ |
(20,277 |
) |
|
(33%) |
Scilex segment |
|
|
2,736 |
|
|
|
2,631 |
|
|
|
105 |
|
|
4% |
Total research and development expenses |
|
$ |
43,805 |
|
|
$ |
63,977 |
|
|
$ |
(20,172 |
) |
|
(32%) |
R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our FUJOVEE (Abivertinib), OVYDSO, SP-102, SP-103, RTX, oncolytic virus, ADC and oncology programs, among others. 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.
Due to the ever-changing SARS-CoV-2 virus evading antibody-mediated immunity and the reduced severity of the COVID pandemic worldwide, we re-prioritized our R&D efforts and reduced expenditures on our COVID-related diagnostics, vaccine and antibody-based therapeutics, as well as our earlier stage immuno-oncology pre-clinical and clinical programs. We utilized the R&D expense reduction to focus on late-stage clinical product candidate development.
The following table summarizes our R&D expenses by program for the quarters ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands |
|
Three Months Ended March 31, |
|
|
Increase (decrease) |
|
Type of expense |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
Third party clinical and pre-clinical R&D expenses by program |
|
|
|
|
|
|
|
|
|
|
|
|
Abivertinib |
|
$ |
3,006 |
|
|
$ |
1,013 |
|
|
$ |
1,993 |
|
|
|
197 |
% |
Resiniferatoxin (“RTX”) |
|
|
1,466 |
|
|
|
1,520 |
|
|
|
(54 |
) |
|
|
-4 |
% |
COVID-19 therapies and diagnostics, excluding Abivertinib |
|
|
3,465 |
|
|
|
10,526 |
|
|
|
(7,061 |
) |
|
|
-67 |
% |
Immuno-oncology and other programs |
|
|
2,125 |
|
|
|
9,392 |
|
|
|
(7,267 |
) |
|
|
-77 |
% |
Total third party clinical and pre-clinical R&D expenses by program |
|
|
10,062 |
|
|
|
22,451 |
|
|
|
(12,389 |
) |
|
|
-55 |
% |
Laboratory supplies and R&D materials expenses |
|
|
4,781 |
|
|
|
9,529 |
|
|
|
(4,748 |
) |
|
|
-50 |
% |
Salary, consulting and other personnel costs |
|
|
14,602 |
|
|
|
14,613 |
|
|
|
(11 |
) |
|
|
0 |
% |
Non-cash share-based compensation expenses |
|
|
2,460 |
|
|
|
3,190 |
|
|
|
(730 |
) |
|
|
-23 |
% |
Facility, depreciation and other expenses |
|
|
9,164 |
|
|
|
11,563 |
|
|
|
(2,399 |
) |
|
|
-21 |
% |
Total research and development expenses - Sorrento Therapeutics segment |
|
|
41,069 |
|
|
|
61,346 |
|
|
|
(20,277 |
) |
|
|
-33 |
% |
Total research and development expenses - Scilex segment |
|
|
2,736 |
|
|
|
2,631 |
|
|
|
105 |
|
|
|
4 |
% |
Total research and development expenses |
|
$ |
43,805 |
|
|
$ |
63,977 |
|
|
$ |
(20,172 |
) |
|
|
-32 |
% |
Acquired In-process Research and Development Expenses.
There were no acquired in-process research and development expenses during the three months ended March 31, 2023. Acquired in-process research and development expenses during the three months ended March 31, 2022 totaled $12.3 million, which included $11.7 million related to our acquisition of Virex Health, Inc.
Selling, General and Administrative (“SG&A”) Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended March 31, |
|
|
Increase (decrease) |
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
(in thousands, except percentages) |
Sorrento Therapeutics segment |
|
$ |
27,675 |
|
|
$ |
33,419 |
|
|
$ |
(5,744 |
) |
|
(17%) |
Scilex segment |
|
|
27,305 |
|
|
|
10,908 |
|
|
|
16,397 |
|
|
150% |
Total sales, general and administrative expenses |
|
$ |
54,980 |
|
|
$ |
44,327 |
|
|
$ |
10,653 |
|
|
24% |
SG&A expenses relate to salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.
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The decrease in SG&A expenses in our Sorrento Therapeutics segment was attributed to lower professional fees, including a decrease in legal and consulting costs of $3.2 million, lower stock-based compensation expenses of $4.1 million and lower personnel costs of $0.7 million. Infrastructure-related and other expenses increased by $2.3 million compared to the prior year.
The increase in SG&A expenses in our Scilex segment was attributed to increases of $5.1 million in legal expenses, $4.2 million in personnel and stock-based compensation, $3.3 million in consulting, $1.8 million in contracted services, $1.0 million in marketing, and $1.0 million in other expenses.
Increase (decrease) on contingent consideration. We recorded a loss on contingent consideration of $3.8 million and a gain on contingent consideration of $2.1 million during the three months ended March 31, 2023 and 2022, respectively, which was attributed to the change in fair value of the Earn-Out Consideration associated with the acquisition of ACEA.
Reorganization items, net. The $20.2 million increase in reorganization items, net was related to our Chapter 11 Cases. The costs are primarily related to legal and professional fees and financing costs incurred relating to the DIP Facility.
Loss on impairment of intangible assets. Loss on impairment of intangible assets for the three months ended March 31, 2023 was $11.9 million and attributed to the impairment of in-process research and development assets acquired from SmartPharm Therapeutics, Inc. in 2020.
Loss (gain) on Derivative Liabilities. Loss on derivative liabilities for the three months ended March 31, 2023 was $1.3 million and was attributed to the change in fair value of the Private Placement Warrants 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 three months ended March 31, 2022 was $7.5 million and was attributed to revised probabilities and revised sales forecasts 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 reflects $13.7 million of unrealized losses related to the change in fair value of our shares of Celularity Inc. (Nasdaq: CELU) (“Celularity”).
Loss on debt extinguishment. Loss of debt extinguishment during the three months ended March 31, 2023 was attributed to repayments made on the September Bridge Loan (as defined below). During the three months ended March 31, 2022, we recorded a loss on debt extinguishment of $4.8 million in connection with repurchases of outstanding principal on the Scilex Notes.
Interest Expense, net. Interest expense for the three months ended March 31, 2023 and 2022 was $1.1 million and $3.2 million, respectively. The decrease was attributed to the repayment of the Scilex Pharma Notes in September 2022.
Income Tax Expense. Income tax expense for the three months ended March 31, 2023 and 2022 was $11.5 million and $1.5 million, respectively. The increase in income tax expense was primarily attributable to gain recognized on distribution of stock of Scilex Holding offset by changes in valuation allowance.
Net Loss. Net loss for the three months ended March 31, 2023 and 2022 was $154.6 million and $40.5 million, respectively.
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Liquidity and Capital Resources
Voluntary Filing Under Chapter 11
We expect to continue operations in the normal course for the duration of the Chapter 11 Cases. However, for the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan, our financial condition, our liquidity and our continuation as a going concern are subject to a high degree of risk and uncertainty associated with our Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court. For a discussion of our ongoing bankruptcy proceedings, see Note 1 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
The Failure of Silicon Valley Bank
On March 10, 2023, we became aware that the Federal Deposit Insurance Corporation (“FDIC”) issued a press release (the “FDIC press release”) stating that Silicon Valley Bank, Santa Clara, California (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the Treasury Department announced that depositors of SVB will have access to all of their money starting March 13, 2023. We had approximately $2.8 million cash deposited with SVB as of each of December 31, 2022, February 13, 2023 when the Debtors commenced voluntary proceedings under Chapter 11, and March 10, 2023. On March 14, 2023, we regained access to the full amount of our cash that was deposited with SVB.
As of March 31, 2023, we had $37.7 million in cash and cash equivalents attributable in part to proceeds from the following arrangements and agreements.
Debt Financings
DIP Facility
As of March 31, 2023, the total outstanding principal balance on the DIP Facility was $30.0 million. Subsequent to March 31, 2023, we received an additional draw from the DIP Facility of $20.0 million. See Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Scilex Holding Convertible Debentures
As of March 31, 2023, Scilex Holding had $9.6 million of Convertible Debentures outstanding pursuant to the Securities Purchase Agreement (see Note 7 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information).
ACEA Significant Debt Arrangements
The outstanding principal amount under ACEA significant debt arrangements assumed in connection with our 2021 acquisition of ACEA was $26.9 million as of March 31, 2023. The ACEA significant debt arrangements are comprised of a series of loans with maturity dates that range from range from December 31, 2024 to December 31, 2028. Each loan is interest free for the first five years, after which time the interest rate is 5.39% per annum.
September Bridge Loan
On September 30, 2022, we entered into a bridge loan pursuant to which we borrowed $41.6 million (the “September Bridge Loan”). We repaid $36.0 million of the September Bridge Loan during the fourth quarter of 2022. We repaid the remaining balance of $5.7 million in January 2023.
Marketable Investments
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As of March 31, 2023, we owned 20,422,124 shares of Class A Common Stock of Celularity (Nasdaq: CELU).
Equity Financings
Yorkville Standby Equity Purchase Agreements
On February 8, 2023, Scilex Holding entered into the A&R Yorkville Purchase Agreement with Yorkville, pursuant to which Scilex Holding has the right, but not the obligation, to sell to Yorkville up to $500.0 million of shares of its common stock at its request during the 36 months following the date on which the initial registration statement filed with respect to the shares of common stock issuable pursuant thereto was declared effective by the SEC, subject to the terms therein. The registration statement filed with the SEC in connection with the Original Purchase Agreement was initially declared effective by the SEC on December 9, 2022 and Scilex Holding is now able to offer and sell shares of its common stock under that agreement, subject to the limitations set forth therein.
On January 8, 2023, Scilex Holding entered into a Standby Equity Purchase Agreement (the “B. Riley Purchase Agreement”) with B. Riley principal Capital II, LLC (“B. Riley”) (together with A&R Yorkville Purchase Agreement, the “Standby Equity Purchase Agreements”), pursuant to which Scilex Holding has the right, but not the obligation, to sell to B. Riley up to $500.0 million of shares of its common stock at Scilex Holding’s sole and absolute discretion during the 36 months following the date on which the initial registration statement filed with respect to the shares of common stock issuable pursuant thereto was declared effective by the SEC, subject to the terms therein. The registration statement filed by Scilex Holding with the SEC in connection with the B. Riley Purchase Agreement was initially declared effective by the SEC on January 20, 2023 and Scilex Holding is now able to offer and sell shares of its common stock under that agreement, subject to the limitations set forth therein and the limitations set forth in the Convertible Debentures.
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
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
March 31,
2022 |
|
|
|
(in thousands) |
|
Net cash provided by (used by) |
|
|
|
|
|
|
Operating activities |
|
$ |
(49,459 |
) |
|
$ |
(83,360 |
) |
Investing activities |
|
$ |
1,684 |
|
|
$ |
(13,664 |
) |
Financing activities |
|
$ |
61,196 |
|
|
$ |
173,369 |
|
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 provided by investing activities was primarily attributed to the buyback of our 49% equity interest in Zhengzhou Fortune Bioscience Co., Ltd. for net proceeds of approximately $1.8 million.
Cash Flows from Financing Activities. Cash from financing activities reflects net proceeds from the DIP Facility of $27.3 million, proceeds from the Scilex Convertible Debentures of $9.6 million, proceeds from other short-term debt of $4.9 million, proceeds from equity offerings of $23.0 million, and repayments of debt and other obligations of $3.6 million.
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
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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, 2022, filed with the SEC on March 16, 2023, and there have been no material changes during the three months ended March 31, 2023.
Adoption of ASC 852
Beginning on the Petition Date, we applied Financial Accounting Standards Board (“FASB”) Codification Topic 852, Reorganizations ("ASC 852") in preparing the consolidated financial statements. ASC 852 requires the financial statements, for the periods subsequent to the Petition Date and up to and including the period of emergence from Chapter 11, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the bankruptcy proceedings, such as legal and professional fees incurred directly as a result of the bankruptcy proceeding are recorded as Reorganization items, net in the Consolidated Statements of Operations. In addition, prepetition obligations that may be impacted by the Chapter 11 process have been classified on the Consolidated Balance Sheet as of March 31, 2023 as liabilities subject to compromise. These liabilities are reported at the amounts we anticipate will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Material Cash Requirements
As of March 31, 2023, there were no material changes outside of the ordinary course of business, other than the following, 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, 2022, filed with the SEC on March 16, 2023:
•Short-term debt of $30.0 million related to the DIP Facility as discussed 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; and
•
$9.6 million of Scilex Holding Convertible Debentures outstanding as discussed 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.
New Accounting Pronouncements
In October 2021, the FASB issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with FASB Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The adoption of the standard beginning January 1, 2023 did not have a material impact on our consolidated financial statements.