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.

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 2, ~~2017~~2018 to December ~~29, 2017,~~31, 2018, our closing stock price ranged from ~~$1.525~~$2.01 to ~~$6.00~~$9.95 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; and

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.

We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. ~~Pursuant~~The Loan Agreement prohibits us from paying any dividends without the prior written consent of the Lenders. In addition, pursuant to our outstanding convertible notes issued in ~~December 2017,~~June 2018, so long as the outstanding principal amount under all such notes is at least ~~$25,000,000,~~$18,845,851, we are prohibited from paying any dividends without

the prior written consent of the holders of such notes. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.

Our strategic investments may result in losses.

We periodically make strategic investments in various public and private companies with businesses or technologies that may complement our business. The market values of these strategic investments may fluctuate due to market conditions and other conditions over which we have no control. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies would require us to record losses related to our investment. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.

A sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.

If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market, including shares issued in connection with the exercise of outstanding options or warrants, the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of biotechnology and biopharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of our securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

variations in the level of expenses related to our development programs;

the addition or termination of clinical trials;

any intellectual property infringement lawsuit in which we may become involved;

regulatory developments affecting our product candidates; and

our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially.

Existing stockholders’ interest in us may be diluted by additional issuances of equity securities and raising funds through acquisitions, lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

We may issue additional equity securities to fund future expansion and pursuant to equity incentive or employee benefit plans. We may also issue additional equity for other purposes. These securities may have the same rights as our common stock or, alternatively, may have dividend, liquidation or other preferences to our common stock. The issuance of additional equity securities will dilute the holdings of existing stockholders and may reduce the share price of our common stock.

If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates, potential products or proprietary technologies, or grant licenses on terms that may not be favorable to us. If adequate funds are not available, our ability to achieve profitability or to respond to competitive pressures would be significantly limited and we may be required to delay, significantly curtail or eliminate the development of our product candidates.

Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you do not consider to be in your best interests or those of our other stockholders.

As of December 31, ~~2017,~~2018, our directors and executive officers beneficially owned, in the aggregate, approximately 5% of our outstanding voting securities. As a result, if some or all of them acted together, they would have the ability to exert significant influence over the election of our board of directors and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices.

Our ability to use our net operating loss and tax credit carry forwards may be subject to limitation.

Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit our ability to use our net operating loss carryforwards attributable to the period prior to the change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability for us.

Our certificate of incorporation, as amended, and bylaws provide for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended for the benefit of our officers and/or directors.

Our certificate of incorporation, as amended, bylaws and applicable Delaware law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay us, therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us, which we will be unable to recover.

Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of our company, prevent attempts to replace or remove current management and reduce the market price of our common stock.

Provisions in our certificate of incorporation, as amended, and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation, as amended, authorizes our board of directors to issue up to 100,000,000 shares of “blank check” preferred stock. As a result, without further stockholder approval, the board of directors has the authority to attach special rights, including voting and

dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire us.

We are also subject to the anti-takeover provisions of the General Corporation Law of the State of Delaware. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change in control of us. An “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock within the past three years, subject to certain exceptions as described in the General Corporation Law of the State of Delaware.

We have adopted a shareholder rights plan, the purpose of which is, among other things, to enhance our board of directors’ ability to protect shareholder interests and to ensure that stockholders receive fair treatment in the event any coercive takeover attempt of our company is made in the future. The shareholder rights plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our company or a large block of our common stock.

Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.

There have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), new regulations promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and rules promulgated by the national securities exchanges. The Dodd-Frank Act, enacted in July 2010, expanded federal regulation

of corporate governance matters and imposes requirements on public companies to, among other things, provides stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act were effective upon enactment, others have been and will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and, accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain. Additionally, while campaigning, President Trump made statements suggesting he may seek to adopt legislation that could significantly affect the regulation of United States financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act, including § 619 (12 U.S.C. § 1851) known as the Volcker Rule and various swaps and derivatives regulations, the authority of the Federal Reserve and the Financial Stability Oversight Council, and renewed proposals to separate banks’ commercial and investment banking activities.

These new or changed laws, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. If the actions we take in our efforts to comply with new or changed laws, regulations and standards differ from the actions intended by regulatory or governing bodies, we could be subject to liability under applicable laws or our reputation may be harmed.

We have identified material weaknesses 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 materially harm our stock price and exchange listing, could cause our stock price to decline significantly and could make it more difficult for us to raise capital.

Sarbanes-Oxley specifically requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of Sarbanes-Oxley.

In March ~~2017,~~2018, in connection with the preparation of our ~~2016~~2017 financial statements, we identified ~~certain purchase agreements which contained terms for contingent consideration~~ that were not identified timely and accounted for in our historical financial statements on a timely basis. Further, certain other purchase agreements containing terms for contingent consideration were identified timely, but we failed to adjust the liabilities for changes in fair value at each subsequent reporting period. Accordingly, we did not appropriately account for liabilities for contingent consideration payable and the related adjustments to earnings. Based on these findings, our management identified a material weakness in our review controls over unusual or non-recurring and significant transactions. Specifically, our controls were not properly designed to provide reasonable assurance that we (1) timely identify and assess the accounting implications of terms in certain unusual or non-recurring and significant agreements were not identified and ~~(2) reassess the~~assessed on a timely basis. Further, valuation of certain associated assets or liabilities were not properly reassessed at the end of each

reporting period. The ~~Company concluded that these controls did not operate effectively as of December 31, 2017, which has been identified as a material weakness in our internal control over financial reporting. This~~ material weakness did not result in ~~any material misstatements to the financial statements. Additionally, as~~ a ~~result of the~~ restatement of previously issued annual consolidated financial statements or condensed interim consolidated financial statements.

In connection with the ~~condensed~~preparation of our consolidated financial statements for the ~~three and nine months~~year ended ~~September 30, 2017 for~~December 31, 2018 there were multiple errors identified related to management’s review of significant agreements. We believe the ~~impairment discussed~~errors identified are due to deficiencies in ~~Note 9~~our internal control environment resulting from insufficient competent accounting resources, including a Chief Accounting Officer, to effectively operate internal controls over financial reporting in a timely manner.

This ineffective control environment contributed to the ~~financial statements~~following material weaknesses: (i) management did not adequately evaluate the underlying assumptions associated with the accounting for key terms identified in significant agreements, which in the current year included convertible notes and debt agreements and (ii) management did not accurately assess the significant assumptions in order to properly estimate the fair value of contingent consideration liabilities. We also identified the following deficiencies in our internal control environment resulting from insufficient accounting resources that collectively represent a material weakness: Management did not properly assess significant assumptions through the performance of precise reviews of accounting estimates including probability of occurrence and assumptions used in evaluating the fair value of embedded derivatives, fair value of indefinite-lived intangible assets, and income tax related balances. Such material weaknesses could result in material misstatements of the aforementioned account balances or disclosures in the annual or interim consolidated financial statements accompanying this Form 10-K, our management identified a material weakness in our review controls with respect to our equity method investments. Specifically, our review controls to assess and monitor the appropriateness of the financial information provided by our equity method investees werethat would not operating effectively beginning in the quarter ended September 30, 2017, to provide reasonable assurance that we timely identify and assess the accounting implications of transactions and events occurring at our equity method investees and properly report such investee financial information in our financial statements.be prevented or detected.

We have initiated and will continue to implement remediation measures to address the underlying causes of the material weaknesses described above and to improve and strengthen our internal control over financial reporting. We cannot assure you that the measures we have taken to date or any measures we may take in response to the material weaknesses in the future will be sufficient to remediate such material weakness or to avoid potential future material weaknesses. 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.

Our compliance with Section 404 of Sarbanes-Oxley requires that we incur substantial accounting expense and expend significant management efforts. We ~~currently do not have an internal audit group, and we~~ will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 of Sarbanes-Oxley in a timely manner, if we fail to remediate the material weaknesses in internal control over financial reporting or if we or our independent registered public accounting firm identifies additional deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.



Item 1B.	Unresolved Staff Comments.

On February 28, 2018, we received a comment letter from the staff of the SEC’s Division of Corporation Finance with respect to our Current Report on Form 8-K filed on February 27, 2018, to revise to clarify information regarding the other-than-temporary impairment associated with our equity method investment in Immunotherapy NANTibody, LLC disclosed therein. We filed a response to the SEC's comment letter on March 12, 2018 and we are awaiting the SEC's response to our response letter. Additionally, we have included disclosures in Note 9 to our consolidated financial statements accompanying this Form 10-K that we believe are responsive to the SEC's comment letter.

As of the date of the filing of this Annual Report on Form 10-K, we have not received confirmation from the staff of the Division of Corporation Finance of the SEC that its review process relating to the comment letter had been completed. If we receive additional comments from the staff, we intend to resolve such additional comments promptly.None.



Item 2.	Properties.

~~The Company~~We currently have leases in San Diego, California of approximately ~~43,000~~130,584 square feet of corporate office and laboratory space, approximately ~~6,350~~1,405 square feet of laboratory and office space at a second location ~~and~~as well as approximately ~~1,405~~36,400 square feet ~~of office space at a third location. The Company’s lease agreements in San Diego, as amended,~~ for ~~its corporate office~~offices and ~~laboratory space, its second laboratory~~cGMP fill and ~~office space~~finish and ~~its third office space, expire in December 2026,~~storage space. In November ~~2025 and September 2020, respectively. Additionally, the Company~~2018, we entered into a new lease in San Diego, California for approximately ~~76,700~~61,200 square feet of additional corporate office and laboratory space, ~~as well as~~which commences in the first quarter of 2019 and expires in October 2029. In December 2018, we entered into a new lease in Broomfield, Colorado, for approximately ~~36,400~~4,500 square feet of additional office space, which is expected to commence in the second quarter of 2019 and expires in 2024.

Our lease agreement in San Diego, for ~~offices, facilities~~our corporate office and laboratory space expires in October 2029. The leases for our second laboratory and office space and our cGMP fill and finish and storage ~~space. The~~space expire in September 2020 and November 2022, respectively. We also lease ~~began in February of 2017 and expires in November 2023.~~

~~The Company leases an additional 1,405 square feet of office space in California and an additional 2,734 square feet in Pennsylvania. The Company also leases~~ 25,381 square feet of office and laboratory space in Suzhou, China, which lease expires in June ~~2019. The Company leases~~30, 2021. We lease 2,312 square feet of office, laboratory, and storage space in Scotland, which lease expires in March 2021.

~~In July 2017, the Company entered into a new~~ We sublease in New York, New York ~~for~~ approximately 4,550 square feet of additional corporate office space. The sublease began in July of 2017 and expires in December 2020. We also lease approximately 3,432 square feet of office and laboratory space in Atlanta, Georgia which began in October of 2018 and expires in September 2024.



Item 3.	Legal Proceedings.

To the best of our knowledge, we are not currently a party to any legal proceedings that, individually or in the aggregate, are deemed to be material to our financial condition or results of operations.

In the normal course of business, we may be named as a defendant in one or more lawsuits. We are 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 our financial condition or results of operations.

~~Derivative Action Litigation~~

On September 8, 2016, Yvonne Williams filed an action both derivatively and on behalf of a purported class of stockholders in the Court of Chancery of the State of Delaware (the "Court") against each of the members of the Henry Ji, William S. Marth, Kim D. Janda, Jaisim Shah, David H. Deming, and Douglas Ebersole (the “Prior Board”) ; George Ng, the Company’s Executive Vice President, Chief Administrative Officer, and Chief Legal Officer; Jeffrey Su, the Company’s Executive Vice President & Chief Operating Officer; and the Company as nominal defendant, alleging: (1) breach of fiduciary duty with respect to the formation of, and certain options and warrants issued by, certain of the Company’s subsidiaries to Dr. Ji and members of the Prior Board; (2) breach of fiduciary duty with respect to the Company’s prior announcement that it had

entered into a voting agreement with Yuhan Corporation in connection with a transaction through which it purchased $10 million of shares of our common stock and warrants (the “Williams Action”). On November 14, 2016, the Company filed motions to dismiss or in the alternative stay the Williams Action. George Ng and Jeffrey Su were dismissed as defendants by plaintiff during the briefing on the motions. The Court denied the motions on June 28, 2017.

On October 25, 2017, Yvonne Williams filed a Supplemental and Amended Class Action and Derivative Complaint which re-added George Ng as a defendant, added Eragon Ventures, LLC as a defendant, and added certain claims challenging transactions whereby Eragon Ventures, LLC agreed to purchase certain stock in the Company’s subsidiary, LA Cell, Inc. Following a mediation held on November 16, 2017, the parties agreed that day to a term sheet reflecting a settlement of the Williams Action, which agreement was memorialized in a Stipulation and Agreement of Settlement executed on December 22, 2017 and filed with the Court. The settlement and plaintiff’s counsel’s request for an award of attorneys’ fees in the amount of $5 million have been submitted to the Court for approval. The Court has set a hearing on the request for approval of the settlement for April 3, 2018, and the Company has caused notice to be provided concerning the settlement and settlement hearing. Objections to the settlement or the requested award of attorneys’ fees were due no later than March 5, 2018. The Company has objected to the amount of fees being requested by plaintiff’s counsel and has suggested that a fee award of $850,000 would be appropriate.

If the Court approves the settlement, this case will be dismissed with prejudice. The settlement consists of non-monetary consideration, such as the cancellation of certain subsidiary shares of stock that were obtained by defendants pursuant to options previously exercised by defendants. Accordingly, the Company does not anticipate any monetary loss with respect to the Williams Action other than for potential payment of the amount of fees and costs that may be awarded to plaintiff’s counsel by the Court. With respect to such fees as may be awarded, the Company believes that all such amounts should be covered by the Company’s director and officer insurance policies.

Immunomedics Litigation

On June 26, 2015, Immunomedics, Inc. (“Immunomedics”) filed a complaint in the United States District Court for the District of New Jersey (the ~~“Immunomedics Action”~~“New Jersey Case”) against the Board of Directors of ~~Roger Williams Medical Center,~~RWMC, Dr. Richard P. Junghans, Dr. Steven C. Katz, the Office of the Board of Advisors of Tufts University School of Medicine, and one or more individuals or entities to be identified later. This complaint (the "Initial Complaint") alleged, among other things: (1) breach of contract; (2) breach of covenant of good faith and fair dealing; (3) tortious interference with prospective economic gain; (4) tortious interference with contracts; (5) misappropriation; (6) conversion; (7) bailment; (8) negligence; (9) vicarious liability; and (10) patent infringement. Overall, the allegations in the Initial Complaint were generally directed to an alleged material transfer agreement dated December 2008 and Immunomedics’ alleged request for the return of certain alleged research material, as well as the alleged improper use and conversion of such research materials outside the scope of the material transfer agreement.

On October 22, 2015, Immunomedics filed an amended complaint (the “First Amended Complaint”), which, among other things, no longer named the Board of Directors of ~~Roger Williams Medical Center~~RWMC and The Office of the Board of Advisors of Tufts University School of Medicine as defendants. ~~Roger Williams Medical Center~~RWMC and Tufts Medical Center were added as new defendants. On January 14, 2016, Immunomedics filed a second amended complaint (the "Second Amended Complaint"), which, among other things, no longer named Tufts Medical Center as a defendant. In addition, the Second Amended Complaint contained allegations directed to two additional alleged material transfer agreements dated September 1993 and May 2010, respectively, and also added an allegation of unjust enrichment. The Second Amended Complaint also no longer asserted claims for (1) breach of covenant of good faith and fair dealing; (2) misappropriation; (3) bailment; (4) negligence; and (5) vicarious liability.

On October 12, 2016, Immunomedics filed a third amended complaint (the “Third Amended Complaint”), which added ~~the Company,~~us, TNK, BDL and CARgenix as defendants. TNK is aour subsidiary ~~of the Company~~ and purchased BDL and CARgenix in August 2015. The Third Amended Complaint ~~includes,~~included, among other things, allegations against ~~the Company,~~us, TNK, BDL and CARgenix regarding (1) conversion; (2) tortious interference; and (3) unjust enrichment. On December 2, 2016, ~~the Company,~~we, TNK, BDL, and CARgenix filed a motion to dismiss ~~Immunomedics’s~~Immunomedics’ complaint against them for lack of personal jurisdiction. On January 25, 2017, the District of New Jersey granted this motion, and ~~the Company,~~we, TNK, BDL and CARgenix were dismissed as defendants from the ~~case. Although dismissed from the case, under~~New Jersey Case. Under various agreements, TNK has certain indemnification obligations to ~~Roger Williams Medical Center,~~RWMC, Dr. Richard P. Junghans and Dr. Steven C. Katz that may be implicated by the ~~case. In addition, the possibility exists that~~New Jersey Case.

On April 27, 2018, Immunomedics ~~could attempt to file suit~~filed a Complaint against ~~the Company and/or~~us and TNK in San Diego Superior Court, Case No. 37-2018-00021006-CU-NP-CTL (the “San Diego Case”). The Complaint includes, among other things, allegations against us and TNK regarding (1) conversion; (2) tortious interference; and (3) inducing breach of contract.

On October 25, 2018, the parties to the New Jersey Case and the San Diego Case entered into a ~~different jurisdiction. The~~Mutual General Release and Settlement Agreement resolving both matters. Pursuant to the terms of the settlement, among other things, both the New Jersey Case and San Diego Case were dismissed with prejudice upon payment by us to Immunomedics ~~Action remains pending~~of $2.35 million, which payment was timely made as called for by the agreement.

Cantor Fitzgerald & Co. Litigation

On May 25, 2018, Cantor Fitzgerald & Co. (“CF&Co.”) filed a complaint against us in the ~~District~~Supreme Court of the State of New ~~Jersey~~York, County of New York, Index No. 652633/2018. The complaint includes, among other things, allegations against ~~defendants Roger Williams Medical Center, Dr. Junghans,~~us for breach of contract arising out of a letter agreement whereby CF&Co. was to supply certain services to us in exchange for a fee (the “CF & Co. Litigation”). We filed an Answer and ~~Dr. Katz. A trial date has~~Counterclaim for breach of contract against CF&Co claiming that CF&Co. did not ~~yet been set. The Company believes that~~perform under the Immunomedics Action is without merit, and will vigorously defend itself against this and any further actions. However, should Immunomedics prevail against the Company, Roger Williams Medical Center or other defendants, certainletter agreement.

~~patent rights optioned, owned and/or licensed~~

Following a mediation held on December 19, 2018, the parties entered into a settlement agreement resolving the matter. Pursuant to the terms of the agreement, the litigation was dismissed with prejudice upon payment by us to CF&Co. of $1.0 million, which payment was timely made as called for by the Company could be at risk of invalidity or enforceability, or the litigation could otherwise adversely impact the Company’s ownership or other rights in certain intellectual property. At this point in time, the Company is unable to determine whether any loss will occur with respect to the Immunomedics Action or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by the Company as of the date of filing of this Annual Report on Form 10-K.agreement.

¹Although dismissed from the case, under various agreements, TNK has certain indemnification obligations to Roger Williams Medical Center, Dr. Richard P. Junghans and Dr. Steven C. Katz that may be implicated by the case. In addition, the possibility exists that Immunomedics could attempt to file suit against the Company and/or TNK in a different jurisdiction.



Item 4.	Mine Safety Disclosures.

None.

PART II



Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is listed on the Nasdaq Capital Market under the symbol “SRNE”.

~~The following table sets forth the range of high and low sale prices for our common stock for the periods indicated in 2017 and 2016 as reported by Nasdaq.~~

2017 2016
High Low High Low
First Quarter $ 6.08
$ 3.90
$ 8.52
$ 4.25
Second Quarter 3.95
1.50
7.80
5.26
Third Quarter 2.15
1.50
8.00
5.55
Fourth Quarter 4.05
1.70
8.35
4.68

Holders of Record

As of ~~March 9, 2018,~~February 21, 2019, there were ~~267~~225 holders of record of our common stock.

~~Dividend Policy~~

We have not declared or paid any cash dividends on our common stock and we do not anticipate paying any dividends or making any other distributions in the foreseeable future. Pursuant to our outstanding convertible notes issued in December 2017, so long as the outstanding principal amount under all such notes is at least $25,000,000, we are prohibited from paying any dividends without the prior written consent of the holders of such notes. Subject to our obligations under such convertible notes, the payment by us of dividends, if any, in the future, rests within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements and financial condition.

Recent Sales of Unregistered Securities

On ~~December 11, 2017,~~November 7, 2018, we and certain of our domestic subsidiaries (the “Guarantors”) entered into a ~~Securities Purchase~~Term Loan Agreement (the ~~“Securities Purchase~~“Loan Agreement” ~~or “Note SPA”~~) with certain ~~accredited investors~~funds and accounts managed by Oaktree Capital Management, L.P. (collectively, the ~~“Purchasers”~~“Lenders”)~~. Pursuant~~ and Oaktree Fund Administration, LLC, as administrative and collateral agent. In connection with the Loan Agreement, on November 7, 2018, we issued to the Securities Purchase Agreement, on December 21, 2017, we issued and sold to the Purchasers, in a private placement transaction (the “Private Placement”), (1) convertible promissory notes in an aggregate principal amount of $50,000,000 (the “Notes”), which will accrue simple interest at a rate equal to 5.0% per annum and mature upon the earlier to occur of (a) December 21, 2022, and (b) the date of the closing

~~of a change in control (the “Maturity Date”), and (2)~~Lenders warrants ~~(the “Warrants”)~~ to purchase ~~an aggregate of 12,121,210 shares of our common stock.~~

At any time and from time to time before the Maturity Date, each Purchaser shall have the option to convert any portion of the outstanding principal amount of such Purchaser’s Note that is equal to or greater than the lesser of: (1) $4,000,000, and (2) the then-outstanding principal amount of such Purchaser's Note into6,288,985 shares of our common stock ~~at a~~(the “Initial Warrants”). The Initial Warrants have an exercise price per share of $2.26875, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions. Accrued but unpaid interest on the Notes shall be paid in cash semi-annually in arrears on or prior to the 30th day of June or 31st day of December of each calendar year commencing with the year ending December 31, 2018. If a Purchaser elects to convert any of the principal amount of their Note, then all accrued but unpaid interest on such portion of the principal amount shall become due and payable in cash. The Notes contain restrictive covenants and event of default provisions that are customary for transactions of this type.

~~Each Warrant has an exercise price of $2.61 per share,~~$3.28, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will ~~become~~be exercisable ~~on June 20, 2018, has a term of five~~from May 7, 2019 through May 7, 2029 and ~~a half years and is~~will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Initial Warrants (the “Initial Warrant Shares”), in which case the Initial Warrants shall also be exercisable on a cashless exercise basis.

~~The Notes, the Warrants, the Note Shares and the shares of common stock issuable upon exercise of the Warrants (collectively, the “Securities”) were offered and sold~~We issued to the ~~Purchasers~~Lenders the Initial Warrants in reliance on ~~December 21, 2017 in a transaction exempt~~the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”),. We relied on this exemption from registration for private placements based in ~~reliance~~part on ~~Section 4(a)(2) thereof and Rule 506 of Regulation D thereunder. Each~~the representations made by the Lenders, including the representations with respect to each of the ~~Purchasers represented that~~Lender’s status as an accredited investor, as such ~~Purchaser was an “accredited investor,” as~~term is defined in Regulation D, and was acquiring the Securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. Accordingly, the Securities have not been registered underRule 501(a) of the Securities Act, and ~~the Securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.~~such Lender’s investment intent.

~~Securities Authorized for Issuance Under Equity Compensation Plans~~

The following table sets forth additional information with respect to the shares of common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of December 31, 2017. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be issued upon exercise of outstanding options.

Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a) (b) (c)
Equity compensation plans approved
by security holders ⁽¹⁾
6,343,400
$ 4.74

4,438,696⁽²⁾

Equity compensation plans
not approved by security holders ⁽³⁾
3,200
1.12
—
Total 6,346,600

4,438,696⁽²⁾


~~(1)~~	~~Comprised of our 2009 Amended and Restated Stock Incentive Plan (the “2009 Plan”).~~

~~(2)~~

Comprised solely of shares subject to awards available for future issuance under the 2009 Plan. In June 2014, our stockholders approved, among other items, the amendment and restatement of the 2009 Plan to increase the number of shares of common stock authorized to be issued pursuant to the 2009 Plan to 3,760,000. In June 2016, our stockholders approved, among other items, another amendment and restatement of the 2009 Plan to increase the number of shares of common stock authorized to be issued pursuant to the 2009 Plan to 6,260,000. In July 2017, our stockholders approved, among other items, another amendment and restatement of the 2009 Plan to increase the number of shares of common stock authorized to be issued pursuant to the 2009 Plan to 11,260,000. Such shares of common stock are reserved for

issuance to our employees, non-employee directors and consultants. As of December 31, 2017, 11,260,000 shares were authorized under the 2009 Plan, with 4,438,696 shares remaining available for future issuance under the 2009 Plan.


~~(3)~~	~~Comprised solely of shares issued to non-employee directors prior to our adoption of the 2009 Plan.~~

Performance Graph

The following graph compares the cumulative total stockholder return on our common stock from December 31, ~~2011~~2012 to December 31, ~~2017~~2018 with the cumulative total return of (i) the Nasdaq Market Index and (ii) the Nasdaq Biotechnology Index. This graph assumes the investment of $100.00 after the market closed on December 31, ~~2011~~2012 in our common stock, and in the Nasdaq Market Index and the Nasdaq Biotechnology Index, and it assumes any dividends are reinvested. The stock price performance included in this graph is not necessarily indicative of future stock price performance.



Item 6.	Selected Financial Data.

You should read the selected consolidated financial data presented below in conjunction with the audited consolidated financial statements appearing elsewhere in this Form 10-K and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data as of December 31, ~~2017~~2018 and ~~2016,~~2017, and for each of the years in the three-year period ended December 31, ~~2017,~~2018, have been derived from our audited consolidated financial statements which appear elsewhere in this Form 10-K. The selected consolidated financial data as of December 31, 2016, 2015 ~~2014~~ and ~~2013~~2014 and for the years ended December 31, ~~2014~~2015 and ~~2013~~2014 have been derived from our audited consolidated financial statements which are not included in this Form 10-K. The historical results are not necessarily indicative of the operating results to be expected in the future. All financial information presented has been prepared in United States dollars and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).



	Year Ended December 31,
(In thousands, except per share data)	2018			2017		2016			2015			2014
Income Statement Data:
Revenues:
Grant	$	356		$	206	$	1,033		$	1,530		$	488
Royalties and licenses	480			140,381		4,017			3,010			3,337
Sales and services	20,357			11,269		3,102			50			—
Total revenues	21,193			151,856		8,152			4,590			3,825
Income (Loss) from operations (1)	(150,425		)	25,335		(96,777		)	(74,005		)	(34,742		)
Net income (loss)	$	(212,526	)	$	11,109	$	(63,937	)	$	(50,074	)	$	(34,657	)
Net loss per share - basic	$	(1.92	)	$	0.13	$	(1.21	)	$	(1.24	)	$	(1.30	)
Net loss per share - diluted	$	(1.92	)	$	0.13	$	(1.21	)	$	(1.24	)	$	(1.30	)
Weighted average number of shares during the period - basic	106,150			69,742		50,360			36,909			26,679
Weighted average number of shares during the period - diluted	106,150			70,381		50,360			36,909			26,679

Year Ended December 31,
(In thousands, except per share data) 2017 2016 2015 2014 2013
Income Statement Data:

Revenues:

Grant $ 206
$ 1,033
$ 1,530
$ 488
$ 452
Royalties and licenses
140,381⁽¹⁾

4,017
3,010
3,337
8
Sales and services 11,269
3,102
50
—
—
Total revenues 151,856
8,152
4,590
3,825
460
Income (Loss) from operations 25,334
(96,777 ) (74,005 ) (34,742 ) (21,668 )
Net income (loss) $ 9,132
$ (63,937 ) $ (50,074 ) $ (34,657 ) $ (21,911 )
Net loss per share - basic $ 0.13
$ (1.21 ) $ (1.24 ) $ (1.30 ) $ (1.46 )
Net loss per share - diluted $ 0.13
$ (1.21 ) $ (1.24 ) $ (1.30 ) $ (1.46 )
Weighted average number of shares during
the period - basic
69,742
50,360
36,909
26,679
15,046
Weighted average number of shares during
the period - diluted
70,357
50,360
36,909
26,679
15,046

(1) Year-over-year increase in 2017 is primarily due to revenue recognized from the intangibles transferred to Celularity as a result of closing the Contribution Agreement in 2017.

As of December 31,
(In thousands) 2017 2016 2015 2014 2013
Balance Sheet Data:

Cash and cash equivalents $ 20,429
$ 82,398
$ 39,038
$ 71,902
$ 31,667
Intangibles, net 71,013
64,776
3,912
4,357
33,321
Goodwill 38,298
41,548
20,626
24,041
24,041
Total assets 431,614
401,586
343,519
141,541
92,582
Total liabilities 225,003
315,084
202,581
32,828
25,773
Stockholders' equity 206,610
86,502
140,938
108,713
66,809

Net Working Capital (49,255 ) 13,569
110,145
64,358
27,152



	As of December 31,
(In thousands)	2018		2017			2016		2015		2014
Balance Sheet Data:
Cash and cash equivalents	$	158,738	$	20,429		$	82,398	$	39,038	$	71,902
Intangibles, net	66,283		71,013			64,776		3,912		4,357
Goodwill	38,298		38,298			41,548		20,626		24,041
Total assets	624,087		431,613			401,586		343,519		141,541
Total liabilities	416,587		225,003			315,084		202,581		32,828
Stockholders' equity	207,500		206,610			86,502		140,938		108,713
Net Working Capital	117,943		(49,255		)	13,569		110,145		64,358



Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information that are included elsewhere in this Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the cautionary note regarding “Forward-Looking Statements” contained elsewhere in this Form 10-K. Additionally, you should read the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Sorrento Therapeutics, Inc. (Nasdaq: SRNE), together with its subsidiaries (collectively, the “Company”, “we”, “us” and “our”) is a clinical stage ~~biotechnology~~and commercial biopharma company focused on delivering innovative and clinically meaningful therapies to patients and their families, ~~globally. Our primary~~globally, to address unmet medical needs. We primarily focus ~~is to transform cancer into a treatable or chronically manageable disease.~~on therapeutics areas in Immune-Oncology and Non-Opioid Pain Management. We also have programs assessing the use of our technologies and products in ~~auto-immune,~~autoimmune, inflammatory and neurodegenerative ~~diseases and pain indications with high unmet medical needs.~~

diseases.

At our core, we are an antibody-centric company and leverage our proprietary G-MAB™ library and targeted delivery modalities to generate the next generation of cancer therapeutics. Our ~~validated~~ fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, c-MET, VEGFR2, CCR2 ~~OX40, TIGIT~~ and CD137 among others.

Our vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy (“CAR-T”), dimeric antigen receptor T-cell therapy (“DAR-T”), antibody drug conjugates (“ADCs”)~~, bispecific approaches,~~ as well as TCR-like antibodies. With LA Cell, Inc. (“LA Cell”), our joint venture with City of Hope, our objective is to become the global leader in the development of antibodies against intracellular targets such as STAT3, mutant KRAS, MYC, p53 and TAU.bispecific antibody approaches. Additionally, we ~~have~~ acquired Sofusa®, a revolutionary drug delivery system, in July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and ~~are assessing the regulatory and strategic path forward for our portfolio of late stage biosimilar/biobetter antibodies based on Erbitux~~®~~, Remicade~~®~~, Xolair~~®~~, and Simulect~~® ~~as these may represent nearer term commercial opportunities.~~fewer adverse effects than standard parenteral immunotherapy.

With each of our clinical and pre-clinical programs, we aim to tailor our therapies to treat specific stages in the evolution of cancer, from elimination, to equilibrium and escape. In addition, our objective is to focus on tumors that are resistant to current treatments and where we can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. We have several immuno-oncology programs that are in or near to entering the clinic. These include cellular therapies, an oncolytic virus and a palliative care program targeted to treat intractable cancer pain. Finally, as part of our global aim to provide a wide range of therapeutic products to meet underserved therapeutic markets, we have made investments and developed a separate pain focused franchise which we believe will serve to provide short term upside to our core thesis.

Our cellular therapy programs focus on ~~Chimeric Antigen Receptor-T Cell (“CAR-T”)~~CAR-T for adoptive cellular immunotherapy to treat both solid and liquid tumors. We have reported early data from Phase I trials of our carcinoembryonic antigen (“CEA”)-directed CAR-T program. We have treated five patients with stage 4, unresectable adenocarcinoma (four with pancreatic and ~~PSMA directed~~one with colorectal cancer) and CEA-positive liver metastases with anti-CEA CAR-T ~~programs. Our CD38 CAR-T is being evaluated in the context of highly resistant multiple myeloma (“MM”), amyloidosis~~ and ~~graft-versus-host disease (“GvHD”).~~are currently expanding this study. We ~~are assessing our CD123 CAR-T in the context of highly resistant acute myeloid leukemia (“AML”). Both of the latter programs have~~ successfully ~~demonstrated strong preclinical anti-tumor activity in animal models. Our plan is to submit~~submitted an Investigational New Drug ~~(“IND”~~application ("IND") ~~applications with~~for anti-CD38 CAR-T for the treatment of refractory or relapsed multiple myeloma ("RRMM") and obtained approval from the U.S. Food and Drug Administration (the ~~“FDA”~~"FDA") to commence a human

clinical trial for ~~at least~~this indication in early 2018. We have dosed two patients and are continuing the enrollment of additional patients.

Broadly speaking, we are one of ~~these~~the world’s leading CAR-T ~~programs~~companies today due to our investments in ~~2018.~~technology and infrastructure, which have enabled significant progress in developing our next-generation non-viral, “off-the-shelf” allogeneic CAR-T solutions. With “off-the-shelf” solutions, CAR-T therapy can truly become a drug product rather than a treatment procedure. One of the approaches we have taken to develop the “off-the-shelf” allogeneic CAR-T solutions is through Celularity, our joint venture with Celgene, United Therapeutics and others. Celularity focuses on developing cell therapies with placenta-derived and cord blood T cells, which have natural allogeneic “off-the-shelf” characteristics. We are the single largest shareholder of Celularity with a stake of approximately 25%.

~~Finally,~~Outside of immune-oncology programs, as part of our global aim to provide a wide range of therapeutic products to meet underserved ~~therapeutic~~ markets, we have made investments ~~and developed a separate~~in non-opioid pain ~~focused franchise which we believe will serve to provide short term upside to our core thesis. Within this franchise,~~management. These include resiniferatoxin (“RTX”), which is a non-opioid-based ~~TRPV1 agonist~~ neurotoxin ~~used as an injectable~~that specifically ablates nerves that conduct pain signals while leaving other nerve functions intact and is being studied for chronic pain treatment. ~~The compound~~ RTX has been granted orphan drug status for the treatment of intractable pain atwith end-stage cancer and a Phase I trial with the National Institutes of Health (“NIH”) is concluding. A Phase Ib trial studying tolerance and efficacy of RTX for the control of osteoarthritis knee pain was initiated in late 2018 and preliminary results have shown strong efficacy with no significant adverse effects. Other applications of RTX are expected to start Phase IIb trials in ~~2018. Additionally,~~2019.

Also in the area of non-opioid pain management, we have acquired proprietary technologies to responsibly develop next generation, branded pharmaceutical products to better manage ~~critical~~patients’ medical conditions and maximize the quality of life of patients and healthcare providers. ~~Scilex’s lead~~The flagship product ~~candidate, ZTlido™~~of our majority-owned subsidiary, Scilex Pharmaceuticals Inc. (“Scilex”), ZTlido® (lidocaine topical system 1.8%), is a next-generation lidocaine delivery system ~~recently~~which was approved by the FDA for the treatment of postherpetic neuralgia, a severe neuropathic pain ~~condition. ZTlido™ (lidocaine topical system 1.8%)~~condition, in February 2018, and was commercially launched in late October 2018. Scilex now has built a full commercial organization, which includes sales, marketing, market access, and medical affairs. ZTlido® is positioned as a best-in-class product with superior adhesion compared to Lidoderm and is manufactured by our ~~collaboration~~Japanese partner in their ~~state of the art~~state-of-the-art manufacturing facility.

Significant Developments

~~Termination of Binding Term Sheet Regarding Acquisition of Semnur Pharmaceuticals, Inc.~~

On August 15, 2016, our subsidiary, Scintilla Pharmaceuticals, Inc. (“Scintilla”) and Semnur Pharmaceuticals, Inc. (“Semnur”) entered into a binding term sheet (the “Semnur Binding Term Sheet”) setting forth the terms and conditions by which Scintilla would, through a subsidiary, purchase all of the issued and outstanding equity of Semnur. On October 6, 2017, the Semnur Binding Term Sheet was terminated without additional consideration, effective immediately.

~~Public Offering of Common Stock~~

On April 13, 2017, we entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co., as representative of the several underwriters named therein (the “Underwriters”), relating to an underwritten public offering (the “Offering”) of 23,625,084 shares of our common stock. The public offering price was $2.00 per share of our common stock and the Underwriters agreed to purchase the shares of our common stock pursuant to the Underwriting Agreement at a price of $1.8571 per share.

On April 19, 2017, the Offering was completed and resulted in net proceeds of approximately $43.5 million, after deducting underwriting discounts and commissions and estimated Offering expenses payable by us.

~~Acquisition of Virttu Biologics Limited~~

~~On April 27, 2017, we entered into a Share~~2018 Securities Purchase Agreement (the “Virttu Purchase Agreement”) with TNK Therapeutics, Inc., our majority-owned subsidiary (“TNK”), Virttu Biologics Limited (“Virttu”), the shareholders of Virttu (the “Virttu Shareholders”) and Dayspring Ventures Limited, as the representative of the Virttu Shareholders, pursuant to which, among other things, TNK acquired from the Virttu Shareholders 100% of the outstanding ordinary shares of Virttu (the “Virttu Acquisition”).

~~Virttu focuses on the development of oncolytic viruses that infect and selectively multiply~~ in ~~and destroy tumor cells without damaging healthy tissue. Its lead oncolytic virus candidate, Seprehvir, infects and replicates in cancer cells selectively, leaving normal cells unharmed.~~

Under the Virttu Purchase Agreement, the total amount of the consideration payable to the Virttu Shareholders in the Virttu Acquisition is equal to $25 million, less Virttu’s net debt (the “Virttu Base Consideration”). An additional $10 million contingent consideration is payable upon the achievement of certain regulatory milestones (as described below) (the “Regulatory Approval Consideration”).

At the closing of the Virttu Acquisition (the “Closing”) on April 27, 2017, we issued to the Virttu Shareholders consideration valued at approximately $2.2 million, which consisted primarily of an aggregate of 797,081 shares (the “Virttu Closing Shares”) and approximately $557,000 in cash (the “Cash Consideration”). The issuance of the Closing Shares and the payment of the Cash Consideration satisfied TNK’s obligation to pay 20% of the Virttu Base Consideration at the Closing. Under the terms of the Virttu Purchase Agreement, we agreed to provide additional consideration to the Virttu Shareholders, as follows:

(1) Upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $50.0 million (a “Qualified Financing”), TNK will issue to the Virttu Shareholders an aggregate number of shares of its capital stock (“TNK Capital Stock”) as is equal to the quotient obtained by dividing 80% of the Virttu Base Consideration by the lowest per share price paid by investors in the Qualified Financing (the “TNK Financing Consideration”); provided, however, that 20% of the TNK Financing Consideration shall be held in escrow until April 27, 2018 (the “Financing Due Date”), to be used to, among other things, satisfy the indemnification obligations of the Virttu Shareholders. In the event that a Qualified Financing does not occur, then on the Financing Due Date, we will issue to the Virttu Shareholders an aggregate number of shares of our common stock as is equal to the quotient obtained by dividing 80% of the Virttu Base Consideration, by $5.55 (as adjusted, as appropriate, to reflect any stock splits or similar events affecting our common stock after the Closing).

(2) Within 45 business days after Virttu becomes aware that certain governmental bodies in the United States, the European Union, the United Kingdom or Japan have approved for commercialization, on or before October 26, 2024, Seprehvir (or any enhancement, combination or derivative thereof) as a monotherapy or in combination with one or more other active components (each of the first two such approvals by a governmental body being a “Regulatory Approval”), TNK shall pay half of the Regulatory Approval Consideration to the Virttu Shareholders, in a combination of (a) up to $5.0 million in cash (the “Regulatory Approval Cash”) and/or (b) (i) such number of shares of our common stock as is equal to the quotient obtained by dividing $5.0 million less the Regulatory Approval Cash (the “Regulatory Approval Share Value”) by the 30 Day VWAP (as defined below) of one share of our common stock; (ii) if TNK has completed its first public offering of TNK Capital Stock, the number of shares of TNK Capital Stock as is equal to the quotient obtained by dividing the Regulatory Approval Share Value by the 30 Day VWAP of one share of TNK Capital Stock; or (iii) such number of shares of common stock of a publicly traded company as is equal to the quotient obtained by dividing the Regulatory Approval Share Value by the volume weighted average price of the relevant security, as reported on the Nasdaq Capital Market (or other principal stock exchange or securities market on which the shares are then listed or quoted) for the thirty trading days immediately following the receipt of Regulatory Approval (the “30 Day VWAP”), with the composition of the Regulatory Approval Consideration to be at TNK’s option. In order for a second regulatory approval to qualify as a Regulatory Approval under the Purchase Agreement, the second approval must be granted by a different governmental body in a different jurisdiction than that which granted the first Regulatory Approval.

~~Celularity Transaction~~

On November 1, 2016, we loaned $5.0 million to Celularity, Inc., a research and development company (“Celularity”), pursuant to a promissory note issued by us to Celularity, as amended (as so amended, the “Celularity Note”), in connection with the entry into a nonbinding term sheet by us, TNK and Celularity. Pursuant to the terms of the Celularity Note, the loan was due and payable in full on the earlier of November 1, 2017 and the occurrence of an event of default under the Celularity Note

(the “Maturity Date”). Under the terms of the Celularity Note, in the event that Celularity met certain minimum financing conditions prior to the Maturity Date, all outstanding amounts under the Celularity Note would be forgiven and converted to equity. On May 31, 2017, we loaned an additional $2.0 million to Celularity pursuant to the terms of the Celularity Note. On June 14, 2017, we loaned an additional $1.0 million to Celularity. Additionally, on July 7, 2017, we loaned an additional $2.0 million to Celularity. The loan amounts were forgiven and converted to additional equity investment in Celularity as part of the closing of the Contribution Agreement (as defined below) on June 12, 2017.

On June 12, 2017, we entered into a Contribution Agreement (the “Contribution Agreement”) with TNK and Celularity, pursuant to which, among other things, we and TNK agreed to contribute certain intellectual property rights related to our proprietary chimeric antigen receptor (“CAR”) constructs and related CARs to Celularity in exchange for shares of Celularity’s Series A Preferred Stock equal to 25% of Celularity’s outstanding shares of capital stock, calculated on a fully-diluted basis (the "Celularity Shares").

On August 15, 2017, the transactions contemplated by the Contribution Agreement closed, the loan amounts were forgiven, and, on such date, among other things, (a) Celularity issued the Celularity Shares to TNK, and (b) we, TNK and Celularity entered into a License and Transfer Agreement (the "License Agreement"). Pursuant to the License Agreement (i) TNK and we agreed to provide to Celularity (1) our CAR constructs and related CARs for use worldwide in combination with placenta-derived cells and/or cord blood-derived cells for the treatment of any disease or disorder except that anti-CD38 CAR constructs and related CARs may also be used in adult cells for the treatment of multiple myeloma unless TNK exercises its termination rights, and (2) our know-how relating to the foregoing, (ii) TNK and we granted to Celularity a limited, perpetual, transferable and sublicensable license and covenant not to sue with respect to certain of their patents and other intellectual property rights, which license is exclusive for a subset of such patents, and (iii) Celularity agreed to pay to~~TNK 50% of the first $200 million and 20% thereafter of any upfront and milestone payments that Celularity receives in connection with any sublicense of acombination of anti-CD38 CAR constructs and either placenta-driven cells and/or cord blood–derived cells or adult cells.~~

~~Termination of Servier License Agreement~~

On July 11, 2016, we announced a license and collaboration agreement with Les Laboratoires Servier, SAS, a corporation incorporated under the laws of France, and Institut de Recherches Internationales Servier, a company duly organized and existing under the laws of France (individually and collectively, “Servier”) for the development, manufacture and commercialization of products using our fully human immuno-oncology anti-PD-1mAb STI-A1110 and provided support for Sevier’s initial development efforts (the “Servier License Agreement”).

~~Effective November 6, 2017, the Servier License Agreement was terminated by mutual agreement pursuant to its terms.~~

~~New Universal Shelf Registration Statement on Form S-3~~

On November 9, 2017, we filed a Universal Shelf Registration Statement on Form S-3 (File No. 33-221443) (the “New Shelf Registration Statement”) to replace our existing and expiring Universal Shelf Registration Statement on Form S-3 (File No. 333-199849) (the “Existing Shelf Registration Statement”). The Existing Shelf Registration Statement expired on December 6, 2017, when the New Shelf Registration Statement was declared effective.

~~At Market Issuance Sales Agreement~~

On November 9, 2017, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc., as sales agent (the “Agent”), pursuant to which we may offer and sell, from time to time, through the Agent (the “Offering”) up to $100,000,000 in shares of our common stock. Any shares of our common stock offered and sold in the Offering will be issued pursuant to the New Shelf Registration Statement and the prospectus relating to the Offering that forms a part of the New Shelf Registration Statement.

Private Placement ~~of Convertible Promissory Notes~~ and Amendment to Warrants

On ~~December 11, 2017,~~March 26, 2018, we entered into a Securities Purchase Agreement, as amended by Amendment No. 1 thereto, dated as of June 13, 2018 (the “Securities Purchase Agreement” ~~or “Note SPA”~~) with certain accredited investors ~~(collectively, the~~(the “Purchasers”). Pursuant to the Securities Purchase Agreement, ~~on December 21, 2017,~~ we ~~issued~~agreed to issue and ~~sold~~sell to the Purchasers, in a private placement ~~transaction~~ (the “Private Placement”), (1) convertible promissory notes in an aggregate principal amount of ~~$50,000,000~~$37,848,750 (the “Notes”~~), which will accrue simple interest at a rate equal to 5.0% per annum and mature upon the earlier to occur of (a) December 21, 2022, and (b) the date of the closing~~

~~of a change in control (the “Maturity Date”~~), and (2) warrants ~~(the “Warrants”)~~ to purchase ~~an aggregate of 12,121,210 shares of our common stock.~~

On June 13, 2018, pursuant to the Securities Purchase Agreement, we issued and sold to the Purchasers, in the Private Placement, the Notes and the Warrants.

On November 7, 2018, we entered into an Agreement and Consent (the “Agreement and Consent”) with the Purchasers Pursuant to the Agreement and Consent, in consideration for certain of the Purchasers, in their capacity as holders of the Notes, providing a waiver and consent on behalf of all holders of the Notes, pursuant to which the Purchasers provided us with certain waivers of their rights and certain of our covenants under the Securities Purchase Agreement with respect to the Loan Agreement (as defined below) and the transactions contemplated thereby, we and the Purchasers agreed to amend the Warrants to reduce the exercise price per share of ~~$2.26875, subject~~our common stock thereunder from $8.77 to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions. Accrued but unpaid interest on the Notes shall be paid in cash semi-annually in arrears on or prior to the 30th day of June and 31st day of December of each calendar year commencing with the year ending December 31, 2018. If a Purchaser elects to convert any of the principal amount of their Note, then all accrued but unpaid interest on such portion of the principal amount shall become due and payable in cash. The Notes contain restrictive covenants and event of default provisions that are customary for transactions of this type.$3.28.

Each Warrant has an exercise price of ~~$2.61~~$3.28 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, ~~will become~~became exercisable on ~~June 20,~~December 11, 2018, has a term of five and a half years from the date of issuance and iswill be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrants, in which case the Warrants shall also be exercisable on a cashless exercise basis.

~~Termination~~

2018 Purchase Agreements and Indenture for Scilex

On September 7, 2018, we entered into Purchase Agreements (the “2018 Purchase Agreements”) with certain investors (collectively, the “Scilex Note Purchasers”) and Scilex. Pursuant to the 2018 Purchase Agreements, on September 7, 2018, Scilex, among other things, issued and sold to the Scilex Note Purchasers senior secured notes due 2026 in an aggregate principal amount of ~~Hercules~~$224,000,000 (the “Scilex Notes”) for an aggregate purchase price of $140,000,000 (the “Offering”). In connection with the Offering, we also entered into an indenture (the “Indenture”) governing the Scilex Notes with Scilex and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”). Pursuant to the Indenture, we agreed to irrevocably and unconditionally guarantee, on a senior unsecured basis, the punctual performance and payment when due of all obligations of Scilex under the Indenture (the “Guarantee”).

The net proceeds of the Offering were approximately $89.3 million, after deducting the Offering expenses payable by Scilex and funding a segregated reserve account with $20.0 million (the “Reserve Account”) and a segregated collateral account with $25.0 million (the “Collateral Account”) pursuant to the terms of the Indenture. The net proceeds of the Offering will be used by Scilex to support the commercialization of ZTlido® (lidocaine topical system 1.8%), for working capital and general corporate purposes in respect of the commercialization of ZTlido® (lidocaine topical system 1.8%). Funds in the Reserve Account will be released to Scilex upon receipt by the Trustee of an officer’s certificate under the Indenture from Scilex confirming receipt of a marketing approval letter from the FDA with respect to ZTlido® (lidocaine topical system 5.4%) or a similar product with a concentration of not less than 5% (the “Marketing Approval Letter”) on or prior to July 1, 2023. Funds in the Collateral Account will be released to Scilex upon receipt of a written consent authorizing such release from the holders of a majority in principal amount of the Scilex Notes issued, upon the occurrence and during the continuance of an event of default at the direction of the holders of a majority in principal amount of the Scilex Notes issued or upon the repayment in full of all amounts owed under the Scilex Notes.

The holders of the Scilex Notes will be entitled to receive quarterly payments of principal of the Scilex Notes equal to a percentage, in the range of 10% to 20% of the net sales of ZTlido® (lidocaine topical system 1.8%) for the prior fiscal quarter, beginning on February 15, 2019. If Scilex has not received the Marketing Approval Letter by March 31, 2021, the percentage of net sales payable shall be increased to be in the range of 15% to 25%. If actual cumulative net sales of ZTlido® (lidocaine topical system 1.8%) from October 1, 2022 through September 30, 2023 are less than 60% of a predetermined target sales threshold for such period, then Scilex will be obligated to pay an additional installment of principal of the Scilex Notes each quarter in an amount equal to an amount to be determined by reference to the amount of such deficiency.

The aggregate principal amount due under the Scilex Notes shall be increased by $28,000,000 on February 15, 2022 if actual cumulative net sales of ZTlido® (lidocaine topical system 1.8%) from the issue date of the Scilex Notes through December 31, 2021 do not equal or exceed 95% of a predetermined target sales threshold for such period. If actual cumulative net sales of ZTlido® (lidocaine topical system 1.8%) 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.

The final maturity date of the Scilex Notes will be August 15, 2026. The Scilex Notes may be redeemed in whole at any time upon 30 days’ written notice at Scilex’s option prior to August 15, 2026 at a redemption price equal to 100% of the then-outstanding principal amount of the Scilex Notes. In addition, upon a change of control of Scilex (as defined in the Indenture), each holder of a Scilex Note shall have the right to require Scilex to repurchase all or any part of such holder’s Scilex Note at a repurchase price in cash equal to 101% of the then-outstanding principal amount thereof.

Oaktree Term Loan ~~and Security~~ Agreement

On ~~December 21, 2017,~~November 7, 2018, we ~~paid off all obligations owing under,~~ and ~~terminated, the Loan and Security Agreement dated November 23, 2016, as amended, among us,~~ certain of our domestic subsidiaries (the “Guarantors”) entered into a Term Loan Agreement (the “Loan Agreement”) with certain funds and ~~Hercules~~accounts managed by Oaktree Capital ~~Inc.,~~Management, L.P. (collectively, the “Lenders”) and Oaktree Fund Administration, LLC, as ~~a lender~~administrative and collateral agent, for ~~the several banks~~an initial term loan of $100.0 million (the “Initial Loan”) and other financial institutions or entities from time to time party to the agreement (the “Terminated Loan Agreement”). The Terminated Loan Agreement permitted us to borrow up to an aggregate principal amounta second tranche of ~~$75.0~~$50.0 million, subject to ~~funding in multiple tranches.~~the achievement of certain commercial and financial milestones between August 7, 2019 and November 7, 2019, and the satisfaction of certain customary conditions (the “Conditional Loan”). The ~~Terminated~~Initial Loan was funded on November 7, 2018. The net proceeds of the Initial Loan were approximately $91.3 million, after deducting estimated loan costs, commissions, fees and expenses, and will be used for general corporate purposes. In connection with the Loan Agreement, ~~was secured by substantially~~on November 7, 2018, we issued to the Lenders warrants to purchase 6,288,985 shares of our common stock (the “Initial Warrants”). The Initial Warrants have an exercise price per share of $3.28, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will be exercisable from May 7, 2019 through May 7, 2029 and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Initial Warrants (the “Initial Warrant Shares”), in which case the Initial Warrants shall also be exercisable on a cashless exercise basis. If the Conditional Loan is

funded, we will issue to the Lenders additional warrants to purchase such number of shares of our common stock as is equal to 2% of our fully-diluted shares on the date the Conditional Loan is funded, subject to adjustment in certain circumstances (the “Conditional Warrants”). The Conditional Warrants will have an exercise price per share equal to the average volume-weighted average price of one share of our common stock for the ten trading days immediately preceding the date the Conditional Loan is funded, will be exercisable from the date that is six months following the date of issuance through the ten year anniversary of the date of issuance and will be exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Conditional Warrants (the “Conditional Warrant Shares”), in which case the Conditional Warrants shall also be exercisable on a cashless exercise basis. In connection with the Loan Agreement, on November 7, 2018, we and the Lenders entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, we agreed to file one or more registration statements with the Securities and Exchange Commission (the “SEC”) for the purpose of registering for resale the Initial Warrant Shares and the shares of common stock issuable upon exercise of the Conditional Warrants. Under the Registration Rights Agreement, we agreed to file a registration statement with the SEC registering all of the Initial Warrant Shares and the shares of common stock issuable upon exercise of the Conditional Warrants for resale by no later than the 45th day following the issuance of the Initial Warrants and the Conditional Warrants, respectively. On December 13, 2018, we filed a registration statement with the SEC registering all of the Initial Warrant Shares for resale, and such registration statement was declared effective by the SEC on December 21, 2018.

Acquired In-process Research and Development of BDL

In August 2015, we and TNK entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with BDL Products, Inc. (“BDL”) and the stockholders of BDL (the “Stockholders”) pursuant to which the Stockholders sold all of their shares of capital stock in BDL to TNK for: (1) a cash payment of $100.00, and (2) $6.0 million in shares of TNK Class A Stock, subject to adjustment in certain circumstances, to be issued to the Stockholders upon a financing resulting in gross proceeds (individually or in the aggregate) to TNK of at least $50.0 million (a “Qualified Financing”). In accordance with subsequent amendments to the Stock Purchase Agreement, in the event a Qualified Financing did not occur by October 15, 2017 (subject to further extension as implied and based on previously amended dates) or TNK did not complete an initial public offering of shares of its capital stock by September 15, 2017, in lieu of receiving shares of TNK pursuant to the acquisition, the Stockholders would receive an aggregate of 309,916 shares of our common stock, subject to adjustment in certain circumstances.TNK did not complete a Qualified Financing by the financing deadline and we issued 309,916 shares of our common stock to the Stockholders on March 19, 2018.

Sofusa® Acquisition

On July 2, 2018, we entered into an Asset Purchase Agreement (the “Sofusa Purchase Agreement”) with Kimberly-Clark Corporation (“KCC”); Kimberly-Clark Global Sales, LLC (“KCCGS”); and Kimberly-Clark Worldwide, Inc. (“KCCW” and together with KCC and KCCGS, “Kimberly-Clark”) pursuant to which, among other things, we acquired certain of Kimberly-Clark’s assets ~~excluding intellectual property.~~related to micro-needle drug delivery system, including the Sofusa® platform (the “Sofusa Assets”) and related fixed assets, and assumed certain of Kimberly-Clark’s liabilities related to the Sofusa Assets (the “Sofusa Acquisition”). The ~~secured interests under~~closing of the ~~Terminated Loan Agreement were terminated~~Sofusa Acquisition (the “Sofusa Closing”) occurred on July 2, 2018. At the Sofusa Closing, we paid $10 million and agreed to pay additional consideration to Kimberly-Clark upon the achievement of certain regulatory and net sales milestones, as well as a percentage in the low double-digits of any non-royalty amounts received by us in connection with any license, sale or other grant of rights by us to develop or commercialize the Sofusa Assets (all such additional consideration, the “Sofusa Contingent Consideration”). Under the Sofusa Purchase Agreement, the aggregate amount of the Sofusa Contingent Consideration payable by us will not exceed $300.0 million. We also agreed to pay Kimberly-Clark a low single-digit royalty on all net sales with respect to the first five products developed by us or our ~~discharge~~licensees that utilizes intellectual property included in the Sofusa Assets. The transaction was accounted for as an asset acquisition since substantially all the value of ~~indebtedness thereunder.~~the gross assets was concentrated in a single asset. Under the Asset Purchase Agreement, we acquired the Sofusa DoseDisc micro-needle technology designed to increase the efficacy of drug delivery by way of transdermal drug delivery for cash consideration of $10.0 million which was allocated based on the relative fair value of the assets acquired. No contingent consideration was recorded as of December 31, 2018 since the related regulatory approval milestones are not deemed probable until they actually occur. As a result, $9.5 million was expensed as a component of acquired in-process research and development and the remaining $0.5 million was recorded primarily to fixed assets as of December 31, 2018.

Results of Operations

The following discussion of our operating results explains material changes in our results of operations for the years ended December 31, 2018, 2017 ~~2016~~ and ~~2015.~~2016. The discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K.

Comparison of the Years Ended December 31, 2018 and 2017

Revenues. Revenues were $21.2 million for the year ended December 31, 2018, as compared to $151.9 million for the year ended December 31, 2017. The net decrease of $130.7 million is primarily due to higher royalty and licensing activities in the prior year. Royalties and license revenues decreased $139.9 million for the year ended December 31, 2018 as compared to the same period of 2017 primarily due to higher licensing revenue associated with collaboration arrangements in the prior year including from the intangibles transferred to Celularity of approximately $116.2 million as a result of closing the Contribution Agreement in 2017 as well as the cancellation of the Servier agreement, which resulted in revenue of approximately $16.7 million. Sales and service revenues increased by $9.1 million as a result of the product launch of ZTlido®(lidocaine topical system 1.8%), which accounted for $2.6 million of the increase, as well as increased revenue generated from contract manufacturing services due to increased volume.

We expect that any revenue we generate will fluctuate from year to year as a result of the unpredictability of the demand for products and services offered as well as the timing and amount of grant awards, research and development reimbursements and other payments received under any strategic collaborations.

Cost of revenues. Cost of revenues for the years ended December 31, 2018 and 2017 were $7.1 million and $3.9 million, respectively. The increase is due primarily to increased contract manufacturing activities and higher direct materials and overhead costs for the year ended December 31, 2018 compared to the prior year period. The costs generally include employee salaries and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance. The increase of approximately $3.1 million is primarily attributable to increased indirect costs associated with the higher sales and service revenues for next generation homogenous antibody drug conjugate development.

Research and Development Expenses. Research and development expenses for the years ended December 31, 2018 and 2017 were $77.0 million and $55.5 million, respectively. Research and development expenses include expenses associated with the ramp up of ZTlido® (lidocaine topical system 1.8%) as well as the costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards (collectively the “NIH Grants”). 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. The increase of approximately $21.4 million is attributable to increased clinical activities related to consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX into clinical trials and potentially pursue other development activities and regulatory related activities associated with ZTlido®(lidocaine topical system 1.8%). We expect research and development expenses to increase in absolute dollars as we: (i) advance RTX and our other product candidates into clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (iv) incur higher salary, lab supply and infrastructure costs in connection with supporting all of our programs, (v) invest in our joint ventures, collaborations or other third party agreements, and (vi) expand our corporate infrastructure.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the years ended December 31, 2018 and 2017 were $11.3 million and $26.1 million, respectively, with the decrease due to higher levels of acquisition related activities in the prior year. Acquired in-process research and development expenses for the year ended December 31, 2018 include costs associated with the acquisition of acquired in-process research and development from the Sofusa Purchase Agreement. Acquired in-process research and development expenses for the year ended December 31, 2017 include costs associated with the acquisition of acquired in-process research and development from Mabtech Limited.

General and Administrative Expenses. General and administrative expenses for the yearsended December 31, 2018 and 2017 were $63.6 million and $38.3 million, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $25.3 million is primarily attributable to higher employee related costs associated with additional headcount, stock-basedcompensation, legal costs related to acquisitions, general corporate and intellectual property matters, consulting and business development expenses and higher compliance costs associated with our public reporting obligations.

Intangible Amortization. Intangible amortization for the years ended December 31, 2018 and 2017 was $3.0 million and $2.6 million, respectively. The increase in the year ended December 31, 2018 as compared to the same period in 2017 is primarily due to the amortization of acquired in-process research and development upon commercialization of ZTlido®(lidocaine topical system 1.8%).

Gain on derivative liability. Gain on derivative liability for the year ended December 31, 2018 was $2.8 million compared to a derivative liability of $0 for the year ended December 31, 2017. The increase in the year ended December 31, 2018 as compared to the same period in 2017 is due to the change in fair value of the Conditional Warrants associated with the Oaktree Term Loan Agreement as further described in Note 12 in the Notes to Consolidated Financial Statements in this Form 10-K.

Loss (gain) on Contingent Liabilities. Contingent liabilities for the years ended December 31, 2018 and 2017 was $12.0 million and $54.3 million, respectively. The decrease in the year ended December 31, 2018 as compared to the same period in 2017 is primarily due to the settlements of Scilex and BDL liabilities for $38.2 million and $2.3 million, respectively, and the $11.3 million partial settlement of the Virttu financing milestone in shares of our common stock. The decrease was partially offset by a re-measurement of fair value resulting in a loss on contingent liabilities of $9.6 million during the year ended December 31, 2018.

Interest Expense. Interest expense for the years ended December 31, 2018 and 2017 was $57.6 million and $5.0 million, respectively. The increase in the year ended December 31, 2018 as compared to the same period in 2017 resulted primarily from the conversion during the year of the convertible notes issued in December 2017. The unamortized discount remaining at the date of conversion of $44.3 million was recognized immediately at that date as interest expense. An additional increase is primarily attributed to interest expense associated with the 2018 Securities Purchase Agreement in the Private Placement and Amendment to Warrants, the 2018 Oaktree Term Loan Agreement and Scilex Notes entered into in 2018.

Interest Income. Interest income for the years ended December 31, 2018 and 2017 was $0.9 million and $0.2 million, respectively.

Income tax benefit. Income tax benefit for the year ended December 31, 2018 was $6.3 million. Income tax benefit for the year ended December 31, 2017 was $36.0 million. The decrease in the year ended December 31, 2018 as compared to the same period in 2017 is primarily due to the reduction in deferred tax liabilities for Scilex.

Loss (income) on equity method investments. Loss on equity investments for the year ended December 31, 2018 was $5.0 million compared to a loss on equity investments of $40.2 million for the year ended December 31, 2017. (See Note 9 in the Notes to Consolidated Financial Statements in this Form 10-K).

Net (loss) income. Net loss for the year ended December 31, 2018 was $212.5 million as compared to net income of $11.1 million for 2017. The decrease in net income is mainly attributable to revenue recognized from the intangibles transferred to Celularity as a result of closing the contribution agreement in 2017.

Comparison of the Years Ended December 31, 2017 and 2016

Revenues. Revenues were $151.9 million for the year ended December 31, 2017, as compared to $8.2 million for the year ended December 31, 2016. The net increase of $143.7 million is primarily due to an increase in royalty and licensing activities for the year ended December 31, 2017 compared to the corresponding period of 2016. Royalties and license revenues increased $136.4 million for the year ended December 2017 as compared to the same period of 2016 primarily due to revenue recognized from the intangibles transferred to Celularity of approximately $116.2 million as a result of closing the Contribution Agreement in 2017 as well as the cancellation of the Servier agreement which resulted in revenue of approximately ~~$16~~$16.0 million. Sales and service revenues generated from the sale of customized reagents and providing contract development services increased $8.2 million for the year ended December 2017 as compared to the same period of 2016.

Cost of revenues. Cost of revenues for the years ended December 31, 2017 and 2016 were $3.9 million and $0.8 million, respectively. The increase is due primarily to increased contract manufacturing activities and higher direct materials and overhead costs for the year ended December 31, 2017 compared to the prior year period. The costs generally include employee

salaries and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance. We expect cost of revenues to fluctuate with related sales and service ~~revenues.~~revenues

Research and Development Expenses. Research and development expenses for the years ended December 31, 2017 and 2016 were $55.5 million and $42.2 million, respectively. Research and development expenses include expenses associated with the ramp up of ~~ZTlido~~^TMZTlido® (lidocaine topical system 1.8%) as well as the costs related to our RTX program activities towards

entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH grant awards (collectively the “NIH Grants”). 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. The increase of $13.4 million is attributable to increased clinical activities related to consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX into clinical trials and potentially pursue other development activities and regulatory related activities associated with ~~ZTlido~~ZTlido®^TM(lidocaine topical system 1.8%). We expect research and development expenses to increase in absolute dollars as we: (i) advance RTX and our other product candidates into clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, (v) invest in our joint ventures, collaborations or other third party agreements, and (vi) expand our corporate infrastructure.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the years ended December 31, 2017 and 2016 were $26.1 million and $45.0 million, respectively, with the decrease to due to higher levels of acquisition related activities in the prior year. Acquired in-process research and development expenses for the year ended December 31, 2017 include costs associated with the acquisition of acquired in-process research and development from Mabtech. Acquired in-process research and development expenses for the year ended December 31, 2016 include costs associated with the acquisition of acquired in-process research and development from Mabtech Limited and LA Cell.

General and Administrative Expenses. General and administrative expenses for the years ended December 31, 2017 and 2016 were $38.3 million and $24.2 million, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $14.1 million is primarily attributable to higher salaries and related compensation expenses, stock-based compensation, legal costs related to acquisitions, general corporate and intellectual property matters, consulting and business development expenses and higher compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, (ii) expand our efforts to ensure continued compliance with our public reporting obligations, (iii) build our infrastructure, and (iv) invest in our joint ventures, collaborations or other third party agreements.

Intangible Amortization. Intangible amortization for the years ended December 31, 2017 and 2016 was $2.6 million and $0.8 million, respectively. The increase in the year ended December 31, 2017 as compared to the same period in 2016 is due to the impact of the acquisition of Scilex and the start of patent right amortization in 2017.

Gain ~~or Loss~~ on derivative liability. Gain on derivative liability for the year ended December 31, 2017 was $0 compared to a gain on derivative liability of ~~$5,520 thousand~~$5.5 million for the year ended December 31, 2016. The decrease in the year ended December 31, 2017 as compared to the same period in 2016 is due to the expiration of the unexercised derivative liability on March 31, 2016 associated with the cancelled call option on shares of NantKwest, Inc. stock.

Interest Expense. Interest expense for the years ended December 31, 2017 and 2016 was $5.0 million and $1.6 million, respectively.

Interest Income. Interest income for the years ended December 31, 2017 and 2016 was $0.2 million and $0.3 million, respectively.

Income tax ~~expense (benefit)~~benefit. Income tax benefit for the year ended December 31, 2017 was $36.0 million. Income tax benefit for the year ended December 31, 2016 was $0.9 million. The increase in the year ended December 31, 2017 as compared to the same period in 2016 is primarily due to re-measurement adjustments related to the impact of U.S. tax reform under the Tax Cut and Jobs Act which was enacted on December 22, 2017.

~~Income (loss)~~Loss on equity method investments. Loss on equity investments for the year ended December 31, 2017 was $40.2 million compared to a gain on equity investments of $0.4 million for the year ended December 31, 2016. The decrease was primarily due to the recognition of other-than-temporary impairment associated with our equity method investment in NANTibody for the year ended December 31, 2017. (See Note 9 in the Notes to ~~the notes to our consolidated financial statements accompanying~~Consolidated Financial Statements in this Form 10-K).

Net ~~Income (Loss)~~(loss) income. Net income (loss) for the years ended December 31, 2017 and 2016 was $11.1 million and $(63.9) million, respectively. The increase in net income is mainly attributable to revenue recognized from the intangibles transferred to Celularity as a result of closing the Contribution Agreement in 2017.

~~Comparison of the Years Ended December 31, 2016 and 2015~~

~~Revenues~~. Revenues were $8,152 thousand for the year ended December 31, 2016, as compared to $4,590 thousand for the year ended December 31, 2015. The net increase of $3,562 thousand is primarily due to an increase in royalty and licensing activities for the year ended December 31, 2016 compared to the corresponding period of 2015. Royalties and license revenues increased $3,052 thousand for the year ended December 2016 as compared to the same period of 2015. Sales and service revenues generated from the sale of customized reagents and providing contract development services increased $1,007 thousand for the year ended December 2016 as compared to the same period of 2015.

In June 2014, the NIAID, a division of the NIH, awarded us the Staph Grant III Award to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat Staph infections, including MRSA. The project period for the Staph Grant III Award covered a two-year period which commenced in June 2014, with total funds available of approximately $1 million per year for up to 2 years. During the years ended December 31, 2016 and 2015, we recorded $699 thousand and $884 thousand of revenue, respectively, associated with the Staph Grant III Award.

~~In June 2014, we were awarded the Phase I STTR Grant Award. The Phase I STTR Grant Award was to support the preclinical development of novel anti-Pseudomonas aeruginosa~~ mAb immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle. Each modality may be an effective and safe stand-alone therapy and/or a component of a “cocktail” therapeutic option for prevention and treatment of ~~P. aeruginosa~~ infections. The project period for the Phase I STTR Grant Award covered a two-year period which commenced in July 2014, with total funds available of approximately $300 thousand per year for up to 2 years. During the years ended December 31, 2016 and 2015, we recorded $256 thousand and $302 thousand of revenue, respectively, associated with the Phase I STTR Grant Award.

In July 2014, we were awarded a Phase I STTR grant from the National Cancer Institute (“NCI”), a division of the NIH, entitled “Targeting of Myc-Max Dimerization for the Treatment of Cancer” (the “Phase I Myc Grant Award”). The Phase I Myc Grant Award was to support the preclinical development of the Myc inhibitor, which interferes with the protein-protein interaction (“PPI”) between Myc and its obligatory dimerization partner, Max, preventing sequence-specific binding to DNA and subsequent initiation of oncogenic transformation. The project period for the Phase I Myc Grant Award covered a one-year period which commenced in August 2014, with total funds available of approximately $225 thousand. During the years ended December 31, 2016 and 2015, we recorded $0 and $139 thousand of revenue, respectively associated with the Phase I Myc Grant Award.

In August 2014, we were awarded a Phase I Small Business Innovation Research (“SBIR”) grant from the National Heart, Lung, and Blood Institute (“NHBLI”), a division of the NIH, entitled “Human Anti-WISP-1 Antibodies for Treatment of Idiopathic Pulmonary Fibrosis” (the “Phase I WISP1 Grant Award”). The Phase I WISP1 Grant Award was to advance our immunotherapy targeting WNT-1 Inducible Signaling Protein-1(“WISP1”) for the treatment of Idiopathic Pulmonary Fibrosis (“IPF”). WISP1 is a protein that has been shown to be upregulated in IPF, linked to key growth factors, cellular proliferation, hyperplasia and is correlated with late stage cancers. IPF is a fatal disease, which results in progressive loss of lung function due to fibrosis of the lungs. The project period for the Phase I WISP1 Grant Award covered a one-year period which commenced in August 2014, with total funds available of approximately $225 thousand. During the years ended December 31, 2016 and 2015, we recorded $51 thousand and $156 thousand of revenue, respectively, associated with the Phase I WISP1 Grant Award.

Revenues from a human immuno-oncology anti PD-L1 license agreement for each of the years ended December 31, 2016 and 2015, were $50 thousand. We had no other revenue during the years ended December 31, 2016 and 2015 as we have not yet developed any product candidates for commercialization or earned any licensing or royalty payments.

~~Cost of revenues~~. Cost of revenues for the years ended December 31, 2016 and 2015 were $811 thousand and $1,950 thousand, respectively. The decrease is due primarily to lower direct materials and overhead costs for the year ended December 31, 2016 compared to the prior year period. The costs generally include employee salaries and benefits, direct materials and

~~overhead costs including rent, depreciation, utilities, facility maintenance and insurance. We expect cost of revenues to fluctuate with related revenues.~~

~~Research and Development Expenses.~~ Research and development expenses for the years ended December 31, 2016 and 2015 were $42,175 thousand and $31,343 thousand, respectively. Research and development expenses include the costs related to our RTX program activities towards entering into future clinical trials, costs to identify, isolate and advance human antibody drug candidates derived from our libraries as well as advancing our ADC preclinical drug candidates, preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the NIH Grants. 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. The increase of $10,832 thousand is primarily attributable to preclinical testing and completion of our BE registration trial prior to its sale in July 2015, salaries and compensation related expense, consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance RTX into clinical trials and potentially pursue other development activities. We expect research and development expenses to increase in absolute dollars as we: (i) advance RTX and our other product candidates into clinical trials and pursue other development, acquire, develop and manufacture clinical trial materials and increase other regulatory operating activities, (ii) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities, (iii) continue to identify and advance a number of fully human therapeutic antibody and ADC preclinical product candidates, (iv) incur higher salary, lab supply and infrastructure costs incurred in connection with supporting all of our programs, (v) invest in our joint ventures, collaborations or other third party agreements, and (vi) expand our corporate infrastructure.

~~Acquired In-process Research and Development Expenses~~. Acquired in-process research and development expenses for the years ended December 31, 2016 and 2015 were $45,000 thousand and $24,013 thousand, respectively. Acquired in-process research and development expenses for the year ended December 31, 2016 include costs associated with the acquisition of acquired in-process research and development from Mabtech Limited and LA Cell. Acquired in-process research and development expenses for the year ended December 31, 2015 include costs associated with the purchase price of the license rights from Mabtech Limited, the purchase price of the license rights from the City of Hope and the purchase price of CARgenix Holdings LLC and BDL Products, Inc.

~~General and Administrative Expenses. General and administrative expenses for the years~~ended December 31, 2016 and 2015 were $24,219 thousand and $20,132 thousand, respectively. General and administrative expenses consist primarily of salaries and personnel related expenses for executive, finance and administrative personnel, stock-based compensation expense, professional fees, infrastructure expenses, legal and accounting expenses and other general corporate expenses. The increase of $4,087 thousand is primarily attributable to higher salaries and related compensation expenses, stock-basedcompensation, legal costs related to acquisitions, general corporate and intellectual property matters, consulting and business development expenses and higher compliance costs associated with our public reporting obligations. We expect general and administrative expenses to increase in absolute dollars as we: (i) incur incremental expenses associated with expanded operations and development efforts, (ii) expand our efforts to ensure continued compliance with our public reporting obligations, (iii) build our infrastructure, and (iv) invest in our joint ventures, collaborations or other third party agreements.

~~Intangible Amortization~~. Intangible amortization for the years ended December 31, 2016 and 2015 was $845 thousand and $1,157 thousand, respectively. The decrease in the year ended December 31, 2016 as compared to the same period in 2015 is due to license rights being amortized on a straight line basis through the date those assets were held for sale.

~~Gain or Loss on derivative liability~~. Gain on derivative liability for the year ended December 31, 2016 was $5,520 thousand compared to a loss on derivative liability of $3,360 thousand for the year ended December 31, 2015. The increase in the year ended December 31, 2016 as compared to the same period in 2015 is due to the expiration of the unexercised derivative liability on March 31, 2016 associated with the cancelled call option on shares of NantKwest, Inc. stock.

~~Interest Expense. Interest expense for the years ended December 31, 2016 and 2015 was $1,610 thousand and $1,652 thousand, respectively.~~

~~Interest Income~~. Interest income for the years ended December 31, 2016 and 2015 was $272 thousand and $24 thousand, respectively. The increase in interest income resulted in an increase in notes receivables in the current year compared to prior period. We expect that continued low interest rates will significantly limit our interest income in the near term.

~~Income tax expense (benefit). Income tax benefit for the year ended December 31, 2016 was $896 thousand. Income tax expense for the year ended December 31, 2015 was $36,314 thousand.~~

~~Income (loss) on equity method investments~~. Gain on equity method investments for the year ended December 31, 2016 was $435 thousand compared to a loss on equity investments of $4,041 thousand for the year ended December 31, 2015. The increase was primarily due to the recognition of our portion of the loss from operations from our joint venture entities which did not exist during the same period in 2015.

~~Net Loss~~. Net loss for the years ended December 31, 2016 and 2015 was $63,937 thousand and $50,074 thousand, respectively. The increase in net loss is mainly attributable to the expanded research and development activities, and an increase in acquired in-process research and development and general and administrative activities.

Liquidity and Capital Resources

As of December 31, ~~2017,~~2018, we had ~~$20.4~~$158.7 million in cash and cash equivalents attributable in part to the ~~net proceeds received in connection with the Private Placement. Pursuant~~following financing arrangements:

On June 13, 2018, pursuant to the Securities Purchase Agreement, ~~on December 21, 2017,~~ we issued and sold ~~the Notes and the Warrants~~ to the Purchasers, in ~~a private placement transaction.~~

~~At any time and from time to time before~~ the ~~Maturity Date, each Purchaser shall have the option to convert any portion of the outstanding~~Private Placement (1) Notes in an aggregate principal amount of ~~such Purchaser’s Note that is equal to or greater than the lesser of: (1) $4,000,000,~~$37,848,750, and (2) ~~the then-outstanding principal amount~~Warrants to purchase an aggregate of ~~such Purchaser's Note into~~2,698,662 shares of our common ~~stock at a price per share of $2.26875, subject~~stock.

On September 7, 2018, Scilex entered into the 2018 Purchase Agreements with the Purchasers and us. Pursuant to ~~adjustment for stock splits, reverse stock splits, stock dividends~~the 2018 Purchase Agreements, on September 7, 2018, Scilex, among other things, issued and ~~similar transactions. Accrued but unpaid interest on~~sold to the Purchasers the Notes ~~shall be paid~~with an aggregate principal of $224.0 million for an aggregate purchase price of $140.0 million. The net proceeds of the Offering were approximately $89.3 million, after deducting the Offering expenses payable by Scilex and funding the Reserve Account ($20.0 million) and the Collateral Account ($25.0 million) pursuant to the terms of the Indenture. In connection with the Offering, Scilex also entered into the Indenture governing the Notes with the Trustee and Collateral Agent and us. Pursuant to the Indenture, we agreed to the Guarantee.

On November 7, 2018, we and the Guarantors entered into the Loan Agreement with the Lenders and Oaktree Fund Administration, LLC, as administrative and collateral agent, for the Initial Loan and the Conditional Loan. The Initial Loan was funded on November 7, 2018. The net proceeds of the Initial Loan were approximately $91.3 million, after deducting estimated loan costs, commissions, fees and expenses.

Cash Flows from Operating Activities. Net cash used for operating activities was $111.8 million for the twelve months ended December 31, 2018 as compared to $99.2 million for the twelve months ended December 31, 2017. Net cash used in 2018 reflects a net loss of $212.5 million, which was partially offset by non-cash interest expense charges of $52.8 million, as well as other non-cash charges totaling $41.9 million, primarily related to depreciation and amortization, stock based compensation, charges related to acquired IPR&D, loss on debt extinguishment, loss on equity investments and loss on contingent liabilities. Net cash used for operating activities was $99.2 million for 2017 and was primarily due to an increase in cash ~~semi-annually~~flow associated with accrued payroll, deferred rent, accrued expenses and other operating activities.

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 pre-clinical development and research activities, and continue to support the commercial launch of ZTlido® and fund our joint ventures, collaborations and other third party agreements.

Cash Flows from Investing Activities. Net cash used for investing activities was $21.2 million for 2018 as compared to $16.5 million for 2017. Our investing activities used $11.2 million to acquire equipment and building improvements. Additionally, we used $10.0 million for the Sofusa Purchase Agreement. In 2017, investing activities used $11.0 million to acquire equipment and building improvements as well as $5.0 million related to our investment in ~~arrears on or prior~~Celularity.

We expect to increase our investment in equipment and implement facility improvements as we seek to expand and progress our research and development capabilities.

Cash Flows from Financing Activities. Net cash provided by financing activities was $326.0 million for 2018, which was primarily attributed to the ~~30th day~~net proceeds from the issuance of ~~June or 31st day of December of each calendar year commencing~~convertible notes in connection with the ~~year ending December 31, 2018. If a Purchaser elects to convert any~~Securities Purchase Agreement, net proceeds from the issuance of the ~~principal amount~~Scilex Notes, and net proceeds from the Initial Loan related to the Loan Agreement. Additional cash was provided by the issuance of ~~their Note, then all accrued but unpaid interest on such portion~~common stock upon the exercise of stock options. Net cash provided by financing activities was $53.7 million for 2017, which was primarily from the net proceeds from the issuance of common stock and the issuance of the ~~principal amount shall become due and payable~~Notes in ~~cash. The Notes contain restrictive covenants and event of default provisions that are customary for transactions of this type.~~

Each Warrant has an exercise price of $2.61 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will become exercisable on June 20, 2018, has a term of five and a half years and is exercisable on a cash basis, unless there is not an effective registration statement covering the ~~resale~~Private Placement partially offset by the repayment of the ~~shares issuable upon exercise~~Hercules loan.

Future Liquidity Needs. We have principally financed our operations through underwritten public offerings and private equity financings with aggregate net proceeds of ~~the Warrants,~~$295.1 million since inception, as we have not generated any significant product related revenue from our principal operations to date, and do not expect to generate significant revenue for several years, if ever. We will need to raise additional capital before we exhaust our current cash resources in ~~which case the Warrants shall also~~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. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements. We can give no assurances that we will be ~~exercisable~~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 ~~a cashless exercise basis.~~

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, 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. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K do not include any adjustments that might result from the outcome of this uncertainty.

~~Cash Flows from Operating Activities~~. Net cash used for operating activities was $99.2 million for 2017 and is primarily due to an increase in cash flow associated with accrued payroll, deferred rent, accrued expenses and other operating activities.

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 and fund our joint ventures, collaborations and other third party agreements.

~~Cash Flows from Investing Activities. Net cash used for investing activities was $16.5 million for 2017 as compared to net cash used for investing activities of $17.5 million for 2016.~~

~~We expect to increase our investment in equipment as we seek to expand and progress our research and development capabilities.~~

~~Cash Flows from Financing Activities~~. Net cash provided by financing activities was $53.7 million for 2017, which was primarily from the net proceeds from the issuance of common stock and the issuance of the Notes in the Private Placement partially offset by the repayment of the Hercules loan.

~~Future Liquidity Needs~~. We have principally financed our operations through underwritten public offerings and private equity financings with aggregate net proceeds of $211.3 million since inception, as we have not generated any product related revenue from our principal operations to date, and do not expect to generate significant revenue for several years, if ever. 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. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings, or through corporate collaboration 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 the Company's ability to continue as a going concern.

We anticipate that we will continue to incur net losses into the foreseeable future as we: (i) advance RTX and other product candidates into clinical trials, ~~and potentially pursue other development,~~ (ii) continue to identify and advance a number of potential mAb and ADC product candidates into preclinical development activities, (iii) continue our development of, and seek regulatory approvals for, our product candidates, (iv) expand our corporate infrastructure, including the costs associated with being a Nasdaq listed public company, and (v) incur our share of joint venture and collaboration costs for our products and technologies.

We plan to continue to fund our 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.

In November ~~2014,~~2017, we filed a universal shelf registration statement on Form S-3 (the “2017 Shelf Registration Statement”) with the ~~U.S. Securities and Exchange Commission (the “SEC”),~~SEC, which was declared effective by the SEC in December ~~2014 (the “2014 Shelf Registration Statement”).~~2017. The ~~2014~~2017 Shelf Registration Statement ~~provided~~provides us with the ability to offer up to ~~$250~~$350 million of securities, including equity and other securities as described in the registration statement. Included in the November 2014 shelf registration was a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $50.0 million of our common stock that could have been issued and sold under a sales agreement with MLV & Co. LLC (the “2014 ATM Facility”). During the twelve months ended December 31, 2017, we sold approximately $3.6 million in shares of common stock under the 2014 ATM Facility. On November 9, 2017, we filed a universal shelf registration statement on Form S-3 with the SEC (the “2017 Shelf Registration Statement”) to replace the 2014 Shelf Registration Statement. The 2014 Shelf Registration Statement expired on December 6, 2017, when the New Shelf Registration Statement was declared effective by the SEC. Included in the 2017 Shelf Registration Statement is a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $100.0 million of our common stock that may be issued and sold under a sales agreement with B. Riley FBR, Inc. (the “ATM Facility”). During the twelve months ended December 31, ~~2017,~~2018, we sold approximately ~~$0.9~~$83.6 million in shares of common stock under the ATM Facility. We ~~have the ability to~~can offer up to ~~$99.1~~$15.5 million of additional shares of common stock under the ATM Facility, subject to certain limitations.

Pursuant to this Shelf Registration Statement, we may offer such securities from time to time and through one or more methods of distribution, subject to market conditions and our capital needs. Specific terms and prices will be determined at the time of each offering under a separate prospectus supplement, which will be filed with the SEC at the time of any offering.

On April 13, 2017, we entered into the Underwriting Agreement with the Underwriters, relating to the Offering of 23,625,084 shares of our common stock. The public offering price was $2.00 per share of our common stock and the Underwriters agreed to purchase the shares of common stock pursuant to the Underwriting Agreement at a price of $1.8571 per share.

On December 11, 2017, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement” or “Note SPA”) with certain accredited investors (collectively, the “Purchasers”). Pursuant to the Securities Purchase Agreement, on December 21, 2017, we issued and sold to the Purchasers, in a private placement transaction (the “Private Placement”), (1) convertible promissory notes in an aggregate principal amount of $50,000,000 (the “Notes”), which will accrue simple interest at a rate equal to 5.0% per annum and mature upon the earlier to occur of (a) December 21, 2022, and (b) the date of the closing of a change in control (the “Maturity Date”), and (2) warrants (the “Warrants”) to purchase an aggregate of 12,121,210 shares of our common stock.

the principal amount of their Note, then all accrued but unpaid interest on such portion of the principal amount shall become due and payable in cash. The Notes contain restrictive covenants and event of default provisions that are customary for transactions of this type. If the Notes are converted, substantial dilution to existing stockholders would result.

Each Warrant has an exercise price of $2.61 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, will become exercisable on June 20, 2018, has a term of five and a half years and is exercisable on a cash basis, unless there is not an effective registration statement covering the resale of the shares issuable upon exercise of the Warrants, in which case the Warrants shall also be exercisable on a cashless exercise basis.

If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise 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 our ability to operate our business.

Uses of Cash. We have and plan to expand our business and intellectual property portfolio through the acquisition of new businesses and technologies as well as entering into licensing arrangements.

Acquisition of Virttu Biologics Limited

On April 27, 2017, we entered into a Share Purchase Agreement (the “Virttu Purchase Agreement”) with TNK Therapeutics, Inc., a majority-owned subsidiary of ours (“TNK”), Virttu Biologics Limited (“Virttu”), the shareholders of Virttu (the “Virttu Shareholders”) and Dayspring Ventures Limited, as the representative of the Virttu Shareholders, pursuant to which, among other things, TNK acquired from the Virttu Shareholders 100% of the outstanding ordinary shares of Virttu (the “Virttu Acquisition”).

We issued an aggregate of 1,795,011 shares of our common stock to the Virttu Shareholders on April 27, 2018 for a value of $11.3 million. As of December 31, 2018, approximately $9.9 million payable in cash related to acquisition consideration has not been paid as of the date of this filing. See further discussion in Note 4 in the Notes to Consolidated Financial Statements in this Form 10-K.

Acquisition of Scilex Pharmaceuticals Inc.

On November 8, 2016, we entered into a Stock Purchase Agreement (the “Scilex Purchase Agreement”) with Scilex and a majority of the stockholders of Scilex (the “Scilex Stockholders”) pursuant to which, on November 8, 2016, we acquired from the Scilex Stockholders, and the Scilex Stockholders sold to us, approximately 72% of the outstanding capital stock of Scilex (the “Scilex Acquisition”), which remains a stand-alone company. The remainder of the outstanding capital stock of Scilex represents a noncontrolling interest of which approximately 19.3% continues to be held by ITOCHU CHEMICAL FRONTIER CORPORATION following the Scilex Acquisition.

Under the terms of the Scilex Purchase Agreement, we agreed to provide additional consideration to the Accredited Scilex Stockholders upon the achievement of certain milestones, as further discussed in Note 4 in the Notes to Consolidated Financial Statements in this Form 10-K. In 2018, we paid $22.5 million of remaining contingent consideration for regulatory milestones related to the Scilex Purchase Agreement.

Sofusa® Acquisition

On July 2, 2018, we entered into an Asset Purchase Agreement (the “Sofusa Purchase Agreement”) with Kimberly-Clark Corporation (“KCC”); Kimberly-Clark Global Sales, LLC (“KCCGS”); and Kimberly-Clark Worldwide, Inc. (“KCCW” and together with KCC and KCCGS, “Kimberly-Clark”) pursuant to which, among other things, we acquired certain of Kimberly-Clark’s assets related to micro-needle drug delivery system, including the Sofusa® platform (the “Sofusa Assets”) and related fixed assets, and assumed certain of Kimberly-Clark’s liabilities related to the Sofusa Assets (the “Sofusa Acquisition”). The closing of the Sofusa Acquisition (the “Sofusa Closing”) occurred on July 2, 2018. At the Sofusa Closing, we paid $10 million and agreed to pay additional consideration to Kimberly-Clark upon the achievement of certain regulatory and net sales milestones, as well as a percentage in the low double-digits of any non-royalty amounts received by us in connection with any license, sale or other grant of rights by us to develop or commercialize the Sofusa Assets (all such additional consideration, the “Sofusa Contingent Consideration”). Under the Sofusa Purchase Agreement, the aggregate amount of the Sofusa Contingent Consideration payable by us will not exceed $300.0 million. We also agreed to pay Kimberly-Clark a low single-digit royalty on all net sales with respect to the first five products developed by us or our licensees that utilizes intellectual property included in the Sofusa Assets. The transaction was accounted for as an asset acquisition since substantially all the value of the gross assets was concentrated in a single asset. Under the Asset Purchase Agreement, we acquired the Sofusa DoseDisc micro-needle technology designed to increase the efficacy of drug delivery by way of transdermal drug delivery for cash consideration of $10.0 million which was allocated based on the relative fair value of the assets acquired. No contingent consideration has been recorded at December 31, 2018 since the related regulatory approval milestones are not deemed probable until they actually occur. As a result, $9.5 million was expensed as a component of acquired in-process research and development and the remaining $0.5 million was recorded primarily to fixed assets as of December 31, 2018.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.

Stock-Based Compensation. We account for stock-based compensation in accordance with authoritative guidance for stock-based compensation, which requires us to measure the cost of employee services received in exchange for equity incentive awards, including stock options, based on the grant date fair value of the award. The fair value is estimated using the Black-Scholes option pricing model. The resulting cost is recognized over the period during which the employee is required to provide services in exchange for the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated statements of operations based on the department to which the related employee reports. To the extent that we issue future stock incentive awards to employees,

our stock-based compensation expense will be increased by the additional unearned compensation resulting from such additional issuances. (See Note 13 in the Notes to the Consolidated Financial Statements in this Form 10-K).

We account for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at its estimated fair value upon vesting. We evaluate the assumptions used to value stock awards to non-employees on a periodic basis. If factors change and we employ different assumptions, including any significant change to the inputs used in the ~~estimated~~option pricing models to determine the fair value, ~~of common stock,~~ stock-based compensation expense may differ significantly from what we have recorded historically. In addition, to the extent that we issue future stock incentive awards to non-employees, our stock-based compensation expense will be increased by the additional unearned compensation resulting from such additional issuances.

Revenue Recognition. ~~The revenue~~Our revenues are generated from various NIH grant awards, ~~is based upon subcontractor~~license fees, product sales, the sale of customized reagents and other materials, and the provision of contract manufacturing and other services. We do not have significant costs associated with costs to obtain contracts with our customers. Substantially all of our grants and internal costs incurred that are specifically covered by each grant, and where applicable, plus a facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors or when we incur internal expenses that are related to the grant. Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue. (See Note 3 to the notes to our consolidated financial statements accompanying this Form 10-K).accounts receivable result from contracts with customers.

License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period, with the exception of license agreements with no remaining performance obligations or undelivered obligations.

Revenues from sales and services are generated from product sales, the sale of customized reagents and providing contract ~~development~~manufacturing services. Reagents are used for preparing ADCs, these reagents include industrial standard cytotoxins, linkers, and linker-toxins. The contract development services include providing synthetic expertise to customer’s synthesis by delivering them proprietary cytotoxins, linkers and linker-toxins and ADC service using industry standard toxin and antibodies provided

by customers. ~~Revenue~~Product sales include the sale of ZTlido®(lidocaine topical system 1.8%).

We recognize revenue when control of the products is ~~recognized~~transferred to the customers in an amount that reflects the consideration we expect to receive from the customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract and the contract price, allocating the contract price to the distinct performance obligations in the contract and recognizing revenue when ~~(i) persuasive evidence of an arrangement exists, (ii)~~ the ~~product has been shipped or the services~~performance obligations have been ~~rendered, (iii)~~satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the ~~price~~customer either on its own or together with other resources that are readily available to the customer and is ~~fixed~~separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or ~~determinable,~~service to the customer, meaning the customer has the ability to use and ~~(iv) collectability is reasonably assured.~~obtain the benefit of the good or service. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. (See Note 3 in the Notes to Consolidated Financial Statements in this Form 10-K).

For Scilex product sales, we record gross-to-net sales adjustments for government and managed care rebates, chargebacks, wholesaler fees, sales returns and prompt payment discounts. These are generally accounted for as variable consideration estimated in the same period the related sales occur. Government and other rebates and chargebacks represent the majority of our variable consideration and require complex and significant judgment. Estimates are assessed each period and updated to reflect current information. There was no material variable consideration for Scilex product sales during the year ended December 31, 2018.

Investments in Other Entities. We hold a portfolio of investments in equity securities that are accounted for under either the equity method or cost method. Investments in entities over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in loss on equity investments.

Our cost method investments are included in cost method investments on the consolidated balance sheets. Our equity method investments are included in equity method investments on the consolidated balance sheets.

All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value has occurred include: the magnitude of the impairment and length of time that the estimated market value was below the cost basis; financial condition and business prospects of the investee; our intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; issues that raise concerns about the investee's ability to continue as a going concern; any other information that

we may be aware of related to the investment. We do not report the fair value of our equity investments in non-publicly traded companies because it is not practical to do so. (See Note 9 in the Notes to ~~the notes to our consolidated financial statements accompanying~~Consolidated Financial Statements in this Form 10-K).

Debt, Including Debt With Detachable Warrants. Debt with detachable warrants are evaluated for the classification of warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with equity-classified warrants, the proceeds from the issuance of convertible debt are first allocated to the debt and the warrants at their relative estimated fair values. The portion of the proceeds so allocated to the warrants are accounted for as paid-in capital and a debt discount. The remaining proceeds, as further reduced by discounts created by the bifurcation of embedded derivatives and beneficial conversion features, are allocated to the debt. We account for debt as liabilities measured at amortized cost and ~~amortizes~~amortize the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument. We consider whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC ~~815.~~815,

Derivatives and Hedging.

If the amount allocated to the convertible debt results in an effective per share conversion price less than the fair value of our common stock on the commitment date, the intrinsic value of this beneficial conversion feature is recorded as a discount to the convertible debt with a corresponding increase to additional paid in capital. The beneficial conversion feature discount is equal to the difference between the effective conversion price and the fair value of our common stock at the commitment date, unless limited by the remaining proceeds allocated to the debt.

We may enter financing arrangements, the terms of which involve significant assumptions and estimates, including future net product sales, in determining interest expense, amortization period of the debt discount, as well as the classification between current and long-term portions. In estimating future net product sales, we assess prevailing market conditions using various external market data against our anticipated sales and planned commercial activities. See Note 12 in the Notes to Consolidated Financial Statements in this Form 10-K for our discussion of the Scilex Notes, which include repayments based on a percentage of net sales of ZTlido® (lidocaine topical system 1.8%). Consequently, we impute interest on the carrying value of the debt and record interest expense using an imputed effective interest rate. We reassess the expected payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis, with a corresponding impact to the classification of our current and long-term portions.

Income Taxes. The provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740-10, Uncertainty in Income Taxes, address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC Topic 740-10, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. We have determined that we have uncertain tax positions.

We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates.

We have deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. As of December 31, ~~2016,~~2018, we maintained a full valuation allowance against our deferred tax assets, with the exception of an amount equal to our deferred tax ~~liabilities, which can be expected to reverse over a definite life.~~liabilities.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act’’), which significantly revises the Internal Revenue Code of 1986, as amended. The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitations ofon the deduction for net operating losses to 80% of current year taxable income, ~~and elimination of~~indefinite carryover period for net operating ~~loss carrybacks.~~

losses and limitations on the deductibility of interest to 30% of adjusted taxable income.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which ~~allows~~allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. ~~We are currently analyzing the impact~~As of ~~the various provisions of~~December 22, 2018, our accounting for the Tax ~~Act. The ultimate impact may differ from~~Act was complete and there were no material changes to the provisional amounts previously recorded.

Goodwill and Other Long-Lived Assets. Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment. During our goodwill impairment review, we may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. We ~~expect~~may also elect to ~~complete~~bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. We performed an annual assessment for goodwill impairment in the fourth quarter of 2018, noting no impairment and that the fair value of the goodwill exceeded the carrying value by a significant margin. There have not been any triggering events indicating the potential for impairment through December 31, 2018.

In determining the fair value utilized in the goodwill impairment assessment, we consider qualitative factors such as changes in strategy, cash flows and the regulatory environment as well as the market capitalization of our ~~analysis within~~publicly traded common stock. Our share price is highly volatile and although there was significant excess of fair value over book value at the ~~measurement period~~annual impairment assessment date as well as December 31, 2018, there have been subsequent declines in ~~accordance~~the market share price and there could be risk of impairment in the future.

It is not possible at this time to determine if an impairment charge would result from these factors, or, if it does, whether such charge would be material. We will continue to monitor the recoverability of goodwill.

We evaluate our long-lived and intangible assets with ~~SAB 118.~~definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of useful life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets’ book value to future net undiscounted cash flows that the assets are expected to generate. There have not been any impairment losses of long-lived assets through December 31, 2018.

Acquisitions and Intangibles. We have engaged in business combination activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill presents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Acquired In-Process Research and Development Expense. We have acquired and may continue to acquire the rights to develop and commercialize new drug candidates. The up-front payments to acquire a new drug compound or drug delivery devices, as well as future milestone payments ~~may be~~associated with asset acquisitions that do not meet the definition of derivative and are deemed probable to achieve the milestones, are immediately expensed as acquired in-process research and development ~~(“IPR&D”)~~ provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, have no alternative future use. ~~Prior to November 8, 2016, all acquired IPR&D was expensed immediately.~~ The acquired in-process research and development related to the business combination of ~~Scilex Pharmaceuticals Inc. (“Scilex”)~~Virttu, for which certain products are under development and expected to be commercialized in the ~~near~~ future, was capitalized and recorded within “Intangibles, net” on the accompanying consolidated balance sheet. We commenced amortization of acquired in-process research and development related to the business combination of Scilex upon commercialization of ZTlido® (lidocaine topical system 1.8%) in October 2018. Capitalized ~~IPR&D~~in-process research and development will be reviewed annually for impairment or more frequently as changes in circumstance or the occurrence of events suggest that the remaining value may not be recoverable. (See Note 4 in the Notes to Consolidated Financial Statements in this Form 10-K for further discussion of acquired in-process research and development expense related to the Sofusa acquisition).

Acquisition Consideration Payable - Gain or Loss on Contingent Liabilities. Acquisition consideration payable relates to our acquisition of businesses and various other assets and is recorded on our consolidated balance sheets at fair value and is re-measured at each balance sheet date until such contingent liabilities have been settled, with changes in fair value recorded as gain on contingent liabilities. We estimate the fair value of contingent consideration based on level 3 inputs primarily driven by the probability of achieving certain financing or operating related milestones.

Contractual Obligations

As of December 31, ~~2017,~~2018, our contractual obligations are as follows (in thousands):


	Payments Due by Fiscal Year													Payments Due by Fiscal Year
	2018		2019		2020		2021			Thereafter		Total		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Convertible debt (See Note 12)	$	2,500	$	2,500	$	2,500	$	2,500		$	52,500	$	62,500
Convertible Notes (1)														$	47,311	$	1,982	$	3,784	$	41,545	$	—
Scilex Notes (1)														224,000		8,696		82,484		132,820		—
Oaktree Term Loan (1)														145,495		9,375		18,750		117,370		—
Operating leases	5,304		5,287		5,315		4,949		5,003	20,403		46,261		91,710		6,396		16,744		16,145		52,425
Total financial obligations	$	7,804	$	7,787	$	7,815	$	7,449		$	72,903	$	108,761	$	508,516	$	26,449	$	121,762	$	307,880	$	52,425

(1) See Note 12 in the Notes to Consolidated Financial Statements in this Form 10-K.

Off-Balance Sheet Arrangements

From our inception through December 31, ~~2017,~~2018, we did not engage in any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

Refer to Note 3, “Nature of Operations and Summary of Significant Accounting Polices,” in the ~~accompanying notes~~Notes to ~~the consolidated financial statements~~Consolidated Financial Statements in this Form 10-K for a discussion of recent accounting pronouncements.



Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. Our exposure to market risk is confined to our cash and cash ~~equivalents.~~equivalents and debt securities. We have cash and cash equivalents and invest primarily in high-quality money market funds, which we believe are subject to limited credit risk. Due to the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We do not believe that we have any material exposure to interest rate risk arising from our investments.

The fair market value of our Loan Agreement is subject to interest rate risk as a portion of the interest rate fluctuates based on the LIBOR. Generally, the fair market value of the debt will vary as interest rates increase or decrease. We had $100.0 million outstanding under our Loan Agreement at December 31, 2018. The weighted average stated interest rate on these borrowings is 9.38% as of December 31, 2018. A hypothetical 100 basis point adverse move in interest rates would increase our annual interest expense by approximately $1.0 million. We have determined that there was no material market risk exposure from such instruments to our consolidated financial position, results of operations or cash flows as of December 31, 2018.

We are not subject to interest rate risk on the Notes issued in 2018 in connection with our Securities Purchase Agreement as the Notes have a fixed rate of 5.00%. We are not subject to interest rate risk on the Scilex Notes associated with our 2018 Purchase Agreements as repayment of the Scilex Notes is determined by projected net sales as further discussed in Note 12 in the Notes to Consolidated Financial Statements in this Form 10-K. For both the Notes and Scilex Notes, changes in interest rates will generally affect the fair value of the debt instrument, but not our earnings or cash flows.

Capital Market Risk. We currently do not have significant revenues from grants or sales and services and we have no product revenues from our planned principal operations and therefore depend on funds raised through other sources. One source of funding is through future debt or equity offerings. Our ability to raise funds in this manner depends upon, among other things, capital market forces affecting our stock price.



Item 8.	Financial Statements and Supplementary Data.

Our consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a)(1) and (a)(2), respectively, of this Form 10-K.



Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.



Item 9A.	Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s regulations, rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and ~~principal~~chief financial ~~and accounting~~ officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) promulgated by the SEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and ~~principal~~chief financial ~~and accounting~~ officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on the foregoing, our chief executive officer and ~~principal~~chief financial ~~and accounting~~ officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Form 10-K as a result of the material weaknesses described below.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, a company’s principal executive officer and ~~principal~~chief financial ~~and accounting~~ officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:

~~(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;~~


(1)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and


(2)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.


(3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate

because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible enhancements to controls and procedures.

We conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In ~~March 2017, in~~ connection with the ~~preparation~~restatement of ~~our 2016~~the Company’s interim condensed consolidated financial statements ~~we identified certain purchase agreements which contained terms~~ for ~~contingent consideration that were not identified timely~~the three and ~~accounted for~~nine months ended September 30, 2017 to correct a material error in our historical financial statements on a timely basis. Further, certain other purchase agreements containing terms for contingent consideration were identified timely, but we failed to adjust the liabilities for changes in fair value at each subsequent reporting period. Accordingly, we did not appropriately account for liabilities for contingent consideration payable and the related adjustments to earnings.

~~Based on these findings and the criteria discussed above,~~equity method investments, our management identified a material weakness in ~~its~~our review controls, ~~over unusual or non-recurring and significant transactions: specifically, our controls~~that were not ~~properly designed~~operating effectively to provide reasonable assurance that we ~~(1)~~ timely identify and assess the accounting implications of transactions and events occurring at our equity method investees and properly report such investee financial information in our financial statements.

During 2018, the Company undertook remediation measures by enhancing existing internal controls with respect to our equity method investments. These include additional procedures to search for and assess information related to our equity method investees, including but not limited to financial statements and publicly available information, to evaluate related accounting implications. As a result of consistent and precise performance of these controls, the Company concluded that they were operating effectively and the related material weakness identified in prior year was remediated as of December 31, 2018.

In March 2018, in connection with the preparation of our 2017 financial statements, we identified that the accounting implications of terms in certain unusual or non-recurring and significant agreements were not identified and ~~(2) reassess the~~assessed on a timely basis. Further, valuation of certain associated assets or liabilities were not properly reassessed at the end of each reporting period. The material weakness did not result in a restatement of previously issued annual consolidated financial statements ~~but it did result in an immaterial restatement of our 2016 quarterly~~or condensed interim consolidated financial ~~information included in Note 19 of the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.~~statements.

During ~~2017,~~2018, the Company undertook remediation measures, including designing new controls and enhancing existing internal controls which, if effectively implemented, would provide reasonable assurance that we timely and precisely (1) ~~timely~~ identify and assess the accounting implications of terms in unusual or non-recurring and significant agreements and (2) reassess the valuation of associated assets or liabilities at the end of each reporting period. These included measures designed to improve centralized documentation control, improve the internal communication procedures between senior executive management, accounting personnel, and related business owners, leverage external accounting experts as appropriate to perform the necessary reviews, and strengthen policies and procedures related to the transferring of responsibilities and the handoff of personnel duties. However, the Company concluded that these controls did not operate effectively as of December 31, 2017, which has been identified as a material weakness in our internal control over financial reporting. This material weakness did not result in any material misstatements to the financial statements.

~~Additionally,~~ in connection with the ~~restatement~~preparation of ~~the Company’s interim condensed~~our consolidated financial statements for the ~~three and nine months~~year ended ~~September 30, 2017~~December 31, 2018 there were multiple errors identified related to ~~correct a material error~~management’s review of significant agreements. We believe the errors identified are due to deficiencies in our equity method investments, our management identified a material weakness in our review controls with respect to our equity method investments. Specifically, our review controls to assess and monitor the appropriateness of the financial information provided by our equity method investees were not operating effectively beginning in the quarter ended September 30, 2017, to provide reasonable assurance that we timely identify and assess the accounting implications of transactions and events occurring at our equity method investees and properly report such investee financial information in our financial statements.internal control environment resulting from insufficient competent

~~These material weaknesses are principally the result of insufficient~~

accounting resources, including a Chief ~~Financial~~Accounting Officer, to ~~appropriately perform,~~effectively operate internal controls over financial reporting in a timely manner.

This ineffective control environment contributed to the following material weaknesses: (i) management did not adequately evaluate the underlying assumptions associated with the accounting for key terms identified in significant agreements, which in the current year included convertible notes and debt agreements and (ii) management did not accurately assess the significant assumptions in order to ~~monitor~~properly estimate the fair value of contingent consideration liabilities. We also identified the following deficiencies in our internal control environment resulting from insufficient accounting resources that collectively represent a material weakness: Management did not properly assess significant assumptions through the performance of ~~control activities.~~precise reviews of accounting estimates including probability of occurrence and assumptions used in evaluating the fair value of embedded derivatives, fair value of indefinite-lived intangible assets, and income tax related balances. Such material weaknesses could result in material misstatements of the aforementioned account balances or disclosures in the annual or interim consolidated financial statements that would not be prevented or detected.

Accordingly, our chief executive officer and ~~principal~~chief financial ~~and accounting~~ officer concluded that, at December 31, ~~2017,~~2018, our internal control over financial reporting was not effective. Notwithstanding the material weaknesses in our internal control over financial reporting, based on the additional analyses and procedures performed, we believe the consolidated financial statements included in our Annual Report on Form 10-K, are fairly presented in all material respects, in conformity with accounting principles generally accepted in the United States of America.

The effectiveness of our internal control over financial reporting at December 31, ~~2017~~2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Remediation Efforts to Address Material Weaknesses

As a result of the material weaknesses, we are in the process of implementing remediation measures including, but not limited to, performing a comprehensive assessment of accounting and finance resource requirements and hiring a Chief ~~Financial~~Accounting Officer and other personnel with sufficient accounting expertise to improve the operating effectiveness of the Company’s review controls and monitoring activities, and utilizing external accounting experts as appropriate. We believe that our remediation measures, if effectively implemented, will provide reasonable assurance that we timely identify terms in agreements that could have material accounting implications, assess the accounting and disclosure implications of the terms, and account for such items in the financial statements appropriately. Further, we will implement remediation measures including, but not limited to, establishing monitoring procedures to ensure that our existing controls to assess and evaluate the appropriateness of the financial information provided by our equity method investees operate as designed. We believe that our remediation measures, when implemented, will provide reasonable assurance that we timely identify transactions and events occurring at our equity method investees that could have material accounting implications, assess the accounting and disclosure implications of the transactions and events, and account for such items in the financial statements appropriately in the time period in which such transactions and events occur. Any failure to implement these improvements to our internal control over financial reporting would result in continued material weaknesses 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.

Changes in Internal Control Over Financial Reporting

~~There~~Except the remediation of the prior year material weakness in relation to the review control of equity method investments, there has been no change in our internal control over financial reporting during the quarter ended December 31, ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As identified above under “Management’s Annual Report on Internal Control Over Financial Reporting,” ~~two~~ material weaknesses were identified in our internal control over financial reporting as of December 31, ~~2017.~~2018. Our plans for remediating such material weaknesses, which would constitute changes in our internal control over financial reporting prospectively when such controls are effectively implemented, are also enumerated above.



Item 9B.	Other Information.

Effective as of March ~~16, 2018, Dean Ferrigno,~~15, 2019, we amended and restated our ~~Vice President~~Bylaws (the “Amended and Restated Bylaws”) to provide for, among other things the following changes from our Bylaws, as in effect immediately prior to the adoption of ~~Finance~~the Amended and ~~Chief Accounting Officer, notified us~~Restated Bylaws:

Article I, Section 1(1): The Amended and Restated Bylaws delete the requirement that ~~he will~~the annual meeting of stockholders be ~~resigning from his roles with~~held within 13 months of the ~~Company, effective March 23, 2018~~last annual meeting of stockholders and provide that such an annual meeting may be held at such place or by means of remote communication as our board of directors may determine in its sole discretion.

Article I, Section 1(2): The Amended and Restated Bylaws add the requirement that a stockholder must be a stockholder of record entitled to vote at the time of the annual meeting in order to ~~pursue~~nominate a director or propose other ~~opportunities.~~business at such a meeting.

Article I, Sections 1(4)-1(9): The Amended and Restated Bylaws update the advance notice provisions by which a stockholder (the “Proposing Person”) may propose business that is not submitted for inclusion in our proxy materials in connection with an annual meeting of the stockholders and nominations in connection with an annual or special meeting of the stockholders. The amendments require, among other things, (i) that the Proposing Person deliver a proxy statement and form of proxy to holders of at least the percentage of our stockholders required under applicable law to carry the relevant proposal, or in the case of a nomination, at least the percentage of our stockholders reasonably believed to be sufficient to elect such nominee, (ii) that the Proposing Person’s notice to us contain certain information regarding the proposal and certain information, representations, consents and undertakings regarding the Proposing Person, (iii) that any proposed nominee for election provide a completed written questionnaire regarding such proposed nominee’s background and qualifications, a written representation and agreement regarding the proposed nominee’s voting, third party compensation and compliance with our policies and such proposed nominee’s fiduciary duties and any other information our board may reasonably require, and (iv) that the Proposing Person must appear in person at the meeting to propose such business or nomination.

Article I, Section 2: The Amended and Restated Bylaws update the provisions regarding special meetings of the stockholders to implement the updated requirements of Article I, Section 1 of the Amended and Restated Bylaws.

Article I, Section 3: The Amended and Restated Bylaws allow the Board to postpone, reschedule, or cancel any previously scheduled special or annual meeting of stockholders before it is held.

Article I, Section 4: The Amended and Restated Bylaws clarify that any of our stock held, directly or indirectly, by us is not entitled to vote or counted for purposes of establishing a quorum; however, this limit does not apply to our ability to vote any stock held by us in a fiduciary capacity and count such stock for purposes of establishing a quorum.

Article I, Section 7: The Amended and Restated Bylaws clarify the duties of the inspector or inspectors of election appointed in connection with any meeting of our stockholders.

Article II, Sections 4 & 5: The Amended and Restated Bylaws provide that notices of regular and special meetings of the Board can be delivered in electronic format.

Article IV, Section 1: The Amended and Restated Bylaws provide for a Chief Financial Officer and an Assistant Secretary. The Amended and Restated Bylaws also provide that our board of directors may authorize our Chief Executive Officer to appoint any officer other than the Chairperson of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer.

Article IV, Section 8: The Amended and Restated Bylaws provide for a Chairperson of the Board, who shall have the power to preside at all meetings of our board of directors and who shall have such other powers and duties provided in the Amended and Restated Bylaws and as our board of directors may from time to time prescribe.

Article V, Section 3: The Amended and Restated Bylaws provide that if the record date for a meeting of stockholders is not fixed by our board of directors, the record date shall be as provided by applicable law and, in the event of an adjournment, if our board of directors fixes a new record date for the adjourned meeting, such new record date shall not precede the date on which the resolution fixing such record date is adopted and shall not be more than 60 nor less than 10 days before the date of the adjourned meeting.

Article VI, Section 2: The Amended and Restated Bylaws provide that all stock and other securities of other corporations held by us will be voted by the person authorized to do so by our board, or in the absence of such authorization, by the Chairperson of our board of directors, our Chief Executive Officer, our President or any Vice President.

Article VII, Section 1: The Amended and Restated Bylaws modernize the forms that notice to the stockholders can take and provide the circumstances when notice is deemed given.

Article VII, Section 3: The Amended and Restated Bylaws provide that no notice shall be required to be given to persons with whom communication is unlawful.

Article VIII, Section 7: The Amended and Restated Bylaws provide for the Court of Chancery in the State of Delaware as the sole and exclusive forum for certain proceedings involving us, unless an alternative forum is approved by our board of directors.

Article IX: The Amended and Restated Bylaws expand the scope of our directors’ and officers’ right to indemnification.

Article X: The Amended and Restated Bylaws delete Article X, relating to loans to officers, in its entirety.

In addition to the changes summarized above, the Amended and Restated Bylaws also include certain other technical, conforming and clarifying changes.

The foregoing description of the Amended and Restated Bylaws is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, which are filed as Exhibit 3.3 to this Annual Report on Form 10-K and incorporated herein by reference.

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the ~~“2018~~“2019 Proxy Statement”), no later than April 30, ~~2018,~~2019, and certain information to be included in the ~~2018~~2019 Proxy Statement is incorporated herein by reference. To the extent that we do not file the ~~2018~~2019 Proxy Statement by April 30, ~~2018,~~2019, we will file an amendment to this Annual Report on Form 10-K that includes the information required by Part III.



Item 10.	Directors, Executive Officers and Corporate Governance.

The information required by this item regarding our directors, executive officers and corporate governance will be included in our ~~2018~~2019 Proxy Statement and is incorporated herein by reference.



Item 11.	Executive Compensation.

The information required by this item regarding executive compensation will be included in our ~~2018~~2019 Proxy Statement and is incorporated herein by reference.



Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item regarding security ownership of certain beneficial owners and management will be included in our ~~2018~~2019 Proxy Statement and is incorporated herein by reference.



Item 13.	Certain Relationships and Related Transactions, and Director Independence.

The information required by this item regarding certain relationships and related transactions and director independence will be included in our ~~2018~~2019 Proxy Statement and is incorporated herein by reference.



Item 14.	Principal Accounting Fees and Services.

The information required by this item regarding principal accounting fees and services will be included in our ~~2018~~2019 Proxy Statement and is incorporated herein by reference.

PART IV



Item 15.	Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

Reference is made to the Index to Consolidated Financial Statements of Sorrento Therapeutics, Inc. appearing on page F-1 of this Form 10-K.

(a)(2) Financial Statement Schedules

Schedule II – Valuation of Qualifying Accounts

All other schedules not listed above have been omitted because of the absence of conditions under which they are required, or because the required information is included in the consolidated financial statements or the notes thereto.

(a)(3) Exhibits



Exhibit No.		Description

2.1*		Agreement and Plan of Merger between Sorrento Therapeutics, Inc. and IgDraSol, Inc. dated September 9, 2013 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 11, 2013).

2.2*		Stock Purchase Agreement, dated November 8, 2016, by and among Sorrento Therapeutics, Inc., Scilex Pharmaceuticals Inc., the stockholders of Scilex Pharmaceuticals Inc. party thereto and SPI Shareholders Representative, LLC, as representative of the stockholders of Scilex Pharmaceuticals Inc. party thereto (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 8, 2016).

2.3*		Share Purchase Agreement, dated April 27, 2017, by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc., Virttu Biologics, Limited, the shareholders of Virttu Biologics Limited and Dayspring Ventures Limited as representative of the shareholders of Virttu Biologics Limited (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 28, 2017).

2.4		Amendment No. 1 to Share Purchase Agreement, effective April 27, 2018, by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc. and Dayspring Ventures Limited, as representative of the shareholders of Virttu Biologics Limited (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2013).

3.2		Certificate of Amendment of the Restated Certificate of Incorporation of Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2013).

3.3		Amended and Restated Bylaws ~~(incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 23, 2009).~~of Sorrento Therapeutics, Inc.

3.4		Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating Preferred Stock of Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 12, 2013).

4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 23, 2009).

4.2		Amended and Restated Rights Agreement, dated as of December 21, 2015 by and between Sorrento Therapeutics, Inc. and Philadelphia Stock Transfer, Inc., as rights agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2015).

4.3		Common Stock Purchase Warrant issued to Cambridge Equities, LP. (incorporated by reference to Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 16, 2015).

4.4		Securities Purchase Agreement, dated as of April 3, 2016, by and among Sorrento Therapeutics, Inc., ABG SRNE Limited and Ally Bridge LB Healthcare Master Fund Limited (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.5		Securities Purchase Agreement, dated as of April 3, 2016, by and between Sorrento Therapeutics, Inc. and FREJOY Investment Management Co., Ltd. (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.6		Securities Purchase Agreement, dated as of April 3, 2016, by and between Sorrento Therapeutics, Inc. and Beijing Shijilongxin Investment Co., Ltd. (incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.7		Securities Purchase Agreement, dated as of April 3, 2016, by and between Sorrento Therapeutics, Inc. and Yuhan Corporation (incorporated by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.8		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of April 3, 2016, by and among Sorrento Therapeutics, Inc., ABG SRNE Limited and Ally Bridge LB Healthcare Master Fund Limited (incorporated by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).



Exhibit No.		Description



4.9		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of April 3, 2016, by and between Sorrento Therapeutics, Inc. and FREJOY Investment Management Co., Ltd. and Securities Purchase Agreement, dated as of April 3, 2016, by and between Sorrento Therapeutics, Inc. and Beijing Shijilongxin Investment Co., Ltd. (incorporated by reference to Exhibit 4.10 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.10		Common Stock Purchase Warrant issued to Yuhan Corporation on April 29, 2016 (incorporated by reference to Exhibit 4.11 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.11		Voting Agreement, dated as of April 29, 2016, by and between Sorrento Therapeutics, Inc. and Yuhan Corporation (incorporated by reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on June 29, 2016).

4.12		Registration Rights Agreement, dated November 8, 2016, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 8, 2016).

4.13		Warrant Agreement, dated November 23, 2016, issued to Hercules Capital, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 29, 2016).

4.14		Registration Rights Agreement, dated April 27, 2017, by and among Sorrento Therapeutics, Inc. and the persons party thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 28, 2017).

4.15		Securities Purchase Agreement, dated as of December 11, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 11, 2017).

~~4.16~~		Form of Convertible Promissory Note issued to investors pursuant to the Securities Purchase Agreement, dated as of December 11, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).

~~4.17~~		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of December 11, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).

~~4.18~~4.16		Registration Rights Agreement, dated December 21, 2017, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2017).

4.17		Form of Convertible Promissory Note issued to investors pursuant to the Securities Purchase Agreement, dated as of June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

4.18		Form of Common Stock Purchase Warrant issued to investors pursuant to the Securities Purchase Agreement, dated as of June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

4.19		Registration Rights Agreement, dated June 13, 2018, by and among Sorrento Therapeutics, Inc. and the purchasers identified on Schedule A thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2018).

4.20		Form of Warrant, dated November 7, 2018, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

4.21		Registration Rights Agreement, dated November 7, 2018, by and among Sorrento Therapeutics, Inc. and the parties identified on Schedule A thereto (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.1+		Exclusive License and Development Agreement between Sorrento Therapeutics, Inc. and China Oncology Focus Limited dated October 3, 2014 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q/A filed with the SEC on November 25, 2014).

10.2+		License Agreement, dated January 8, 2010, by and between The Scripps Research Institute and Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 14, 2010).

10.3±		Form of Stock Option Agreement (incorporated by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K/A filed with the SEC on September 22, 2009).

10.4±		Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on September 7, 2012).

10.5±		2009 Amended and Restated Stock Incentive Plan, and forms of agreements related thereto (incorporated by reference to Appendix A to the definitive proxy statement filed by Sorrento Therapeutics, Inc. with the Securities and Exchange Commission on May 13, 2016).

10.6±		2009 Equity Incentive Plan, and forms of agreement related thereto (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 25, 2010).



10.7		Option Agreement between Sorrento Therapeutics, Inc. and B.G, Negev Technologies and Applications Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 13, 2013).



Exhibit No.		Description

10.8+		Exclusive License Agreement dated as of April 21, 2015 by and between NantCell, Inc. and Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2015).

10.9*		Stock Sale and Purchase Agreement dated as of May 14, 2015 by and between NantPharma, LLC and Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2015).

10.10*		Stock Purchase Agreement by and among TNK Therapeutics, Inc., BDL Products, Inc., the Stockholders of BDL Products, Inc., Richard Junghans, M.D., Ph.D. as the Stockholders’ Representative and Sorrento Therapeutics, Inc. dated as of August 7, 2015 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 16, 2015).

~~10.11~~		Amendment No. 1 to Stock Purchase Agreement, dated as of March 7, 2016, by and between TNK Therapeutics, Inc. and Richard P. Junghans, M.D., Ph.D., as the Stockholders’ Representative (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2016).

~~10.12~~		Amendment No. 2 to Stock Purchase Agreement, dated as of September 14, 2016, by and between TNK Therapeutics, Inc. and Richard P. Junghans, M.D., Ph.D., as the Stockholders’ Representative. (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 22, 2017).

~~10.13~~		Amendment No. 3 to Stock Purchase Agreement, dated as of March 14, 2017, by and between TNK Therapeutics, Inc. and Richard P. Junghans, M.D., Ph.D., as the Stockholders’ Representative (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017).

~~10.14~~10.10		Binding Term Sheet for License Between Cytolumina/Fetolumina and TNK Therapeutics, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 16, 2015).

~~10.15+~~10.11+		Exclusive License Agreement dated September 25, 2015 by and between LA Cell, Inc. and City of Hope (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 15, 2016).

~~10.16±~~10.12±		Employment Agreement, dated December 8, 2014, by and between Sorrento Therapeutics, Inc. and George Ng (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K/A filed with the SEC on April 29, 2016).

~~10.17±~~		Employment Agreement between Sorrento Therapeutics, Inc. and Kevin M. Herde dated as of April 5, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2016).

~~10.18~~10.13		Letter Agreement, dated June 30, 2016, among Chan Soon-Shiong Family Foundation, Cambridge Equities, L.P. and Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2016).

~~10.19~~10.14		Lease Agreement, dated September 12, 2016, between Sorrento Therapeutics, Inc. and HCP Life Science REIT, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2016).

~~10.20~~10.15		First Amendment to Office Lease, dated October 19, 2018, between Sorrento Therapeutics, Inc. and HCP Life Science REIT, Inc.

10.16		Unit Purchase Agreement dated August 5, 2016, by and among MedoveX Corporation and the purchasers party thereto (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by MedoveX Corporation (File No. 001-36763) with the SEC on August 8, 2016).



Exhibit No.		Description

~~10.21~~10.17		Registration Rights Agreement, dated August 5, 2016, by and among MedoveX Corporation and the investors party thereto (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by MedoveX Corporation (File No. 001-36763) with the SEC on August 8, 2016).

~~10.22±~~10.18±		Amended and Restated Employment Agreement between Sorrento Therapeutics, Inc. and Henry Ji, Ph.D. dated May 9, 2017 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017).



~~10.23+~~10.19+		Contribution Agreement, dated as of June 12, 2017, by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc. and Celularity, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017).

~~10.24+~~10.20+		Amendment No. 1 to Contribution Agreement, dated as of June 30, 2017, by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc. and Celularity, Inc. (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017).

~~10.25~~10.21		Amendment No. 2 to Contribution Agreement, dated as of August 10, 2017, by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc. and Celularity, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2017).

~~10.26+~~

10.22+		License and Transfer Agreement dated August 15, 2017 by and among Sorrento Therapeutics, Inc., TNK Therapeutics, Inc. and Celularity, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2017).

~~10.27~~10.23		At Market Issuance Sales Agreement, dated as of November 9, 2017, by and between Sorrento Therapeutics, Inc. and B. Riley FBR, Inc. (incorporated by reference to Exhibit 1.2 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on November 9, 2017).

~~12.1~~10.24		~~Ratio~~Offer Letter, dated March 15, 2018, by and between Sorrento Therapeutics, Inc. and Jiong Shao (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2018).

10.25+		Indenture and form of ~~Earnings~~Note issued thereunder, dated as of September 7, 2018, by and among Scilex Pharmaceuticals Inc., as issuer, Sorrento Therapeutics, Inc., as parent guarantor, and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to ~~Fixed Charges~~Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.26		Form of Purchase Agreement, dated as of September 7, 2018, by and among Scilex Pharmaceuticals Inc., Sorrento Therapeutics, Inc. and the purchasers party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.27		Collateral Agreement, dated as of September 7, 2018, by and between Scilex Pharmaceuticals Inc. and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.28+		Irrevocable Standby Letter of Credit, dated September 7, 2018, issued by Sorrento Therapeutics, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.29+		Term Loan Agreement, dated November 7, 2018, by and among Sorrento Therapeutics, Inc., certain subsidiaries of Sorrento Therapeutics, Inc., the lenders party thereto and Oaktree Fund Administration, LLC, as administrative and collateral agent (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

10.30		Lease Agreement, dated November 13, 2018, between Sorrento Therapeutics, Inc. and HCP Life Science Estates, Inc.

10.31		Agreement and Consent, dated November 7, 2018, by and among Sorrento Therapeutics, Inc. and the Warrant Holders party thereto (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2018).

21.1		List of Subsidiaries

23.1		Consent of Deloitte & Touche LLP

~~23.2~~		~~Consent of Mayer Hoffman McCann P.C.~~

24		Power of Attorney (included on signature page hereto)

31.1		Certification of Henry Ji, Ph.D., Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

31.2		Certification of ~~Dean Ferrigno,~~Jiong Shao, Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

32.1		Certification of Henry Ji, Ph.D., Principal Executive Officer and ~~Dean Ferrigno,~~Jiong Shao, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase 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 supplementally copies of any of the omitted schedules and exhibits upon request by the SEC.



+	The SEC has granted confidential treatment with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.



±	Management contract or compensatory plan.

The following financial statement schedule is filed as part of this Annual Report on Form 10-K:



Schedule Number	Description
II	Valuation and Qualifying Accounts

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS


(in thousands)	Balance at Beginning of Period		Reserves Acquired		Additions		Deductions			Balance at End of Period		Balance at Beginning of Period		Reserves Acquired		Additions		Deductions			Balance at End of Period
Fiscal Year 2018:
Income tax valuation allowance												43,405		—		31,565		—			74,970
												$	43,405	$	—	$	31,565	$	—		$	74,970
Fiscal Year 2017:
Income tax valuation allowance	81,039		797		—		(38,431		)	43,405		81,039		797		—		(38,431		)	43,405
	$	81,039	$	797	$	—	$	(38,431	)	$	43,405	$	81,039	$	797	$	—	$	(38,431	)	$	43,405
Fiscal Year 2016:
Income tax valuation allowance	39,605		—		41,434		—			81,039		39,605		—		41,434		—			81,039
	$	39,605	$	—	$	41,434	$	—		$	81,039	$	39,605	$	—	$	41,434	$	—		$	81,039
Fiscal Year 2015:
Income tax valuation allowance	25,350		—		14,255		—			39,605
	$	25,350	$	—	$	14,255	$	—		$	39,605



Item 16.	Form 10-K Summary.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: March ~~16, 2018~~15, 2019	SORRENTO THERAPEUTICS, INC.

	By:	/s/ Henry Ji
		Henry Ji, Ph.D. Chairman of the Board of Directors, Chief Executive Officer & President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Henry Ji, Ph.D., and ~~George Ng,~~Jiong Shao, and each of them acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature	Title(s)	Date
/s/ Henry Ji, Ph.D.	Chairman of the Board of Directors, Chief Executive Officer	March ~~16, 2018~~15, 2019
Henry Ji, Ph.D.	& President (Principal Executive Officer)
/s/ ~~Dean Ferrigno~~Jiong Shao	Chief ~~Accounting~~Financial Officer	March ~~16, 2018~~15, 2019
~~Dean Ferrigno~~Jiong Shao	(Principal Financial and Accounting Officer)
/s/ Dorman Followwill	Director	March ~~16, 2018~~15, 2019
Dorman Followwill
/s/ Yue Alexander Wu	Director	March ~~16, 2018~~15, 2019
Yue Alexander Wu, Ph.D.
/s/ Kim D. Janda, Ph.D.	Director	March ~~16, 2018~~15, 2019
Kim D. Janda, Ph.D.
~~/s/ David Deming~~	~~Director~~	~~March 16, 2018~~
~~David Deming~~
/s/ Jaisim Shah	Director	March ~~16, 2018~~15, 2019
Jaisim Shah
/s/ David Lemus	Director	March ~~16, 2018~~15, 2019
David Lemus

Sorrento Therapeutics, Inc.

Index to Consolidated Financial Statements



	Page
Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets—As of December 31, ~~2017~~2018 and ~~2016~~2017	F-5

Consolidated Statements of Operations—For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016	F-6

Consolidated Statements of Comprehensive Income (Loss)—For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016	F-7

Consolidated Statements of Stockholders’ Equity—For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016	F-8

Consolidated Statements of Cash Flows—For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016	F-9

Notes to Consolidated Financial Statements	F-11

Reports of Independent Registered Public Accounting ~~Firms~~Firm

~~To the Board of Directors and Stockholders of~~

~~Sorrento Therapeutics, Inc. and Subsidiaries~~

~~San Diego, California~~

~~We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows of~~ ~~Sorrento Therapeutics, Inc. and Subsidiaries~~ for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows of Sorrento Therapeutics, Inc. and Subsidiaries for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

~~/s/ Mayer Hoffman McCann P.C.~~

~~San Diego, CA~~

~~March 14, 2016~~

To the stockholders and Board of Directors of Sorrento Therapeutics, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Sorrento Therapeutics, Inc. and subsidiaries (the “Company”) as of December 31, ~~2017,~~2018, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, ~~2017,~~2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, ~~2017,~~2018, of the Company and our report dated March ~~16, 2018,~~15, 2019, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Material Weaknesses

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 the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: 1) The Company’s review controls over unusual or non-recurring and significant transactions were not operating effectively to provide reasonable assurance that it (a) timely identifies and assesses the accounting implications of terms in unusual or non-recurring agreements, and (b) reassesses the valuation of associated assets or liabilities at the end of each reporting period; and 2) the Company's review controls to assess and monitor the appropriateness of the financial information provided by its equity method investees were not operating effectively to timely identify and assess the accounting implications of transactions and events occurring at its equity method investees and properly report such investee financial

~~information. Such material weaknesses are principally~~As required by COSO Principles 4 and 12, the ~~result of insufficient~~Company did not attract, develop, and retain sufficient accounting resources, including a Chief ~~Financial~~Accounting Officer, with appropriate knowledge and expertise commensurate with the Company’s corporate structure and financial reporting requirements to ~~appropriately perform, and to monitor the performance~~effectively operate internal controls over financial reporting in a timely manner. As a result of the lack of sufficient and appropriate resources, the Company’s control ~~activities.~~activities in certain process or control areas did not operate effectively. Areas where we identified deficiencies resulting from the lack of sufficient accounting department resources included a lack of precise reviews of significant assumptions underlying fair value of embedded derivatives, fair value of indefinite-lived intangible assets, and income tax related balances.

~~These~~

The Company’s failure to establish an effective control environment also contributed to the following individual material ~~weaknesses were considered~~weaknesses: (i) a deficiency in ~~determining~~evaluating the ~~nature, timing,~~underlying assumptions associated with the accounting for key terms identified in significant transactions, which in the current year included convertible note and ~~extent~~debt agreements; and (ii) a deficiency in reviewing and assessing assumptions underlying the determination of ~~audit tests applied in our audit~~fair value of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2017, of the Company, and this report does not affect our report on such consolidated financial statements and financial statement schedule.contingent consideration liabilities.

/s/ DELOITTE & TOUCHE LLP

San Diego, California

March ~~16, 2018~~15, 2019

Reports of Independent Registered Public Accounting Firm

To the stockholders and the Board of Directors of Sorrento Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sorrento Therapeutics, Inc. and subsidiaries (the "Company") as of December 31, ~~2017~~2018 and ~~2016,~~2017, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the ~~two~~three years in the period ended December 31, ~~2017,~~2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2018 and ~~2016,~~2017, and the results of its operations and its cash flows for each of the ~~two~~three years in the period ended December 31, ~~2017,~~2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, ~~2017,~~2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March ~~13, 2018,~~15, 2019, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s recurring losses from operations, recurring negative cash flows from operations and ~~working capital deficiencies~~substantial cumulative net losses raise substantial doubt about its ability to continue as a going concern. Management's plans in ~~regards~~regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

San Diego, California

March ~~16, 2018~~15, 2019

We have served as the Company's auditor since 2016.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts)

December 31,
2017 2016
ASSETS

Current assets:

Cash and cash equivalents $ 20,429
$ 82,398
Marketable securities 441
1,106
     Grants and accounts receivables, net 2,211
1,696
Income tax receivable 1,715
1,289
Prepaid expenses and other, net 4,904
3,165
Total current assets 29,700
89,654
Property and equipment, net 19,345
12,707
Intangibles, net 71,013
64,766
Goodwill 38,298
41,548
Cost method investments 237,008
112,008
Equity method investments 32,999
76,994
Other, net 3,250
3,909
Total assets $ 431,613
$ 401,586
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $ 9,911
$ 8,282
Accrued payroll and related 4,485
3,565
Current portion of deferred compensation —
1,012
Accrued expenses 7,274
4,741
Current portion of deferred revenue 3,864
9,666
Current portion of deferred rent 212
248
Acquisition consideration payable 53,209
48,362
Current portion of debt —
209
Total current liabilities 78,955
76,085
Long-term debt, net of discount 5,211
47,107
Deferred tax liabilities, net 15,535
53,238
Deferred revenue 119,287
134,376
Deferred rent and other 6,015
4,278
Total liabilities 225,003
315,084
Commitments and contingencies

Equity:

Sorrento Therapeutics, Inc. equity

Preferred stock, $0.0001 par value; 100,000,000 shares authorized and no shares
   issued or outstanding
—
—
Common stock, $0.0001 par value; 750,000,000 shares authorized and
   82,903,567 and 50,882,856 shares issued and outstanding at
   December 31, 2017 and 2016, respectively
9
6
Additional paid-in capital 413,901
303,865
Accumulated other comprehensive income (loss) 242
(118 )
Accumulated deficit (165,120 ) (174,252 )
Treasury stock, 7,568,182 shares and 7,568,182 shares at cost at December 31, 2017

and 2016, respectively (49,464 ) (49,464 )
Total Sorrento Therapeutics, Inc. stockholders' equity 199,568
80,037


					December 31,
					2018			2017
ASSETS
Current assets:
Cash and cash equivalents					$	158,738		$	20,429
Restricted cash					9,592			—
Marketable securities					297			441
Grants and accounts receivables, net					3,833			2,211
Income tax receivable					526			1,715
Prepaid expenses and other, net					6,578			4,904
Total current assets					179,564			29,700
Property and equipment, net					24,384			19,345
Intangibles, net					66,283			71,013
Goodwill					38,298			38,298
Cost method investments					237,008			237,008
Equity method investments					27,980			32,999
Restricted cash					45,000			—
Other, net					5,570			3,250
Total assets					$	624,087		$	431,613
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable					$	13,817		$	9,911
Accrued payroll and related					10,236			4,485
Accrued expenses					13,403			7,274
Current portion of deferred revenue					2,703			3,864
Current portion of deferred rent					—			212
Acquisition consideration payable					11,312			53,209
Current portion of debt					10,150			—
Total current liabilities					61,621			78,955
Long-term debt, net of discount					223,136			5,211
Deferred tax liabilities, net					9,416			15,535
Deferred revenue					116,274			119,287
Deferred rent and other					6,140			6,015
Total liabilities					416,587			225,003
Commitments and contingencies
Equity:
Sorrento Therapeutics, Inc. equity
Preferred stock, $0.0001 par value; 100,000,000 shares authorized and no shares issued or outstanding					—			—
Common stock, $0.0001 par value; 750,000,000 shares authorized and 122,280,092 and 82,903,567 shares issued and outstanding at December 31, 2018 and 2017, respectively					13			9
Additional paid-in capital					626,658			413,901
Accumulated other comprehensive income					15			242
Accumulated deficit					(367,750		)	(165,120		)
Treasury stock, 7,568,182 shares and 7,568,182 shares at cost at December 31, 2018 and 2017, respectively					(49,464		)	(49,464		)
Total Sorrento Therapeutics, Inc. stockholders' equity					209,472			199,568
Noncontrolling interests	7,042		6,465		(1,972		)	7,042
Total equity	206,610		86,502		207,500			206,610
Total liabilities and equity	$	431,613	$	401,586	$	624,087		$	431,613

See accompanying notes

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016

(In thousands, except for per share amounts)

2017 2016 2015
Revenues:

Grant $ 206
$ 1,033
$ 1,530
Royalties and licenses 140,381
4,017
—
Sales and services 11,269
3,102
3,060
Total revenues 151,856
8,152
4,590
Operating costs and expenses:

Costs of revenues 3,945
811
1,950
Research and development 55,532
42,175
31,343
Acquired in-process research and development 26,102
45,000
24,013
General and administrative 38,332
24,219
20,132
Intangible amortization 2,610
845
1,157
(Gain) on contingent liabilities —
(8,121 ) —
Total costs and operating expenses 126,521
104,929
78,595
Income (loss) from operations 25,335
(96,777 ) (74,005 )
Gain on sale of IgDraSol, net —
—
69,274
Gain (loss) on derivative liabilities —
5,520
(3,360 )
Gain on marketable securities —
27,193
—
Loss on foreign currency exchange (178 ) —
—
(Loss) gain on trading securities (665 ) 356
—
Interest expense (4,980 ) (1,610 ) (1,652 )
Interest income 241
272
24
Loss on debt extinguishment (4,275 ) (222 ) —
Loss on receivable (163 ) —
—
Income (loss) before income tax expense⁽¹⁾
15,315
(65,268 ) (9,719 )
Income tax (benefit) expense (36,038 ) (896 ) 36,314
(Loss) income on equity method investments (40,244 ) 435
(4,041 )
Net income (loss) 11,109
(63,937 ) (50,074 )
Net income (loss) attributable to noncontrolling interests 1,977
(3,014 ) (4,263 )
Net income (loss) attributable to Sorrento $ 9,132
$ (60,923 ) $ (45,811 )
Net income (loss) per share - basic per share attributable
to Sorrento
$ 0.13
$ (1.21 ) $ (1.24 )
Net income (loss) per share - diluted per share attributable
to Sorrento
$ 0.13
$ (1.21 ) $ (1.24 )
Weighted-average shares used during period - basic per share attributable to Sorrento 69,742
50,360
36,909
Weighted-average shares used during period - diluted per share attributable to Sorrento 70,381
50,360
36,909

⁽¹⁾ ~~Activity for the years ended December 31, 2016 and December 31, 2015 have been recast to present (loss) income on equity method investments below income (loss) before income tax expense.~~



	2018			2017			2016
Revenues:
Grant	$	356		$	206		$	1,033
Royalties and licenses	480			140,381			4,017
Sales and services	20,357			11,269			3,102
Total revenues	21,193			151,856			8,152
Operating costs and expenses:
Costs of revenues	7,060			3,945			811
Research and development	76,963			55,532			42,175
Acquired in-process research and development	11,304			26,102			45,000
General and administrative	63,638			38,332			24,219
Intangible amortization	3,009			2,610			845
Loss (gain) on contingent liabilities	9,644			—			(8,121		)
Total costs and operating expenses	171,618			126,521			104,929
(Loss) income from operations	(150,425		)	25,335			(96,777		)
Gain on derivative liabilities	2,830			—			5,520
Gain on marketable securities	—			—			27,193
Loss on foreign currency exchange	(1,243		)	(178		)	—
(Loss) gain on trading securities	(144		)	(665		)	356
Interest expense	(57,631		)	(4,980		)	(1,610		)
Interest income	921			241			272
Loss on debt extinguishment	(8,089		)	(4,275		)	(222		)
Loss on receivable	—			(163		)	—
(Loss) income before income tax (benefit) loss and (loss) income on equity method investments	(213,781		)	15,315			(65,268		)
Income tax benefit	(6,274		)	(36,038		)	(896		)
(Loss) income on equity method investments	(5,019		)	(40,244		)	435
Net (loss) income	(212,526		)	11,109			(63,937		)
Net (loss) income attributable to noncontrolling interests	(8,986		)	1,977			(3,014		)
Net (loss) income attributable to Sorrento	$	(203,540	)	$	9,132		$	(60,923	)
Net (loss) income per share - basic per share attributable to Sorrento	$	(1.92	)	$	0.13		$	(1.21	)
Net (loss) income per share - diluted per share attributable to Sorrento	$	(1.92	)	$	0.13		$	(1.21	)
Weighted-average shares used during period - basic per share attributable to Sorrento	106,150			69,742			50,360
Weighted-average shares used during period - diluted per share attributable to Sorrento	106,150			70,381			50,360

See accompanying notes

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016

(In thousands, except for share amounts)

2017 2016 2015
Net income (loss) 11,109
(63,937 ) (50,074 )
Other comprehensive income:

Unrealized (loss) gain on marketable securities, net of tax of $0,
   $(14,294), and $14,294 —
(73,579 ) 73,579
Foreign currency translations adjustments and other 360
(118 ) —
Total other comprehensive income (loss) 360
(73,697 ) 73,579
Comprehensive income (loss) 11,469
(137,634 ) 23,505
Comprehensive income (loss) attributable to
   noncontrolling interests 1,977
(3,014 ) (4,263 )
Comprehensive income (loss) attributable to
   Sorrento $ 9,492
$ (134,620 ) $ 27,768



	2018			2017		2016
Net (loss) income	$	(212,526	)	$	11,109	$	(63,937	)
Other comprehensive income:
Unrealized loss on marketable securities, net of tax of $0, $0, and $(14,294)	—			—		(73,579		)
Foreign currency translation adjustments	(227		)	360		(118		)
Total other comprehensive (loss) income	(227		)	360		(73,697		)
Comprehensive (loss) income	(212,753		)	11,469		(137,634		)
Comprehensive (loss) income attributable to noncontrolling interests	(8,986		)	1,977		(3,014		)
Comprehensive (loss) income attributable to Sorrento	$	(203,767	)	$	9,492	$	(134,620	)

See accompanying notes

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016

(In thousands, except for share amounts)


	Common Stock					Treasury Stock			Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Noncontrolling						Common Stock					Treasury Stock				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Noncontrolling
	Shares		Amount			Shares	Amount		Capital			Income (Loss)			Deficit			Interest			Total			Shares		Amount			Shares	Amount			Capital			Income (Loss)			Deficit			Interest			Total
Balance, December 31, 2014	36,184,912		4			—	—		176,227			—			(67,518		)	—			108,713
Issuance of common stock with exercise of warrants	3,563		—			—	—		—			—			—			—			—
Issuance of common stock with exercise of options	276,712		—			—	—		1,699			—			—			—			1,699
Issuance of common stock upon achievement of milestone	1,306,272		—			—	—		—			—			—			—			—
Stock-based compensation	—		—			—	—		6,972			—			—			—			6,972
Change in unrealized gain on marketable securities	—		—			—	—		—			73,579			—			—			73,579
Sale of noncontrolling interest	—		—			—	—		—			—			—			49			49
Net loss	—		—			—	—		—			—			(45,811		)	(4,263		)	(50,074		)
Balance, December 31, 2015	37,771,459		4			—	—		184,898			73,579			(113,329		)	(4,214		)	140,938			37,771,459		4			—	—			184,898			73,579			(113,329		)	(4,214		)	140,938
Issuance of common stock with exercise of options	204,668		—			—	—		524			—			—			—			527			204,668		—			—	—			524			—			—			—			527
Issuance of common stock for private placement and investments, net	27,598,235		3			—	—		108,298			—			—			—			108,301			27,598,235		3			—	—			108,298			—			—			—			108,301
Issuance of common stock upon acquisition of Scilex	754,911		1			—	—		5,368			—			—			13,693			19,061			754,911		1			—	—			5,368			—			—			13,693			19,061
Cancellation of stock issuance	(15,446,417	)	(2		)	7,568,182	(49,464	)	(1,341		)	—			—			—			(50,807		)	(15,446,417	)	(2		)	7,568,182	(49,464		)	(1,341		)	—			—			—			(50,807		)
Stock-based compensation	—		—			—	—		4,741			—			—			—			4,741			—		—			—	—			4,741			—			—			—			4,741
Change in unrealized gain on marketable securities	—		—			—	—		—			(73,579		)	—			—			(73,579		)	—		—			—	—			—			(73,579		)	—			—			(73,579		)
Foreign currency translation adjustment	—		—			—	—		—			(118		)	—			—			(118		)	—		—			—	—			—			(118		)	—			—			(118		)
Hercules warrant	—		—			—	—		1,377			—			—			—			1,377			—		—			—	—			1,377			—			—			—			1,377
Net loss	—		—			—	—		—			—			(60,923		)	(3,014		)	(63,937		)	—		—			—	—			—			—			(60,923		)	(3,014		)	(63,937		)
Balance, December 31, 2016	50,882,856		6			7,568,182	(49,464	)	303,865			(118		)	(174,252		)	6,465			86,502			50,882,856		6			7,568,182	(49,464		)	303,865			(118		)	(174,252		)	6,465			86,502
Scilex acquisition adjustments	—		—			—	—		(627		)	—			—			(1,400		)	(2,027		)
Issuance of common stock for placements and investments, net	30,468,700		3			—	—		57,925			—			—			—			57,928
Scilex acquisition adjustment																								—		—			—	—			(627		)	—			—			(1,400		)	(2,027		)
Issuance of common stock for public placement and investments, net																								30,468,700		3			—	—			57,925			—			—			—			57,928
Beneficial conversion feature recorded on convertible notes	—		—			—	—		32,062			—			—			—			32,062			—		—			—	—			32,062			—			—			—			32,062
Warrants issued in connection with convertible notes	—		—			—	—		12,669			—			—			—			12,669			—		—			—	—			12,669			—			—			—			12,669
Issuance of common stock for business combinations	1,552,011		—			—	—		3,055			—			—			—			3,055			1,552,011		—			—	—			3,055			—			—			—			3,055
Stock-based compensation	—		—			—	—		4,952			—			—			—			4,952			—		—			—	—			4,952			—			—			—			4,952
Foreign currency translation adjustment	—		—			—	—		—			360			—			—			360			—		—			—	—			—			360			—			—			360
Net income	—		—			—	—		—			—			9,132			1,977			11,109
Net loss																								—		—			—	—			—			—			9,132			1,977			11,109
Balance, December 31, 2017	82,903,567		$	9		7,568,182	(49,464	)	$	413,901		$	242		$	(165,120	)	$	7,042		$	206,610		82,903,567		9			7,568,182	(49,464		)	413,901			242			(165,120		)	7,042			206,610
Adoption impact of ASC 606																								—		—			—	—			—			—			910			—			910
Issuance of common stock with exercise of options																								57,690		—			—	—			211			—			—			—			211
Issuance of common stock for BDL settlement																								309,916		—			—	—			2,340			—			—			—			2,340
Issuance of common stock for Scilex settlement																								1,381,346		—			—	—			13,744			—			—			—			13,744
Issuance of common stock for public placement, net																								13,793,997		2			—	—			83,608			—			—			—			83,610
Issuance of common stock for Virttu settlement																								1,795,011		—			—	—			11,308			—			—			—			11,308
Issuance of common stock related to conversion of notes payable																								22,038,565		2			—	—			49,998			—			—			—			50,000
Beneficial conversion feature recorded on convertible notes																								—		—			—	—			12,006			—			—			—			12,006
Warrants issued in connection with convertible notes																								—		—			—	—			9,646			—			—			—			9,646
Warrants issued in connection with Term Loan Agreement																								—		—			—	—			21,746			—			—			—			21,746
Loss on debt extinguishment																								—		—			—	—			1,916			—			—			—			1,916
Stock-based compensation																								—		—			—	—			6,234			—			—			(28		)	6,206
Foreign currency translation adjustment																								—		—			—	—			—			(227		)	—			—			(227		)
Net loss																								—		—			—	—			—			—			(203,540		)	(8,986		)	(212,526		)
Balance, December 31, 2018																								122,280,092		$	13		7,568,182	$	(49,464	)	$	626,658		$	15		$	(367,750	)	$	(1,972	)	$	207,500

See accompanying notes

SORRENTO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016

(In thousands, except for share amounts)


	2017		2016		2015		2018			2017			2016
Operating activities
Net income (loss)	11,109		(63,937	)	(50,074	)	$	(212,526	)	$	11,109		$	(63,937	)
Adjustments to reconcile net loss to net cash provided by and (used in) operating activities:
Adjustments to reconcile net loss to net cash provided by and (used for) operating activities:
Depreciation and amortization	7,079		2,885		2,370		9,054			7,079			2,885
Non-cash interest expense	1,326		164		392		52,841			1,326			164
Gain on sale of IgDraSol	—		—		(69,274	)
Amortization of debt issuance costs and debt discount	477		—		—
(Gain) loss on sale of marketable securities	—		(27,193	)	—
Amortization of debt issuance costs							550			477			—
Loss (gain) on sale of marketable securities							—			—			(27,193		)
Loss on trading securities	665		—		—		144			665			—
Stock-based compensation	4,952		4,741		6,972		6,206			4,952			4,741
Acquired in-process research and development	—		—		12,000		9,895			—			—
Provision for doubtful accounts	—		—		5
Loss on disposal for property and equipment	59		—		—		440			59			—
Loss on receivable	163		—		—		—			163			—
Loss on debt extinguishment	4,275		—		—		8,089			4,275			—
(Gain) or loss on derivative liability	—		(5,520	)	3,360
(Gain) on derivative liability							(2,830		)	—			(5,520		)
Loss (income) on equity method investments	40,244		(435	)	4,041		5,019			40,244			(435		)
Non-cash income on cost method investments	(116,249	)	—		—		—			(116,249		)	—
(Gain) on contingent liabilities	—		(8,121	)	—
Loss (Gain) on contingent liabilities							9,644			—			(8,121		)
Loss on IPR&D impairment							1,826			—			—
Deferred tax provision	(35,679	)	982		33,337		(6,119		)	(35,679		)	982
Changes in operating assets and liabilities; net of dispositions:
Grants and other receivables	(515	)	(472	)	(176	)	(1,623		)	(515		)	(472		)
Accrued payroll	920		—		—		5,751			920			—
Prepaid expenses and other	(1,902	)	40		(1,052	)	(1,674		)	(1,902		)	40
Deposits and other assets	233		(448	)	(1,715	)	(1,130		)	233			(448		)
Accounts payable	1,592		3,714		(2,713	)	3,578			1,592			3,714
Deferred revenue	(20,891	)	23,534		9,876		(3,263		)	(20,891		)	23,534
Deferred rent and other	639		(2,535	)	—		251			639			(2,535		)
Acquisition consideration payable							(2,020		)	—			—
Accrued expenses and other liabilities	2,323		1,673		10,582		6,130			2,323			1,673
Net cash used for operating activities	(99,180	)	(70,928	)	(42,069	)	(111,767		)	(99,180		)	(70,928		)
Investing activities
Purchases of property and equipment	(10,972	)	(6,860	)	(3,707	)	(11,195		)	(10,972		)	(6,860		)
Proceeds from sale of IgDraSol	—		—		27,759
Purchase of assets related to Sofusa							(10,000		)	—			—
Investment in SiniWest	—		(1,000	)	—		—			—			(1,000		)
Investment in Celularity	(5,000	)	(5,000	)	—		—			(5,000		)	(5,000		)
Purchase of business, net of cash acquired	(557	)	(3,842	)	—		—			(557		)	(3,842		)
Purchase of MedoveX Investment	—		(750	)	—		—			—			(750		)
Cost method investments	—		—		(11,500	)
Net cash (used in) provided by investing activities	(16,529	)	(17,452	)	12,552
Net cash used for investing activities							(21,195		)	(16,529		)	(17,452		)
Financing activities
Proceeds from issuance of convertible note, net of fees	49,916		—		—
Proceeds from issuance of common stock, net	57,928		107,986		—
Cash payments for treasury shares	—		(15,639	)	—
Proceeds from loan and security agreement, net of fees	—		48,320		(3,095	)
Net borrowings under loan and security agreement							—			49,916			—
Payments on short term bridge loan							(20,000		)	—			—
Bridge loan for Scilex settlement							20,000			—			—
Bridge loan for Scilex settlement repayment							(20,000		)	—			—
Proceeds from loan agreement							1,586			—			—


Short-term bridge loan, net of issuance costs							19,675			—			—
Scilex consideration for regulatory milestones							(22,466		)	—			—
Proceeds from issuance of common stock, net							83,608			57,928			107,986
Proceeds from issuance of Scilex notes							140,000			—			—
Scilex notes issuance of Scilex notes							(5,725		)	—			—
Proceeds from issuance of convertible notes							37,849			—			—
Cash payments for treasury shares							—			—			(15,639		)
Proceeds from loan and security agreement, net of fees							—			—			48,320
Payments of debt on retired note	(53,157	)	(9,451	)	—		—			(53,157		)	(9,451		)
Net payments of deferred compensation	(1,012	)	—		(2,000	)	—			(1,012		)	—
Sale of a noncontrolling interest	—		—		49
Proceeds from Oaktree term loan							100,000			—			—
Oaktree issuance cost							(8,740		)	—			—
Proceeds from exercise of stock options	—		524		1,699		211			—			524
Net cash provided by (used in) financing activities	53,675		131,740		(3,347	)
Net change in cash and cash equivalents	(62,034	)	43,360		(32,864	)
Net cash provided by financing activities							325,998			53,675			131,740
Net change in cash, cash equivalents and restricted cash							193,036			(62,034		)	43,360
Net effect of exchange rate changes on cash	65		—		—		(135		)	65			—
Cash and cash equivalents at beginning of period	82,398		39,038		71,902
Cash and cash equivalents at end of period	20,429		82,398		39,038
Cash, cash equivalents and restricted cash at beginning of period							20,429			82,398			39,038
Cash, cash equivalents and restricted cash at end of period							$	213,330		$	20,429		$	82,398
Supplemental disclosures:
Cash paid during the period for:
Income taxes	34		2		3,001		6			34			2
Interest	3,499		1,342		1,574		1,620			3,499			1,342
Supplemental disclosures of non-cash investing and financing activities:
Virttu acquisition non-cash consideration	15,465		—		—		11,308			15,465			—
Scilex acquisition non-cash consideration	—		(45,368	)	—		—			—			(45,368		)
Scilex non-cash consideration for regulatory milestone	1,380		—		—		13,744			1,380			—
SiniWest non-cash consideration	—		(2,832	)	—		—			—			(2,832		)
Roger Williams Medical Center non-cash consideration	—		(3,398	)	—		—			—			(3,398		)
Investment in ImmuneOncia	—		(9,608	)	—		—			—			(9,608		)
Common stock received in exchange for license	—		—		(100,000	)
Contributions to equity method investments made on Company's behalf	—		—		(60,000	)
BDL stock issuance							2,340			—			—
Conversion of 2017 convertible notes							50,000			—			—
Loss on debt extinguishment							1,916			—			—
Property and equipment costs incurred but not paid	37		—		2,396		328			37			—
Reconciliation of cash, cash equivalents and restricted cash within the Company's consolidated balance sheets:
Cash and cash equivalents							158,738			20,429			82,398
Restricted cash							54,592			—			—
Cash, cash equivalents, and restricted cash							$	213,330		$	20,429		$	82,398



Delaware		33-0344842
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
4955 Directors Place San Diego, California		92121
(Address of Principal Executive Offices)		(Zip Code)



Title of each class		Name of exchange on which registered
Common Stock, par value $0.0001 per share		The Nasdaq Stock Market LLC



	2019	2020 and thereafter
Contract manufacturing services	$1,118	$529



	Years Ended December 31,
	2018	2017	2016
Outstanding options	10,523,075	6,321,400	4,332,876
Outstanding warrants	25,635,117	4,708,860	7,740,340



☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



		Page No.
PART I		1
Item 1.	Business	1
Item 1A.	Risk Factors	1922
Item 1B.	Unresolved Staff Comments	4853
Item 2.	Properties	4853
Item 3.	Legal Proceedings	4854
Item 4.	Mine Safety Disclosures	5055
PART II		5055
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5055
Item 6.	Selected Financial Data	5256
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5357
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	6570
Item 8.	Financial Statements and Supplementary Data	6670
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	6670
Item 9A.	Controls and Procedures	6671
Item 9B.	Other Information	6873
PART III		6875
Item 10.	Directors, Executive Officers and Corporate Governance	6875
Item 11.	Executive Compensation	6875
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	6875
Item 13.	Certain Relationships and Related Transactions and Director Independence	6975
Item 14.	Principal Accounting Fees and Services	6975
PART IV		6975
Item 15.	Exhibits, Financial Statement Schedules	6975
	Schedule II – Valuation and Qualifying Accounts	7481
Item 16.	Form 10-K Summary	7481


1.	~~Advancing~~Rapidly advancing our lead product candidates through the clinic. These include the initiation of Phase I, Phase II and potentially accelerated approval trials for our cellular therapies and oncolytic virus immunotherapy ~~and RTX~~ in oncology and/or hematology indications. Our clinical-state RTX program will be developed in several pain indications with high-unmet medical needs.


3.	Collaborating with key opinion leaders and leading clinical and research institutes to enhance our preclinical and clinical development plans. We currently have such agreements in place with the Karolinska Institute, The Scripps Research Institute (“TSRI”), the NIH, City of Hope, Tufts Medical School, and Roger Williams Medical Center, among others.


1.	~~Non-Immunogenic:~~ ~~Anti-CD38 CAR-T is based on a fully human mAb generated from our GMAB® library. This may result in a potentially more tolerable CAR-T regimen, and a more durable long term response.~~


2.	~~Selective Lysing of High Expressing CD38 Positive Cells:~~ ~~Ability to selectively lyse CD38 high expression cells only, may limit on-target / off-tumor toxicity.~~


3.	~~Has Not Demonstrated Graft versus Host Disease: Our anti-CD38 CAR-T cells did not cause GvHD in vivo. This could have implications on our ability to apply this therapy in an allogeneic setting.~~


1)	The G-MAB™ discovery antibody library technology. Certain aspects of this technology are covered by issued patents and are the subject matter of pending patent applications with potential patent coverage to at least 2023.


2)	The G-MAB™-derived immuno-oncology antibody candidate portfolio. Certain of these antibody candidates are covered by issued patents and are the subject matter of pending applications and granted patents with potential patent coverage to at least 2033.



Item 1.	Business.


3)	The bispecific antibody technology directed to the combination of one or more different monoclonal antibodies or fragments that can target multiple or different antigens. The bispecific antibody technology is the subject matter of pending applications with potential patent coverage to at least 2035.


5)	The CAR T-Cell based technology is an immunotherapy platform and is the subject matter of pending patent applications with potential patent coverage to at least 2035. Candidates arising from the platform are the subject matter of pending applications with potential patent coverage to at least 2037.


6)	The CAR adoptive cellular immunotherapy using T cells and NK immune cells is directed to helping a patient’s immune system fight disease, including cancer. We have filed patent applications on the techniques for creating such therapies based on our CAR combination therapies providing with potential patent coverage to at least 2036.


7)	The intracellular targeting antibody (iTAb) technology (LA Cell) for targeting intracellular targets for treating disease is the subject matter of pending patent applications with potential patent coverage to at least 2036. We have filed patent applications on improvements to this technology with potential patent coverage to at least 2038.


8)	The new biosimilar / biobetter antibody technology using manufacture in certain cells (for example, directed to antigen targets such as EGFR or TNF-alpha) is the subject matter of pending patent applications with potential patent coverage to at least 2035.


9)	The RTX (resiniferatoxin)-based pain management technology. Certain aspects of this technology are covered by an issued patent in the U.S. providing patent protection to at least 2021 and are the subject matter of pending patent applications that will provide potential patent coverage to at least 2036.



	2017				2016
	High		Low		High		Low
First Quarter	$	6.08	$	3.90	$	8.52	$	4.25
Second Quarter	3.95		1.50		7.80		5.26
Third Quarter	2.15		1.50		8.00		5.55
Fourth Quarter	4.05		1.70		8.35		4.68



Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders ⁽¹⁾	6,343,400	$	4.74	4,438,696⁽²⁾
Equity compensation plans not approved by security holders ⁽³⁾	3,200	1.12		—
Total	6,346,600			4,438,696⁽²⁾



	Level 1—Quoted prices in active markets for identical assets or liabilities.



	Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.



	Level 3—Unobservable inputs based on the Company's own assumptions.



	Fair Value Measurements at December 31, 2018
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	158,738	$	158,738	$	—	$	—
Restricted cash	54,592		54,592		—		—
Marketable securities	297		247		—		50
Total assets	$	213,627	$	213,577	$	—	$	50
Liabilities:
Acquisition consideration payable	$	11,312	$	—	$	—	$	11,312
Acquisition consideration payable, non-current	725		—		—		725
Total liabilities	$	12,037	$	—	$	—	$	12,037



(in thousands)	2018
Beginning Balance at December 31, 2017	54,272
Re-measurement of Fair Value	9,644
Settlements of current year contingent consideration	(51,879		)
Ending Balance at December 31, 2018	$	12,037



(in thousands)	2017
Beginning Balance at December 31, 2016	48,362
Scilex acquisition adjustment (See Note 4)	(6,500		)
Acquisition consideration payable - current year acquisitions (See Note 4)	12,807
Contingent consideration (Non-current) - current year acquisitions (See Note 4)	983
Re-measurement of Fair Value	—
Payment of shares for current year contingent consideration	(1,380		)
Ending Balance at December 31, 2017	$	54,272



(in thousands)	2016
Beginning Balance at December 31, 2015	—
Contingent consideration - current year acquisitions (1)	50,137
Re-measurement of Fair Value – current year acquisitions	(1,775		)
Payment of current year contingent consideration	—
Ending Balance at December 31, 2016	$	48,362



(in thousands)	Fair Value Measurements at December 31, 2018		Valuation Methodology	Significant Unobservable Input	Weighted Average (range, if applicable)
Virttu Contingent Consideration (Non-Current)	$	725	Multiple outcome discounted cash flow	Discount Rate Probability of Regulatory Milestone	19.2% 16%
Concortis Contingent Consideration	511		Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	19.2% 20%
Shanghai Three Contingent Consideration	336		Multiple outcome discounted cash flow	Discount Rate Percent probabilities assigned to scenarios	19.2% 10%
RWMC Contingent Consideration	503		Multiple outcome discounted cash flow	Discount Rate, Percent probabilities assigned to scenarios	19.2% 10%



	December 31, 2018
	Cost		Gross Realized Gains (Losses)			Fair Value
Trading securities:
MedoveX common shares and warrants	$	750	$	(453	)	$	297



	December 31, 2017
	Cost		Gross Realized Gains (Losses)			Fair Value
Trading securities:
MedoveX common shares and warrants	$	750	$	(309	)	$	441



	Total
Beginning balance at December 31, 2017	$	84
Addition of warrant	—
Change in fair value of warrant	(34		)
Ending balance at December 31, 2018	$	50



	December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Intangibles, net
Customer relationships	$	1,585	$	1,373	$	212
Acquired technology	3,410		885		2,525
Acquired in-process research and development	35,834		366		35,468
Patent rights	32,720		4,742		27,978
Assembled workforce	105		5		100
Total intangible assets	$	73,654	$	7,371	$	66,283

	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Intangibles, net
Customer relationships	$	1,585	$	1,091	$	494
Acquired technology	3,410		709		2,701
Acquired in-process research and development	37,660		—		37,660
Patent rights	32,720		2,562		30,158
Total intangible assets	$	75,375	$	4,362	$	71,013

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